All sales are made on credit terms of net 90 days and are collected the following quarter. No bad debts are anticipated. The accounts receivable on the balance sheet at the end of 2020 thus will be collected in Quarter 1, 2021. Quarter 1, 2021 sales will be collected in Quarter 2, and so on. Inventory on hand represents a minimum operating level (safety stock), which the company intends to maintain. ALMA.com's policy is to maintain ending inventory at the end of each quarter equals to 30% of next quarter's expected sales. Purchases are paid 60% in the same quarter and 40% in the next quarter. Cost of goods sold averages 70% of sales (gross profit margin 30%). General, Administration and Selling cash expenses average 10% of sales. Depreciation is $0.01M per Quarter. The annual interest rate on outstanding lease liability is 5%. Interest expense is paid quarterly. Ms Alma Serah assumes taxes are paid quarterly and the income tax rate is 40% for budgeting purposes. The capital lease installment is 0.08M per Year (0.02 per quarter). There are no additional capital expenditures planned during 2021, and no equity payouts will be paid. The company's desired end-of- quarter minimum cash balance is $0.15M. Ms Serah hopes to meet any cash shortages during the period by an agreed $0.15M open line of credit with the bank at 4%. a. Prepare quarterly purchase budget for Q1, 02, 03, and for Q4 ending December 31, 2021 Assume that forecasted sales for the first quarter of 2022 = $1.2 million. b. Prepare quarterly general, administration and selling budget for Q1, Q2, Q3, and for Q4 ending December 31, 2021. c. Prepare quarterly cash budget for Q1, Q2, Q3, and for Q4 ending December 31, 2021. d. Prepare the pro forma income statement for the year ending December 31, 2021. e. Prepare the end of the year 2021 pro forma balance sheet. f. Based on your projections for the four quarters of 2021, indicate (1) whether new bank borrowing (open line of credit) will be needed and (2) if borrowing is needed, when does the need start occurring and what is the maximum amount needed? g. An analysis of the cash conversion cycle should also help Alma Serah understand what has been happening to the operations of ALMA.com. Prepare an analysis of the conversion periods for the three components of the cash conversion cycle for 2021. Explain what has happened in terms of each component of the cycle during 2021. Ms. Serah should be interested in knowing whether ALMA.com. has been building or burning cash. Comment on the cash build, cash burn, and the net cash build/burn position for 2021. Ms. Alma Serah is planning to leverage equity capital with debt during the years 2022, 2023 and 2024. She is keen to know whether ALMA.com will add economic value. Therefore, in order to assess the effects of its leveraging debt strategy, ALMA.com prepared a projected Statement of Financial Position (Balance Sheet) and Income Statement for the years 2022, 2023 and 2024 based on certain assumptions and events that are likely to happen in the future. The interest rate on capital lease is 5%. The average expected interest rate on the bank loan during 2022 - 2024 is 4%. For long-term debt, the real interest rate is estimated to be 3%; the inflation premium is 4%; and ALMA.com's default/liquidity risk premium over government bonds is estimated to be 5%. The cost of common equity was estimated using the risk-free long-term government bond rate plus investment risk premium of 5.8%. The income tax rate = 40%. Following are the projected statements of income and financial position for 2022, 2023 and 2024: Alma.com Projected Statement of Income (2022 - 2024) INCOME STATEMENT 2022 2023 2024 Revenues $3.44M $7.50M $12.30M Cost of Goods Sold 2.55 5.20 8.72 Gross Profit 0.89 3.30 3.58 General and Marketing Expenses 0.26 0.34 0.36 Research and Development 0.05 0.05 0.05 Depreciation 0.06 0.09 0.12 EBIT 0.57 1.87 3.05 Interest Expense 0.07 0.11 