FIN3002, Financing Innovations ASSESSMENT 2
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FIN3002, Financing Innovations
ASSESSMENT 2
Task: Individual Business Case
Due Date: 16th September, 5:00 PM
Submission Method: LMS Submission Link
Weighting: 30% of final marks
Documents to Submit:
Excel Spreadsheet plus MS word document. The excel spreadsheet should contain your financial statement projections and valuations from Task 1 to Task 10. Only task 11, 12 and 13 require detailed discussions on in the MS word document. While you only need to submit one excel spreadsheet document, please make sure to have a separate sheet for each of the tasks from task 1 to task 10:
Objectives:
The objective of this assessment is to project the financial statements and value the venture based on your analysis of the generic business case and data provided.
Marks:
The assignment will be marked out of 100 and then rebased to 30%. The marks for this assignment will be allocated across the thirteen tasks as follows:
• Task 1 |
Estimate Revenue and Accounts Receivable |
5 marks |
• Task 2 |
Estimate COGS, Inventories, Purchases and Accounts Payable |
5 marks |
• Task 3 |
Estimate Wage Expense, Accrued Liability and S & A Expenses |
5 marks |
• Task 4 |
Project an Income Statement |
15 marks |
• Task 5 |
Project a Balance Sheet |
15 marks |
• Task 6 |
Project a Cash Flow Statement |
15 marks |
• Task 7 |
Estimate Sustainable Growth Rate |
5 marks |
• Task 8 |
Estimate Required Return |
5 marks |
• Task 9 |
Estimate Terminal Value |
5 marks |
• Task 10 |
Estimate Venture’s Value |
10 marks |
• Task 11 |
Estimate Equity Share |
5 marks |
• Task 12 |
Discuss financial viability of the new business venture |
5 marks |
• Task 13 |
Justify Assumptions or Estimate value using Venture Capital Method |
5 marks |
Task 1:
Estimate revenues from year 1 to year 5 based on the following assumptions:
• Current Market Volume Units: 72,000,000
• Current Unit Price: $6.00
• Annual Estimated Volume Growth Rate: 3%
• Targeted Market Share:
o First Year 0.5%
o Second Year 2%
o Third Year 4%
o Fourth Year 4%
o Fifth Year 4%
• Accounts Receivable is estimated to be 10% of Sales.
• Prior to the First Year there were no Sales.
Task 2:
Estimate the COGS, Inventories, Purchases and Accounts Payable from year 1 to year 4
• Unit Sales Price is a 60% mark up on the Unit Cost of Goods Sold
• You plan to hold Inventories equal to 30% of your estimate for next year’s Sales
• You pay for 92% of Purchases in the year in which they were purchased and the remainder in the following year.
• Inventory at the beginning of the First Year is $1,000,000.
Task 3:
Estimate Wage Expense, Accrued Liabilities and Selling and Administrative Expenses from year 1 to year 4 based on the following assumptions:
• Wage Expense equals to 8% of current year Sales
• You pay wages monthly in arrears, meaning that you will only pay for eleven of the twelve months wages in the year in which they have been earned and will pay the remaining one month of wages earned in the last month of the current year in the following year.
• Selling and Administrative Expenses, including rent is estimated to be 10% of sales and is paid in the year in which it occurs
Task 4:
Estimate a projected four-year Income Statement, based on the above assumptions and the following additional assumptions:
• Depreciation is estimated as being equal to 10% of Gross Fixed Assets at the end of the prior year.
• Interest Expense on Debt is at a rate of 15% per annum and is estimated based on the Debt Balance and Additional Funds Needed (if any) estimated at the end of the prior year.
• Tax is estimated as being expensed at 30% of Earnings before Tax. Assume that any tax benefits are NOT carried forward to reduce future tax payable.
• Assume NO dividends are declared.
