In 2010 Jennifer (Jen) Liu and Larry Mestas founded Jen and Larrys Frozen Yogurt Company which

QUESTION

In 2010, Jennifer (Jen) Liu and Larry Mestas founded Jen and Larrys Frozen Yogurt Company, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale of frozen yogurt. Jen and Larry began producing small quantities of unique flavors and blends in limited editions. Revenues were $600,000 in 2010 and were estimated at $1.2 million in 2011.Because Jen and Larry were selling premium frozen yogurt containing premium ingredients, each small cup of yogurt sold for $3, and the cost of producing the frozen yogurt averaged $1.50 per cup. Administrative expenses, including Jen and Larrys salaries and expenses for an accountant and two other administrative staff, were estimated at $180,000 in 2011. Marketing expenses, largely in the form of behind-the-counter workers, in-store posters, and advertising in local newspapers, were projected to be $200,000 in 2011.An investment in bricks and mortar was necessary to make and sell the yogurt. Initial specialty equipment and the renovation of an old warehouse building in lower downtown (known as LoDo) of $450,000 occurred at the beginning of 2010 along with $50,000 being invested in inventories. An additional equipment investment of $100,000 was estimated to be needed at the beginning of 2011 to make the amount of yogurt forecasted to be sold in 2011. Depreciation expenses were expected to be $50,000 in 2011, and interest expenses were estimated at $15,000. The tax rate was expected to be 25 percent of taxable income.A. How much net profit, before any financing costs, is the venture expected to earn in 2011? What would be the net profit if sales reach $1.5 million? What would be the net profit if sales are only $800,000?B. If inventories are expected to turn over ten times a year (based on cost of goods sold), what will be the ventures average inventories balance next year if sales are $1.2 million? How much might the venture be able to borrow if a lender typically lends an amount equal to 50 percent of the average inventories balance? If the borrowing rate is 12 percent, how much dollar amount of interest would have to be paid on the loan?C. How might the venture acquire and finance the new equipment that is needed?D. Identify potential government credit resources for the venture.E. Prepare a summary of the benefits and risks of Jen and Larrys continued use of credit card financing.F. Prepare a summary of how the venture might benefit from receivables financing if commercial customers are extended credit for thirty days on their purchases.G. Discuss the impact of potential loan restrictions should the venture seek commercial loan financing.H. Comment on how the venture might be evaluated in terms of the five Cs of credit analysis.
Solution: A) Net profit (Without charging interest) = (Sales Cost of production Administrative expense Advertisement expense Depreciation)*(1-Tax) Case-1: Profit if sales is $1.2million: = (1200000 600000 180000 200000 50000)*(1-.25) = 127500 Working: Unit sold = Revenue / Price per unit = 1200000 / 3 = 400000 Material cost = 400000 * 1.5 = 60000 Case-2: Profit if sales is $1.5 million: = (1500000 750000 180000 200000 50000)*(1-.25) = 240000 Working: Material cost = Units sold * Cost per unit = 1500000 / 3 * 1.5 = 750000 Case-3: Profit if sales is $800000: = (800000 400000 180000 200000 50000)*(1-.25) = (-) 22500 Working: Material cost = Units sold * COst per unit = 800000 / 3 * 1.5 = 400000 B.1) Avergae inventory = Cost of goods sold / inventory turnover = (600000 + 180000 + 50000) / 10 = 83000 B.2) Loan amount = Average inventory * 50% = 83000 * .50 = $41500 B.3) Interest amount = Loan amount * interest rate = 41500 * .12 = $4980 C) New equipment can be financed four ways: 1. Equity holders should bring in additional equity 2. Avail a term loan funding from banker 3. Avail deferred or extended credit from supplier of equipment 4. Venture capital funding D) Potential government credit resources for the venture: 1. State funded grants 2. SBA loan subject to owner contribution of 25-30% E) Credit card financing benefits are that it is easily available and there is no formal pplication for loan and repayment can be done at the flexibility. While

risk are that in case of default heavy charges are to be paid, limits can be reduced, interest rate is too high. F) This wil be spontaneous funding and will not involve any cost. Spontaneous funding is always best for any enterprise. Here possible funding through this option will be: 600000*30/360 = 50000 G) Commercial loan financing can also be obtained but since its a start up venture it may be difficult to obtain the same at favourable terms. However company can look forward the option of lease funding in case of restriction on loan. H) Five Cs are defined as below: -Character -Capacity -Capital -Collateral -Conditions Owners are seems to have good character and dont have defaulter tag in past. Capacity has to understood from business ability to repay the loan. Which seems to be fair enough in terms of profitiability. Capital is about owners investment in business, since they have invested 450,000in equipment and warehouse in 2010, therefore we can say capital is more than 450,000 which is consdered good for a loan proposal of 100,000. Collateral is the security offered to the financer. Here company can offer its equipment purchased last eyar as collateral Conditions such as amount to be financed and interest rate will be influencing the financer. Here amount involved is small and borrower can pay higher interest rate also so this aspect is also considered as good for the company.

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