Project - Phase 1 - To Do
FNCE 390 - Project - Phase 1
POPLAR LTD.
Formation of Business
I Introduction
For several years now you have been working with three "boot-strap" business operations involved in
the manufacture of fertilizer and other nutrients. As a "green world" business investor you have recently joined
a boutique venture capital firm. You believe in your mission and have introduced to the venture firm partners
a project you believe has unlimited potential if these three businesses are combined (your fellow school mates).
You have also convinced your school mates that there are many potential benefits by combining the three operations
and gaining access to your firms venture capital funding. Believing you, they have asked you to "make it happen "
and complete the combination. Your documented project plan and implementation steps are outlined below:
The business's will combine effective Fe
uary 1, 2023 into a single incorporated entity. You will create a
Fe
uary 1, 2023 Opening Balance sheet reflecting the closing of the business combination transaction.
The businesses will then transition operations from "as is" to an integrated entity over the next year. The focus will
be around reorganizing operations to improve financial performance and getting everyone aligned with strategy.
You will develop the forecast income statement for the first year of operations using the assumptions provided for the
year ended January 31, 2024 as well as the January 31, 2024 Balance Sheet. The plan is to establish a firm base
believing it takes one year to establish operations before heading down the growth plan you have in mind. Financial
performance for the first year is based on 2023 combined results of the individual businesses with certain adjustments
you expect to see from the formation of the new company.
II Project Plan
A Combination process - Entries for Column H
1 Complete the column "Combined As Is" Balance Sheet by adding the respective balances of the individual entities.
Column H reflects the totals of columns B-D-F
2 Complete the column "Combined As Is" Income Statement by adding the respective balances of the individual entities.
Column H reflects the totals of columns B-D-F
3 Review the "Combined As Is" Ratios (each entity has formulas to work with)
Test check accuracy of ratios in Column H
B Incorporation process - revaluation adjustments reflect in Column J - new Balance column L
1 The incorporation process has been structured such that an incorporated entity created by your firm will acquire
the operations of each entity. As such all assets are revalued to their fair market values at the time of
acquisition. The fair market values are:
Cash All cash balances of original operations paid to founders - Combined cash = $0
Opening Balance Sheet cash = $0
Accounts receivable Accounts receivable revalued 8% higher as no allowance for doubtful accounts
Inventory Inventory is revalued at 10% lower due to obsolete raw materials
Prepaid expenses Transfer $105,000 to Inventory as goods received day of transaction.
Defe
ed revenue Reduce by 20% to reflect work completed - record change to venture capital
short term loan as is considered a purchase adjustment
Land combined revised market value per appraisal 2,200,000
Building combined revised market value of 2,450,000
Equipment increase combined market value to 975,000
Vehicles revised market value 380,000
Accumulated depreciation Adjusted all historical balances to a zero balance as assets are revalued
and reflect a new starting value
Goodwill and intangibles Add $420,000 for goodwill
Accounts payable Due diligence discovered an additional $400,000 in payables
Income taxes payable None as start-up
Defe
ed tax liability Add $385,000 for tax effect of transaction as defe
ed tax liability
Term loan No change
Mortgage No change
Cu
ent portion of debt No change
Due to relatives Convert 30% of balance to share capital - repay 70% using venture capital
short term loan
Proprietorship capital Convert full balances to share capital
Partnership capital Convert full balances to share capital
Share capital Proprietor + Partnership capital + 30% of due from relatives converted
Retained Earnings None as the start-up of new legal entity
Venture capital loan Balancing figure of all other balance sheet balances and adjustments
C XXXXXXXXXXOperations - Operational Changes - reflect in XXXXXXXXXXadjustments column (Column P)