Task 5:
Estimate a projected four-year Balance Sheet, based on the above assumptions and the following additional assumptions:
• The Balance Sheet at the end of the year prior to First Year was comprised as follows: Cash $50,000; Inventories $1,000,000; Gross Fixed Assets $4,000,000; Debt $2,000,000 and Owners Equity $3,050,000. You should assume all other prior period Balance Sheet values were zero.
• Required cash is estimated to be 1% of Sales.
• The business requires capital expenditure of $500,000 a year in each of the first two years.
• Assume the founder invests additional $2,000,000 in the first year.
Task 6:
Estimate a projected four-year Cash Flow Statement, based on the above assumptions.
Task 7:
Estimate the sustainable growth rate as at the end of the fourth year, based on the following assumptions:
• The sustainable Profit Margin is estimated to be equal to that estimated for the fourth year, based on the fourth year Net Income and Sales.
• The sustainable Asset Turnover is estimated to be equal to that estimated for the fourth year, based on average Total Assets in year 3 and 4 and Sales in year 4.
• Assume a target Leverage Ratio as being equal to 120%.
• Assume a target Retention Ratio as being equal to 40%.
Task 8:
Estimate the required return based on CAPM, based on the following assumptions:
• Assume the Risk Free Rate equals 1.5%
• Assume Beta equals 2.0
• Assume a Market Risk Premium of 6.0%
Task 9:
Estimate the Terminal Value of the new venture as at the end of the fourth year, based on the following assumptions:
• Equity Valuation Cash Flow = Net Income + Depreciation – Change in Net Operating Working Capital (exclude surplus cash) – Change in Gross Fixed Assets + Net Debt Issues
• Assume the Equity Valuation Cash Flow grows at the sustainable growth rate estimated in Task 7 from year 5 onwards.
• Use the required return estimate from Task 8.
Task 10:
Estimate the Present Value of the venture.
Task 11:
Estimate the share of equity ownership the owner would need to offer an external investor to invest $2,000,000 based on the valuation of the new venture you have completed above.
If you have valued your own new business venture proposal, the amount of external investment required may differ and so you should base your answer to this question on the amount your venture requires.
Task 12:
Discuss whether the new business venture is financially justified to the entrepreneur and/or the external investor.
Task 13:
Assume the external investor employs the Venture Capital Valuation Method to determine the Present Value of the venture. He estimates that the PE ratio for comparable firm at the exit four years from now is 15 times. He requires a compound annual rate of return of 50% to compensate for the time, risk, and probability that the venture might not succeed as expected. Determine the present value of the venture using this method. Discuss why an investor would employ this method and its limitations.
Appendix 1: List of Assumptions
• Current Market Volume Units Task 1
• Current Unit Price Task 1
• Annual Estimated Volume Growth Rate Task 1
• Five Years Targeted Market Share Task 1
• Sales prior to year one, if any Task 1
• Accounts Receivable as a percentage of Sales Task 1
• Unit Sales Price percentage markup on the Unit Cost of Goods Sold Task 2
• Inventories as a percentage of next year’s sales Task 2
• Percentage of Purchases paid in the same year Task 2
• Inventory at the beginning of the first year, if any Task 2
• Wage Expense as a percentage of Sales Task 3
• Percentage of Wage Expense paid in the same year Task 3
• Selling and Administrative (S & A) Expenses as a percentage of Sales Task 3
• Percentage of S & A expenses paid in the same year Task 3
• Depreciation rate Task 4
• Interest rate on Debt Task 4
• Tax rate Task 4
• Dividend Payout Rate Task 4
• Balance Sheet items for the year prior to first year, if any Task 5
• Minimum amount of cash required each year Task 5
• Founder investment during the years, if any Task 5
• Any investment in Gross Fixed Assets Task 5
• Target Leverage Ratio Task 7
• Target Retention Ratio Task 7
• Risk Free Rate Task 8
• Beta Task 8
• Market Risk Premium Task 8
2022-09-12