Andreas Pelekanos (Contemporary Epiplo Design) Background It is early 2021. Andreas Pelekanos is a very confident and charismatic 27 year-old. He is focused, keen, hard working and passionate about fumiture design and fashion. He has a real talent in designing high quality contemporary and modern furniture pieces. For the last two years he had worked with Interfurniture a Milan (Italy) workshop, putting a 12 hour day long in order to learn about the rigorous furniture Industry as quickly as he could He graduated in June 2018 from the University of Florence, Italy. As part of his four-year interior and furniture design degree he created in co-operation with Interfurniture, Furnifun Firenze (an international furniture design and marketing Institute based in Florence) and the Furniture design Institute of Paris, furniture pieces that won international recognition at international exhibitions and shows. In his designed Dieces he introduced a personal character which made his design approach unique and won impressive International exhibition prizes. A considerable number of his creations decorate xury hotels, conference and exhibition centres in Europe and North America. Andreas is anxious about establishing his own contemporary furniture designer label. His ambition is to be one of the world's most well known designers of contemporary fumiture, for which he specialized at his university studies in Florence. He believes that it is possible soon to have his own labeled contemporary furniture pieces exhibited in leading fumiture boutiques both in Europe and North America, soon becoming a recognised label Internationally, Andreas has some very basic knowledge about business from his university studies but not an idea on how to start up a new business. His girlfriend Petra Marble who studies for her Finance Degree, has convinced her to help him with the financial planning to get the business off the ground. The two do not have any important personal contacts in the international contemporary furniture Industry, however Andreas has met with important personalities in the international market during the exhibitions he participated as a designer in Interfurniture Antonio Romeo the retired Chief Executive Officer (CEO) of Interfurniture, a well known Italan personality in the area, with strong links within the industry network in Europe and the United States, is a good friend of Andreas. He spotted Andreas during the time he worked at Interfurniture as a young talented man and promised to give him all his support, including the possibility of introducing him to the big international players of the international contemporary furniture design market. Andreas spoke already with Antonio and he was delighted with the idea of setting up his own designer label encouraging Andreas to go ahead with his plans, promising him his full support Finances A venture capitalist Nicholas Shadow, approached by Antonio Romeo, has offered to participate in the financing of the Andreas Pelekanas (Conteryorary Exible Design) label as a new business. The nature, terms and security of this funding have to be finalized and of course wil depend on the outcomes of further discussions. Nicholas Shadow has clearly however indicated that he wil reserve the position of revising his participation in the new venture in 2025 Business Model Andreas, Petra, Antonio and Nicholas are formulating a business plan. They have decided that the Andreas Pelekavas label will only sell at the wholesale market. Petra has made a research on exports in the contemporary design furniture industry. However Antonio is of the view that it is better to start in the short term with sales only in Europe expanding to the North American and other international markets at a later stage. Therefore they have decided that exporting outside Europe may not be an option for the first two years of operations. Based on his experience from interfumiture, Antonio believes that a lower and more competitive manufacturing cost will be crucial to the success of the business, especially during the first period of its life. His success with Interfurniture was, to a large extend, due to the exploitation of the then available low cost manufacturing options of South East Asia. However he agreed with Nicholas, the venture capitalist, that even though China is an option for low cost manufacturing and that South East Asia remains a competitive low cost manufacturing area, it might be prudent to start manufacturing in Europe and then to source out manufacturing in other lower cost international locations. After all, their objective is to create a well respected manufacturing label rather than a low cost furniture design label Therefore they have decided that it may be prudent to begin with the model of manufacturing in Greece (and then to move to an off-shore manufacturing strategy). Greece offers an attractive low manufacturing cost and high quality production package. In view of this discussion it was decided that the Andreas Pelekanios (Contemporary Epipio Design) label will adopt as its starting business model the option of manufacturing in Europe low cost high quality location) trade in Europe for two years and then to expand to North America and possibly to other parts of the world. a Operating costs Antonio bringing his experience, has prepared an average cost and pricing structure of the adopted business model (European sales and manufacture) as shown in table 1. This model assumes that each piece of furniture will have an average selling price of 62,000. This selling price includes the 100% mark-up offered to retailers. "Pieces of furniture will not necessarily include a single Item of furniture but it is possible to include two or in some cases more than two items (eg a couple of chairs with a sitting table). 