Aconcern of the venture capitalists, of course, is whether FCI would be able to survive its first year in business if for some reason~such as an economic recession or just an overly optimistic sales projection-the cash flow targets in FCI's business plan were not met. To allay such fears, Mabra included in the FCI business plan a worst-case scenario based on the foUowing pessimistic projections.

Mabra believes FCI should maintain a $500,000 cash balance. Starting initially with zero cash, the comIiany would obtain cash of $10,000,000 from either of the two financing alternatives described above. A total of $9,500,000 of such financing would be used for capital acquisitions; the balance is intended to be available to provide initial working capital. The pessimistic sales forecast indicates cash receipts would be $4 million. Miscellaneous cash receipts (for example, from the sale of scrap titanium and other materials) would be $200,000. Cash payments on raw materials purchases would be $1 million; wage and salary cash outlays would be $1,500,000; nondiscretionary cash costs (not including tax payments) would be $700,000; and estimated tax payments would be $265,000 under LLP and $54,000 under HLP (note that the difference in estimated tax payments is attributable to the variation in taxable income, which reflects the difference in deductible interest expense).

6. What would be the total fixed financial charges under each of the two alternative financing plans being considered by FCI?

7. Asignificant issue is whether FCI will have a sufficient cash balance at the end of the possible recessionary year. What is your estimate of FCI's cash balance under each of the two financing plans at the end ofsuch a year?

8. In light of the above and your knowledge of FCI's desired cash level, which financing plan, LLP or HLp, would you reconunend?