a) With no other financing, will the $200,000 of founder investment be sufficient to achieve the Year 3 sales target? (Yes or No?)

b) If not, what level of initial equity investment would be required? (hint: use sustainable growth equation or goal seek)

Options: "$346,021", "$200,000 (yes to above question)", "$276,040", "$548,697"

c) 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 8% interest rate before tax. How much debt will initially be required? (hint: use sustainable growth equation or goal seek)

Dropdown options: "$70,000", "$270,000", "$146,000", "$100,000"

A new software start-up, Lutoj, Inc., is developing a new smart home software product. Lutoj believes revenue must reach $5 million in Year 3 for the product to be viable. Lutoj's operating margin (EBIT/Sales) is 20%, the tax rate is 30%, and asset turnover is 5X. The founders have $200,000 between them for initial equity funding. Assume Lutoj will pay no dividend. Hint: Lutoj Sustainable Growth Model Year 1 Assumptions Initial equity Operating margin Turnover Leverage Retention rate Tax rate Interest rate Hint From problem statement From problem statement From problem statement No debt - 1.0 No mention of dividends so 100% From problem statement From problem statement (part 2) Year 1 Financial Results Sales Starting Assets Starting Equity Debt Net Income Return on sales (ROS) Return on assets (ROA) Multiply starting assets by turnover Initial equity * Leverage Initial equity Starting assets - Initial equity ((Sales * Operating margin) - interest expense) * (1-Tax rate) Net income / Sales Net income / Starting assets Sustainable growth (g*) Year 3 Sales Return on sales * Turnover * Leverage * Retention Year 1 sales *(1+sustainable growth rate)^2 (two more years) A new software start-up, Lutoj, Inc., is developing a new smart home software product. Lutoj believes revenue must reach $5 million in Year 3 for the product to be viable. Lutoj's operating margin (EBIT/Sales) is 20%, the tax rate is 30%, and asset turnover is 5X. The founders have $200,000 between them for initial equity funding. Assume Lutoj will pay no dividend. Hint: Lutoj Sustainable Growth Model Year 1 Assumptions Initial equity Operating margin Turnover Leverage Retention rate Tax rate Interest rate Hint From problem statement From problem statement From problem statement No debt - 1.0 No mention of dividends so 100% From problem statement From problem statement (part 2) Year 1 Financial Results Sales Starting Assets Starting Equity Debt Net Income Return on sales (ROS) Return on assets (ROA) Multiply starting assets by turnover Initial equity * Leverage Initial equity Starting assets - Initial equity ((Sales * Operating margin) - interest expense) * (1-Tax rate) Net income / Sales Net income / Starting assets Sustainable growth (g*) Year 3 Sales Return on sales * Turnover * Leverage * Retention Year 1 sales *(1+sustainable growth rate)^2 (two more years)