0.18 EBT 0.50 1.76 2.87 Income Taxes 0.20 0.70 1.15 Net Income (Loss) 0.30 1.06 1.72 Alma.com Projected Statement of Financial Position (2022 - 2024) BALANCE SHEET 2022 2023 2024 Cash $ 1.15 M $ 1.87 M $ 3.95 M Accounts Receivable 0.35 1.00 1.50 Inventories 0.50 0.48 1.40 Total Current Assets 2.00 3.35 6.85 Net fixed assets* 0.15 0.35 0.57 Total Assets 2.15 3.70 7.42 Accounts payable 0.44 0.59 1.13 Accrued Liabilities 0.16 0.38 0.52 Total Current Liabilities 0.60 0.97 1.65 Capital Lease Liability* 0.13 0.30 0.60 Bank Loan 0.12 0.45 0.70 Long-Term Debt 0.50 1.50 Total Non-Current Liabilities 0.45 1.25 2.80 Total Liabilities 1.05 2.22 4.45 Venture Capital 1.00 1.00 1.00 Additional Paid-in Capital 0 0.30 0 Retained Earnings 0.10 0.18 1.97 Total Equity 1.10 1.48 2.97 Total Liabilities and Equity 2.15 3.70 7.42 *Represents the capital lease of tools and equipment (warehouse facilities) h. Determine the financial structure weights from ALMA.com's 2024 statement of financial position for the three interest-bearing debt components and the common equity. i. Calculate ALMA.com's weighted average cost of capital (WACC) j. Estimate ALMA.com's economic value added (EVA). Did ALMA.com expect to build or destroy economic value in 2024? (Hint: Consider whether ALMA.com is adding economic value in terms of its net operating profit after taxes (NOPAT)* and its weighted average cost of capital (WACC). k. Alma.com investors have been approached by an outside investor who wants to invest $3.0M in the venture at the end of 2020. What percentage of ownership in the venture should ALMA.com investors give up to the outside investor for a $3.0M new investment? Alma.com financial analysts predict that Operating Cash Flows are expected to be $0.21M in 2021, $0.55M in 2022, $0.60M in 2023 and $76M in 2024. The analysts further predict that the company's cash flows are expected to grow at 1% annual rate indefinitely beyond 2024. (Hint: Use Projected Free Cash Flow]. 3 All sales are made on credit terms of net 90 days and are collected the following quarter. No bad debts are anticipated. The accounts receivable on the balance sheet at the end of 2020 thus will be collected in Quarter 1, 2021. Quarter 1, 2021 sales will be collected in Quarter 2, and so on. Inventory on hand represents a minimum operating level (safety stock), which the company intends to maintain. ALMA.com's policy is to maintain ending inventory at the end of each quarter equals to 30% of next quarter's expected sales. Purchases are paid 60% in the same quarter and 40% in the next quarter. Cost of goods sold averages 70% of sales (gross profit margin 30%). General, Administration and Selling cash expenses average 10% of sales. Depreciation is $0.01M per Quarter. The annual interest rate on outstanding lease liability is 5%. Interest expense is paid quarterly. Ms Alma Serah assumes taxes are paid quarterly and the income tax rate is 40% for budgeting purposes. The capital lease installment is 0.08M per Year (0.02 per quarter). There are no additional capital expenditures planned during 2021, and no equity payouts will be paid. The company's desired end-of- quarter minimum cash balance is $0.15M. Ms Serah hopes to meet any cash shortages during the period by an agreed $0.15M open line of credit with the bank at 4%. a. Prepare quarterly purchase budget for Q1, 02, 03, and for Q4 ending December 31, 2021 Assume that forecasted sales for the first quarter of 2022 = $1.2 million. b. Prepare quarterly general, administration and selling budget for Q1, Q2, Q3, and for Q4 ending December 31, 2021. c. Prepare quarterly cash budget for Q1, Q2, Q3, and for Q4 ending December 31, 2021. d. Prepare the pro forma income statement for the year ending December 31, 2021. e. Prepare the end of the year 2021 pro forma balance sheet. f. Based on your projections for the four quarters of 2021, indicate (1) whether new bank borrowing (open line of credit) will