6400 Manufacturing Cost Gross Pront Wholesale seling price Mark-up for retailer Retal selling price 600 A good gross pro mark Upis 40-50% on sales. A 10% premium for contemporary fumitur peces is expected 1000 1000 80-100% 2000 Table 1: Cost and Pricing Structure for European Sale and Manufacture. This is considered to be the average cost and pricing structure for the standard contemporary furniture pieces Capital Structure The long term capital structure of the business remains to be agreed. The initial proposal of Petra Marble which has been accepted to be used as the foundation of the co-operation agreement between the parties Involved, provides for the creation of a limited ability company which will own the rights of the Andreas Pelekanos (Contemporary Eppo Design) label. Nicholas Shadow will hold the majority of the shareholding 60%, with the remaining 40% to be allocated equally to the other two parties (Andreas Pelekanos 20% and Antonio Romeo 20%). Nicholas Shadow will pay the full nominal value of his shareholding in cash (shares of 1.00 each) and Antonio Romeo 15%. The remaining shares (5% of Antonio Romeo's shareholding and 20% of Andreas Pelekano's shareholding) will not be paid in cash but they will be issued on the basis of the in kind contribution to the company of Antonio and Andreas respectively. The intention is to combine shareholding (equity) and debt capital (long term borrowing) for financing the long term capital business. The debt capital will be obtained through the issue of a 10 year 4 % convertible corporate bond (to be converted at matunty into ordinary share capital at the price of 2.50 per share). Recognising the high risk Involved in a new business set up, the plan is to initialize the operation through a gearing (leverage) ratio of 50% the Budgeted Financial Statements Petra Marble has produced the budgeted financial statements for the first two years of the new Andreas Aenekanos(Contemporary tapo Design) label business shown in table 2. Andreas has studied carefully all the recent European contemporary furniture design success stories. He knows enough of the hardships ahead and wants to establish a business on the right foundations from the beginning. He is well aware of the big business risks that Andreus Pelekanas (Contemporary Epipb Design) label business faces especially the possibility of low profitability and cash flow tightening. He and Petra particularly want to assess how variations in the level of sales and cost of operations assumed in the budgeted profit statement will affect the profitability of the business. They both realize that they need to keep a very careful, watchful and alert eye on the level of sales and the costs of the business in the first two years. Budpeted Pracal Statements, Assumptions and Notes follow. Profit Statement Budgets Al figures in Euros Sales Less Preston Costa Sme Materials Labour and Contractors 2022 2022 Mest likely Worst Case 1,800,000 1,350,000 2022 Best Case 2,250,000 2023 2023 Most Likely Worst Case J.800.000 1.950,000 2023 Best Case 3,850,000 720,000 360,000 1.000.000 720,000 607,500 337,500 945,000 405,000 787,500 337,500 1,125.000 1,125,000 1,520,000 760,000 2,250,000 1,520,000 877,500 1,347,500 487,500 577,500 1,365,000 1,965,000 585,000 1,925,000 150,000 150,000 150,000 Gross Pront Les de Administrative costs Business Establishment Costs Depreciation Seting and Distribution Net Profit "for some specific and very speciale operations 150,000 100,000 100,000 380,000 -10,000 150.000 150,000 100,000 335.000 -330,000 150,000 75,000 150,000 425.000 325,000 150,000 580,000 640,000 100,000 150,000 395.000 585.000 -60,000 1,040,000 Balance Sheet Budgets 2022 2022 2022 2023 2023 2023 All Figures in Euros Most Likely Worst Case Best Case Most Likely Worst Case Best Case Current Assets Inventory (Stocks) 120,000 105,000 125,000 240,000 140,000 200.000 Debtors 400,000 300,000 500,000 400,000 200,000 400,000 Fim Asses R&D Designer Label 500,000 1,000,000 1.500,000 2,500,000 Plant and Equipment 400,000 400,000 650,000 500,000 300,000 450,000 1,420,000 805,000 2,225,000 2,640,000 640,000 3,550,000 Carrera Bank OverdraftCash Bal) - 115.000 650,000 760,000 -220,000 935.000 Long-Term & E Long-Term Liabilities & Equity 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 Retained Earnings -10,000 -330,000 325,000 630,000 390,000 1,365.000 1,420,000 805,000 2,225,000 2,640,000 640,000 3,550,000 Table 2: Andrews Alecanos (Contemporary tab Dewan label Budgeted Financial Statements for the two years to 31 December 2022 and 2023. Assumptions and Notes: The assumptions made in the preparation of the financial statements are noted as follows: 1. All sales are contracted for, before production - thus all production is to forward orders. 