1 Revenues will increase by $9,300,000
2 Gross profit will be 32% based on XXXXXXXXXXpro forma ending revenues
3 Selling costs will increase by 10% of incremental sales
4 Administrating costs will increase by 9% of incremental cost of sales
5 Amortization will increase by $259,000 per annum (in addition to historical)
6 Interest expense will increase based on venture capital short term loan balance at 9% interest rate
7 Income taxes will be 26% of combined incomes as now an incorporated entity - split as
follows - 30% defe
ed - 70% cu
ent - adjust balance sheet accounts for these amounts
8 Adjust final accounts receivable balances to reflect a 45 day collection cycle - difference to cash (use 360 days)
9 Adjust final inventory balances to reflect 72 days on hand - difference to cash (use 360 days)
10 Adjust final accounts payable balances to reflect a turnover ratio of 45 days - difference to cash (use 360 days)
11 Acquired new formulation equipment for $255,000 and financed 100% with a new term loan at end of year.
Term loan is repayable over five years and life of equipment will be 10 years.
D Balance Sheet Steps - balancing everything
1 Columns B through to L will balance at the Balance Sheet level - ignore income statement effects.
2 Columns N & P must reflect the income statement changes and will balance by recording the balance amount in cash
If you leave cash blank - the figure reflected in line 57 * -1 should work. Once cash adjusted - line 57 = 0
3 Column R will balance if 1 and 2 above are balanced
E Your Management Report
Upon completion you are to prepare a
ief report and include as an Appendix your completed Template
Your report should address the following:
1) describe 3 benefits of incorporation into a larger entity
2) 3 areas of financial improvement you want to address going forward based on ratio analysis
3) identify 3 potential conflicts that could arise between management and your venture capital
firm
4) What Board of Director committees would you recommend to oversee business?
Using Management Team and Venture Capital firm staff, set up your Board of Directors
with a maximum of 5 people. Describe the area of expertise they will
ing to the business.
5) Build the Year 1 cash flow statement to support the change in cash for Year 1
statement section and add as Appendix
6) Should dividends be considered at this time.
Maximum Report length is 2 pages plus Appendices
F Project Responsibility
As you develop the project you are required to report to the Venture Capital Senior Manager to ensure work
is progressing co
ectly. You are encouraged to ask for assistance at any time - email with questions
and proposed solutions. DO NOT LEAVE THIS TO LAST MOMENT. Good practice for mid-term preparation.
Each column must balance at the balance sheet level. Working on a column by column basis will
be most effective with the respective columns cross adding.
If a formula exists in a cell - do not alter it. If unsure of what to do - contact the Senior Manager.
The cells with require work by you.
Poplar Template
POPLAR LTD. Owner: XXXXXXXXXXMargaret Lentil Partners: Helen Grass (45%) + Candace Pot (55%) Shareholder: XXXXXXXXXXCharles Green Balance Sheet Opening As Is = Combined + Corporate Tax Effect Operational Changes Including Corporate Tax Forecast Results
Start-up Balance Sheets CanGrow XXXXXXXXXXproprietorship) Bluebis (partnership) BigYield Inc. Combined Revaluation POPLAR LTD. First Year XXXXXXXXXXFeb XXXXXXXXXXJan XXXXXXXXXX Adjustments POPLAR LTD.
