Question
A software start-up, Lutoj, Inc., is developing a new smart home software product. Lutoj believes revenue must reach $2 million in Year 3 for the
A software start-up, Lutoj, Inc., is developing a new smart home software product. Lutoj believes revenue must reach $2 million in Year 3 for the product to be viable. Lutojs operating margin (EBIT/Sales) is 15%, the tax rate is 30%, and asset turnover is 2X. The founders have a total of $500,000 for initial equity funding. Lutoj's will pay no dividends. With no other financing, will the $500,000 of founder investment be sufficient to achieve the Year 3 sales target? If not, what level of initial equity investment would be required?
Yes, Lutoj will be able to reach its goal of $2 million with the $500,000 initial equity investment.
No, Lutoj will need an initial equity investment of $541,698
No, Lutoj will need an initial equity investment of $601,471
No, Lutoj will need an initial equity investment of $683,014
Assume Lutoj cannot raise additional equity, but will use debt to achieve the scale necessary to reach the Year 3 sales target. They can borrow at an 7.25% annual interest rate before tax. How much debt will initially be required?
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