2. The business faces no sensonality. Therefore at sales are considered to flow normally during the year Year Most Uly 2022 2,000 2023 4.000 Table 3. Budgeted Orders Worst Case 11.500 2.000 Best Case 2,500 4,000 3 Inventory (stock) comprises of finished furniture pieces that have not been delivered to buyers. There is no stock of raw materials or work in progress. 1. All sales we acredit 5. Collections from debtors are based on an improving relationship with retailers No allowance for bad debts tas been made Galled Uncoded Table Collections from Debtors 6. Capital funds to sales should every ste at about 10% of sales by the time the business is properly established. An increased investment in plant and equipment will be needed at the 2,500 furniture production level 7. Depreciation is applied at 20% straight line Market Testa a well known European manat research and promotion company based in Italy hos beco contracted to promote the Andar Anato Contemporary fap Detabel Maret Testatas provided a comprehensive promotion plan with the costs involved as shown in tables The spenditure will provide for two yeahibition show med training, and radio interviews, advertisingowy me and every parties for the entical media wiers The whole thrust of the PR campaign is to create a furniture designer label that is associated with its designer - it is retailer independent. It is assumed that in the worst case scenario there will be no expenditure on the promotion of the Andreas Starparts (Contemporari Eppo Design) tabel Year Most Likely Expenditure Best Case Expenditure 2022 500,000 1,000,000 2023 1,000,000 1,500,000 Table 5: Costing for Creating the Andreas Porlekanos (Contemporary Epiplo Design) label. 9. Estimated establishment costs are expected to cover the accounting and legal advice during the establishment of the business entity, costs associated with securing suitable feased premises and the initial round of staff recruitment. 10. The cost structure that wil apply to this new business is estimated at: Cost structure per garment On ) Wholesale Selling Price Materials Labour and subcontracting Prime Cost Gross Profit Table 6: Estimated Cost Structure. Most Likely 1000 400 200 Worst case 1000 450 Best Case 1000 350 150 500 500 600 400 250 700 300 11. Administrative costs including rent are estimated at 150,000 per year. 12. Selling and distribution costs are a mix of fixed 200,000 per annum and 100 per piece of furniture sold. 13. All costs incurred are assumed to be paid immediately. 14. All figures are stated exclusive of sales taxes. Question 1 (40 marks) Given the long term capital requirements, propose a capital structure of Andreas Pelekanos (Contemporary Epiplo Design) label, advising Petra Marble on the number of shares you propose to issue. You need to maintain an adequate under the circumstances gearing (leverage) and to take into consideration all the other parameters referred to in the case. Andreas Pelekanos (Contemporary Epiplo Design) Background It is early 2021. Andreas Pelekanos is a very confident and charismatic 27 year-old. He is focused, keen, hard working and passionate about fumiture design and fashion. He has a real talent in designing high quality contemporary and modern furniture pieces. For the last two years he had worked with Interfurniture a Milan (Italy) workshop, putting a 12 hour day long in order to learn about the rigorous furniture Industry as quickly as he could He graduated in June 2018 from the University of Florence, Italy. As part of his four-year interior and furniture design degree he created in co-operation with Interfurniture, Furnifun Firenze (an international furniture design and marketing Institute based in Florence) and the Furniture design Institute of Paris, furniture pieces that won international recognition at international exhibitions and shows. In his designed Dieces he introduced a personal character which made his design approach unique and won impressive International exhibition prizes. A considerable number of his creations decorate xury hotels, conference and exhibition centres in Europe and North America. Andreas is anxious about establishing his own contemporary furniture designer label. His ambition is to be one of the world's most well known designers of contemporary fumiture, for which he specialized at his university studies in Florence. He believes that it is possible soon to have his own labeled contemporary furniture pieces exhibited in leading fumiture boutiques both in Europe and North America, soon becoming a recognised label Internationally, Andreas has some very basic knowledge about business from his university studies but not an idea on how to start up a new business. His girlfriend Petra Marble who studies for her Finance Degree, has convinced her to help him with the financial planning to get the business off the ground. The two do not have any important personal contacts in the international contemporary furniture Industry, however Andreas has met with important personalities in the international market during