10 WJP PARTNERS Projecting Financial Requirements Angela Martin is a sophomore English major attending STATEMENT O Central State University, a small liberal arts college in FINANCIAL ASSUMPTIONS Missouri. She is president of the journalism club, which met her dorm roommate and good Drawing on their findings, Martin and Stegemoller have friend Ashlie Stegemoller. Stegemoller is a junior co de the following observations: puter science major. Martin and Stegemoller have been1. Sales projections related to the preparation of stu discussing the possibility of a new business venture. After months of brainstorming, they have agreed to start a venture that would offer students and local businesses help in preparing term papers and reports. Both young entrepreneurs recently attended a local seminar entitled How to Start a New Business." From this experience, they realized the need for preparing pro forma financial statements to obtain necessary financing and also to help them better visualize the merits of the venture. dent reports and term papers are based on the fol- lowing assumptions: versity, or 9,600 students, prepare at least two reports each 12-month period. This gives a pro- ection of 19,200 reports (9,600 x2-19,200). The firm will get 3 percent of the student mar- ket in the first year, which will increase to 5 per- cent and 7 percent in the following two years b. respectively c. Student reports will average 16 pages in length. for which the firm will receive $20 per report. RESEARCH FINDINGS Revenue forecasts associated with the businesses needing the firm's services are based on the follow- 2. Research indicates an unfulfilled demand for quality report-preparation services on campus. Market projec- tions estimate a potential volume of 19.200 reports a year from Central State's students. Additionally, there are over 100 small businesses within two miles of the university that have indicated an interest in the service. Sixty percent of the 100 local businesses will need at least 10 reports each 12-month period. The firm will obtain 6 percent of the business market in the first year, which will increase to 10 percent and 12 percent in the following two a. b. The majority of the students at Central State Univer- sity are enrolled in classes that require two or three reports each semester, ranging from 5 to 50 pages in length. The venture's secondary target market consists of businesses in the nearby city of Emmett, Missouri, which has an SMA (Standard Metropolitan Area) population of c. Business reports will average 30 pages in length, for which the firm will receive $40 per On average, students will want one copy of their report in addition to the original; businesses will want five copies. The firm will charge $0.06 a page 3. complexes within two miles of the university, each con- taining over 50 small businesses for copies. 610 611 Case 10 Practiclly all copies of reports will be bound, for a Financing is expected to come from the following The effective income tax rate will be 20 percent. 6. 5. As the founders, Martin and Stegemoller will each The firm will extend credit to its business customers. Accounts receivable should be about 15 percent of annual business sales, and inventories should run invest $2,000 in the business. Additional equity will be raised in the amount of 4,000 from an outside investor: S3,000 will be invested at startup and the remaining $1,000 at the conclusion of the first year of operations. about 12 percent of annual total sales. However which is estimated at 6 percent of annual sales. mated to be $12 in labor and $0.50 in materials. suppliers are expected to provide credit to the firm, The National Bank of Emmett has agreed to loan the 7. The average cost of producing each report is esti- firm $3,000, to be repaid within one year, but with the option to renew each year, provided the business is doing well. The interest rate is expected to be9 Martin and Stegemoller have an option for a rent- free office in the university's student activities building. This arrangement was negotiated based on an under The $17,000 in equipment will be purchased with a cial pricing schedule after 12 months of operation down payment of $7,000, the remaining balance will be paid off at $2,000 in principal per year, plus inter- est due on the remaining balance at an interest rate of 10 percent. standing that they will provide the university with a spe- The initial operation will include two personal com puters with word-processing, spreadsheet, and database software. One laser printer and two photocopying machines will also be needed. The total equipment costs QUESTION Given the above information, help Martin and Stege moller prepare sheets, and cash flow statements for the first three years of their operation. pro forma income statements, balance Total equipment costs $17,000 The equipment will be depreciated on a straight-line 10 WJP PARTNERS Projecting Financial Requirements Angela Martin is a sophomore English major attending STATEMENT O Central State University, a small liberal arts college in FINANCIAL ASSUMPTIONS Missouri. She is president of the journalism club, which met her dorm roommate and good Drawing on their findings, Martin and Stegemoller have friend Ashlie Stegemoller. Stegemoller is a junior co de the following observations: puter science major. Martin and Stegemoller have been1. Sales projections related to the preparation of stu discussing the possibility of a new business venture. After months of brainstorming, they have agreed to start a venture that would offer students and local businesses help in preparing term papers and reports. Both young entrepreneurs recently attended a local seminar entitled How to Start a New Business." From this experience, they realized the need for preparing pro forma financial statements to obtain necessary financing and also to help them better visualize the merits of the venture. dent reports and term papers are based on the fol- lowing assumptions: versity, or 9,600 students, prepare at least two reports each 12-month period. This gives a pro- ection of 19,200 reports (9,600 x2-19,200). The firm will get 3 percent of the student mar- ket in the first year, which will increase to 5 per- cent and 7 percent in the following two years b. respectively c. Student reports will average 16 pages in length. for which the firm will receive $20 per report. RESEARCH FINDINGS Revenue forecasts associated with the businesses needing the firm's services are based on the follow- 2. Research indicates an unfulfilled demand for quality report-preparation services on campus. Market projec- tions estimate a potential volume of 19.200 reports a year from Central State's students. Additionally, there are over 100 small businesses within two miles of the university that have indicated an interest in the service. Sixty percent of the 100 local businesses will need at least 10 reports each 12-month period. The firm will obtain 6 percent of the business market in the first year, which will increase to 10 percent and 12 percent in the following two a. b. The majority of the students at Central State Univer- sity are enrolled in classes that require two or three reports each semester, ranging from 5 to 50 pages in length. The venture's secondary target market consists of businesses in the nearby city of Emmett, Missouri, which has an SMA (Standard Metropolitan Area) population of c. Business reports will average 30 pages in length, for which the firm will receive $40 per On average, students will want one copy of their report in addition to the original; businesses will want five copies. The firm will charge $0.06 a page 3. complexes within two miles of the university, each con- taining over 50 small businesses for copies. 610 611 Case 10 Practiclly all copies of reports will be bound, for a Financing is expected to come from the following The effective income tax rate will be 20 percent. 6. 5. As the founders, Martin and Stegemoller will each The firm will extend credit to its business customers. Accounts receivable should be about 15 percent of annual business sales, and inventories should run invest $2,000 in the business. Additional equity will be raised in the amount of 4,000 from an outside investor: S3,000 will be invested at startup and the remaining $1,000 at the conclusion of the first year of operations. about 12 percent of annual total sales. However which is estimated at 6 percent of annual sales. mated to be $12 in labor and $0.50 in materials. suppliers are expected to provide credit to the firm, The National Bank of Emmett has agreed to loan the 7. The average cost of producing each report is esti- firm $3,000, to be repaid within one year, but with the option to renew each year, provided the business is doing well. The interest rate is expected to be9 Martin and Stegemoller have an option for a rent- free office in the university's student activities building. This arrangement was negotiated based on an under The $17,000 in equipment will be purchased with a cial pricing schedule after 12 months of operation down payment of $7,000, the remaining balance will be paid off at $2,000 in principal per year, plus inter- est due on the remaining balance at an interest rate of 10 percent. standing that they will provide the university with a spe- The initial operation will include two personal com puters with word-processing, spreadsheet, and database software. One laser printer and two photocopying machines will also be needed. The total equipment costs QUESTION Given the above information, help Martin and Stege moller prepare sheets, and cash flow statements for the first three years of their operation. pro forma income statements, balance Total equipment costs $17,000 The equipment will be depreciated on a straight-line