be needed and (2) if borrowing is needed, when does the need start occurring and what is the maximum amount needed? g. An analysis of the cash conversion cycle should also help Alma Serah understand what has been happening to the operations of ALMA.com. Prepare an analysis of the conversion periods for the three components of the cash conversion cycle for 2021. Explain what has happened in terms of each component of the cycle during 2021. Ms. Serah should be interested in knowing whether ALMA.com. has been building or burning cash. Comment on the cash build, cash burn, and the net cash build/burn position for 2021. Ms. Alma Serah is planning to leverage equity capital with debt during the years 2022, 2023 and 2024. She is keen to know whether ALMA.com will add economic value. Therefore, in order to assess the effects of its leveraging debt strategy, ALMA.com prepared a projected Statement of Financial Position (Balance Sheet) and Income Statement for the years 2022, 2023 and 2024 based on certain assumptions and events that are likely to happen in the future. The interest rate on capital lease is 5%. The average expected interest rate on the bank loan during 2022 - 2024 is 4%. For long-term debt, the real interest rate is estimated to be 3%; the inflation premium is 4%; and ALMA.com's default/liquidity risk premium over government bonds is estimated to be 5%. The cost of common equity was estimated using the risk-free long-term government bond rate plus investment risk premium of 5.8%. The income tax rate = 40%. Following are the projected statements of income and financial position for 2022, 2023 and 2024: Alma.com Projected Statement of Income (2022 - 2024) INCOME STATEMENT 2022 2023 2024 Revenues $3.44M $7.50M $12.30M Cost of Goods Sold 2.55 5.20 8.72 Gross Profit 0.89 3.30 3.58 General and Marketing Expenses 0.26 0.34 0.36 Research and Development 0.05 0.05 0.05 Depreciation 0.06 0.09 0.12 EBIT 0.57 1.87 3.05 Interest Expense 0.07 0.11 0.18 EBT 0.50 1.76 2.87 Income Taxes 0.20 0.70 1.15 Net Income (Loss) 0.30 1.06 1.72 Alma.com Projected Statement of Financial Position (2022 - 2024) BALANCE SHEET 2022 2023 2024 Cash $ 1.15 M $ 1.87 M $ 3.95 M Accounts Receivable 0.35 1.00 1.50 Inventories 0.50 0.48 1.40 Total Current Assets 2.00 3.35 6.85 Net fixed assets* 0.15 0.35 0.57 Total Assets 2.15 3.70 7.42 Accounts payable 0.44 0.59 1.13 Accrued Liabilities 0.16 0.38 0.52 Total Current Liabilities 0.60 0.97 1.65 Capital Lease Liability* 0.13 0.30 0.60 Bank Loan 0.12 0.45 0.70 Long-Term Debt 0.50 1.50 Total Non-Current Liabilities 0.45 1.25 2.80 Total Liabilities 1.05 2.22 4.45 Venture Capital 1.00 1.00 1.00 Additional Paid-in Capital 0 0.30 0 Retained Earnings 0.10 0.18 1.97 Total Equity 1.10 1.48 2.97 Total Liabilities and Equity 2.15 3.70 7.42 *Represents the capital lease of tools and equipment (warehouse facilities) h. Determine the financial structure weights from ALMA.com's 2024 statement of financial position for the three interest-bearing debt components and the common equity. i. Calculate ALMA.com's weighted average cost of capital (WACC) j. Estimate ALMA.com's economic value added (EVA). Did ALMA.com expect to build or destroy economic value in 2024? (Hint: Consider whether ALMA.com is adding economic value in terms of its net operating profit after taxes (NOPAT)* and its weighted average cost of capital (WACC). k. Alma.com investors have been approached by an outside investor who wants to invest $3.0M in the venture at the end of 2020. What percentage of ownership in the venture should ALMA.com investors give up to the outside investor for a $3.0M new investment? Alma.com financial analysts predict that Operating Cash Flows are expected to be $0.21M in 2021, $0.55M in 2022, $0.60M in 2023 and $76M in 2024. The analysts further predict that the company's cash flows are expected to grow at 1% annual rate indefinitely beyond 2024. (Hint: Use Projected Free Cash Flow]. 3