the exhibitions he participated as a designer in Interfurniture Antonio Romeo the retired Chief Executive Officer (CEO) of Interfurniture, a well known Italan personality in the area, with strong links within the industry network in Europe and the United States, is a good friend of Andreas. He spotted Andreas during the time he worked at Interfurniture as a young talented man and promised to give him all his support, including the possibility of introducing him to the big international players of the international contemporary furniture design market. Andreas spoke already with Antonio and he was delighted with the idea of setting up his own designer label encouraging Andreas to go ahead with his plans, promising him his full support Finances A venture capitalist Nicholas Shadow, approached by Antonio Romeo, has offered to participate in the financing of the Andreas Pelekanas (Conteryorary Exible Design) label as a new business. The nature, terms and security of this funding have to be finalized and of course wil depend on the outcomes of further discussions. Nicholas Shadow has clearly however indicated that he wil reserve the position of revising his participation in the new venture in 2025 Business Model Andreas, Petra, Antonio and Nicholas are formulating a business plan. They have decided that the Andreas Pelekavas label will only sell at the wholesale market. Petra has made a research on exports in the contemporary design furniture industry. However Antonio is of the view that it is better to start in the short term with sales only in Europe expanding to the North American and other international markets at a later stage. Therefore they have decided that exporting outside Europe may not be an option for the first two years of operations. Based on his experience from interfumiture, Antonio believes that a lower and more competitive manufacturing cost will be crucial to the success of the business, especially during the first period of its life. His success with Interfurniture was, to a large extend, due to the exploitation of the then available low cost manufacturing options of South East Asia. However he agreed with Nicholas, the venture capitalist, that even though China is an option for low cost manufacturing and that South East Asia remains a competitive low cost manufacturing area, it might be prudent to start manufacturing in Europe and then to source out manufacturing in other lower cost international locations. After all, their objective is to create a well respected manufacturing label rather than a low cost furniture design label Therefore they have decided that it may be prudent to begin with the model of manufacturing in Greece (and then to move to an off-shore manufacturing strategy). Greece offers an attractive low manufacturing cost and high quality production package. In view of this discussion it was decided that the Andreas Pelekanios (Contemporary Epipio Design) label will adopt as its starting business model the option of manufacturing in Europe low cost high quality location) trade in Europe for two years and then to expand to North America and possibly to other parts of the world. a Operating costs Antonio bringing his experience, has prepared an average cost and pricing structure of the adopted business model (European sales and manufacture) as shown in table 1. This model assumes that each piece of furniture will have an average selling price of 62,000. This selling price includes the 100% mark-up offered to retailers. "Pieces of furniture will not necessarily include a single Item of furniture but it is possible to include two or in some cases more than two items (eg a couple of chairs with a sitting table). 6400 Manufacturing Cost Gross Pront Wholesale seling price Mark-up for retailer Retal selling price 600 A good gross pro mark Upis 40-50% on sales. A 10% premium for contemporary fumitur peces is expected 1000 1000 80-100% 2000 Table 1: Cost and Pricing Structure for European Sale and Manufacture. This is considered to be the average cost and pricing structure for the standard contemporary furniture pieces Capital Structure The long term capital structure of the business remains to be agreed. The initial proposal of Petra Marble which has been accepted to be used as the foundation of the co-operation agreement between the parties Involved, provides for the creation of a limited ability company which will own the rights of the Andreas Pelekanos (Contemporary Eppo Design) label. Nicholas Shadow will hold the majority of the shareholding 60%, with the remaining 40% to be allocated equally to the other two parties (Andreas Pelekanos 20% and Antonio Romeo 20%). Nicholas Shadow will pay the full nominal value of his shareholding in cash (shares of 1.00 each) and Antonio Romeo 15%. The remaining shares (5% of Antonio Romeo's shareholding and 20% of Andreas Pelekano's shareholding) will not be paid in cash but they will be issued on the basis of the in kind contribution to the company of Antonio and Andreas respectively. The intention is to combine shareholding (equity) and debt capital (long term borrowing) for financing the long term capital business. The debt capital will be obtained through the issue