January XXXXXXXXXX Fe
uary 1 Fe
uary 1
2023 2023 2023 As Is Adjustments Opening Operations XXXXXXXXXX Jan XXXXXXXXXX
Assets
Cu
ent assets
Cash $ 95,000 $ 125,000 $ 65,000 $ 285,000 $ - 0 $ 285,000 $ 285,000 Balancing Figure
Accounts receivable 1,450,000 1,400,000 1,025,000 $ 3,875,000 3,875,000 3,875,000
Inventory 945,000 1,350,000 985,000 $ 3,280,000 3,280,000 3,280,000
Prepaid expenses 85,000 100,000 55,000 $ 240,000 240,000 240,000
2,575,000 2,975,000 2,130,000 7,680,000 - 0 7,680,000 - 0 - 0 7,680,000
Property, plant and equipment
Land 700,000 700,000 675,000 2,075,000 2,075,000 2,075,000
Buildings 240,000 650,000 495,000 1,385,000 1,385,000 1,385,000
Equipment 135,000 600,000 120,000 855,000 855,000 855,000
Vehicles 75,000 220,000 100,000 395,000 395,000 395,000
1,150,000 2,170,000 1,390,000 4,710,000 - 0 4,710,000 - 0 - 0 4,710,000
Less: Accumulated amortization
Accumulated amortization - Buildings (60,000) (145,000) (100,000) (305,000) (305,000) - 0 - 0 (305,000)
Accumulated amortization - Equipment (30,000) (90,000) (195,000) (315,000) (315,000) (0) (0) (315,000)
Accumulated amortization - Vehicles (90,000) (120,000) (40,000) (250,000) (250,000) (0) (0) (250,000)
(180,000) (355,000) (335,000) (870,000) - 0 (870,000) (0) (0) (870,001)
970,000 1,815,000 1,055,000 3,840,000 - 0 3,840,000 (0) (0) 3,839,999
Goodwill and other intangibles - 0 - 0 - 0 - 0 - 0 - 0
$ 3,545,000 $ 4,790,000 $ 3,185,000 $ 11,520,000 $ - 0 $ 11,520,000 $ (0) $ (0) $ 11,519,999
Liabilities and Shareholders' Equity
Cu
ent liabilities
Accounts payable $ 2,110,000 $ 2,650,000 $ 1,664,900 $ 6,424,900 $ 6,424,900 $ 6,424,900
Defe
ed revenue 115,000 150,000 220,000 $ 485,000 485,000 485,000
Income taxes payable - 0 - 0 - 0 - 0 5,607,000 (18,662) 5,588,338
Venture short term loan - due on demand - 0 - 0 - 0 1,152,000 1,152,000 1,152,000
Cu
ent portion of long term debt 90,000 135,000 130,000 $ 355,000 - 0 355,000 355,000
2,315,000 2,935,000 2,014,900 $ 7,264,900 1,152,000 8,416,900 5,607,000 (18,662) 14,005,238
-
Term loan payable 400,000 600,000 - 0 1,000,000 1,000,000 1,000,000
Refinance term loan - 0 - 0 - 0 - 0 - 0
Mortgage payable - 0 550,000 560,000 1,110,000 1,110,000 1,110,000
Due to Relatives 500,000 200,000 740,000 1,440,000 1,440,000 1,440,000
900,000 1,350,000 1,300,000 3,550,000 - 0 3,550,000 - 0 - 0 3,550,000
Less: portion due within one year (90,000) (135,000) (130,000) (355,000) - (355,000) - - (355,000)
810,000 1,215,000 1,170,000 3,195,000 - 0 3,195,000 - 0 - 0 3,195,000
Defe
ed income taxes - 0 - 0 - 0 - 0 5,607,000 (6,221) 5,600,779
3,125,000 4,150,000 3,184,900 10,459,900 1,152,000 11,611,900 11,214,000 (24,883) 22,801,017
Shareholders' Equity
Proprietorship Capital 420,000 - 0 - 0 420,000 420,000 420,000
Partnership Capital - 0 640,000 - 0 640,000 640,000 640,000
Share capital - 0 - 0 100 100 100 100
Retained earnings - 0 - 0 - 0 - 0 19,936,000 (78,797) 19,857,203
420,000 640,000 100 1,060,100 - 0 1,060,100 19,936,000 (78,797) 20,917,303
3,545,000 4,790,000 3,185,000 11,520,000 1,152,000 12,672,000 31,150,000 (103,680) 43,718,320
- 0 - 0 - 0 - 0 (1,152,000) (1,152,000) (31,150,000.40) 103,679.60 (32,198,321)
POPLAR LTD. AS IS
Income Statement CanGrow XXXXXXXXXXproprietorship) Bluebis (partnership) BigYield Inc. Combined First Year Operating Adjustments POPLAR LTD.
Year Ended January 31 2023 2023 2023 As Is Operations XXXXXXXXXX Jan XXXXXXXXXX