of a 10 year 4 % convertible corporate bond (to be converted at matunty into ordinary share capital at the price of 2.50 per share). Recognising the high risk Involved in a new business set up, the plan is to initialize the operation through a gearing (leverage) ratio of 50% the Budgeted Financial Statements Petra Marble has produced the budgeted financial statements for the first two years of the new Andreas Aenekanos(Contemporary tapo Design) label business shown in table 2. Andreas has studied carefully all the recent European contemporary furniture design success stories. He knows enough of the hardships ahead and wants to establish a business on the right foundations from the beginning. He is well aware of the big business risks that Andreus Pelekanas (Contemporary Epipb Design) label business faces especially the possibility of low profitability and cash flow tightening. He and Petra particularly want to assess how variations in the level of sales and cost of operations assumed in the budgeted profit statement will affect the profitability of the business. They both realize that they need to keep a very careful, watchful and alert eye on the level of sales and the costs of the business in the first two years. Budpeted Pracal Statements, Assumptions and Notes follow. Profit Statement Budgets Al figures in Euros Sales Less Preston Costa Sme Materials Labour and Contractors 2022 2022 Mest likely Worst Case 1,800,000 1,350,000 2022 Best Case 2,250,000 2023 2023 Most Likely Worst Case J.800.000 1.950,000 2023 Best Case 3,850,000 720,000 360,000 1.000.000 720,000 607,500 337,500 945,000 405,000 787,500 337,500 1,125.000 1,125,000 1,520,000 760,000 2,250,000 1,520,000 877,500 1,347,500 487,500 577,500 1,365,000 1,965,000 585,000 1,925,000 150,000 150,000 150,000 Gross Pront Les de Administrative costs Business Establishment Costs Depreciation Seting and Distribution Net Profit "for some specific and very speciale operations 150,000 100,000 100,000 380,000 -10,000 150.000 150,000 100,000 335.000 -330,000 150,000 75,000 150,000 425.000 325,000 150,000 580,000 640,000 100,000 150,000 395.000 585.000 -60,000 1,040,000 Balance Sheet Budgets 2022 2022 2022 2023 2023 2023 All Figures in Euros Most Likely Worst Case Best Case Most Likely Worst Case Best Case Current Assets Inventory (Stocks) 120,000 105,000 125,000 240,000 140,000 200.000 Debtors 400,000 300,000 500,000 400,000 200,000 400,000 Fim Asses R&D Designer Label 500,000 1,000,000 1.500,000 2,500,000 Plant and Equipment 400,000 400,000 650,000 500,000 300,000 450,000 1,420,000 805,000 2,225,000 2,640,000 640,000 3,550,000 Carrera Bank OverdraftCash Bal) - 115.000 650,000 760,000 -220,000 935.000 Long-Term & E Long-Term Liabilities & Equity 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 1,250,000 Retained Earnings -10,000 -330,000 325,000 630,000 390,000 1,365.000 1,420,000 805,000 2,225,000 2,640,000 640,000 3,550,000 Table 2: Andrews Alecanos (Contemporary tab Dewan label Budgeted Financial Statements for the two years to 31 December 2022 and 2023. Assumptions and Notes: The assumptions made in the preparation of the financial statements are noted as follows: 1. All sales are contracted for, before production - thus all production is to forward orders. 2. The business faces no sensonality. Therefore at sales are considered to flow normally during the year Year Most Uly 2022 2,000 2023 4.000 Table 3. Budgeted Orders Worst Case 11.500 2.000 Best Case 2,500 4,000 3 Inventory (stock) comprises of finished furniture pieces that have not been delivered to buyers. There is no stock of raw materials or work in progress. 1. All sales we acredit 5. Collections from debtors are based on an improving relationship with retailers No allowance for bad debts tas been made Galled Uncoded Table Collections from Debtors 6. Capital funds to sales should every ste at about 10% of sales by the time the business is properly established. An increased investment in plant and equipment will be needed at the 2,500 furniture production level 7. Depreciation is applied at 20% straight line Market Testa a well known European manat research and promotion company based in Italy hos beco contracted to promote the Andar Anato Contemporary fap Detabel Maret Testatas provided a comprehensive promotion plan with the costs involved as shown in tables The spenditure will provide for two yeahibition show med training, and radio interviews, advertisingowy me and every parties for the entical media wiers The whole thrust of the PR campaign is to create a furniture designer label that is associated with its designer - it is retailer independent. It is assumed that in the worst case scenario there will be no expenditure on the promotion of the Andreas Starparts (Contemporari Eppo Design) tabel Year Most Likely Expenditure Best Case Expenditure 2022 500,000 1,000,000 2023 1,000,000 1,500,000 Table 5: Costing for Creating the Andreas Porlekanos (Contemporary Epiplo Design) label. 9. Estimated establishment costs are expected to cover the accounting and legal advice during the establishment of the business entity, costs associated with securing suitable feased premises and the initial round of staff recruitment. 10. The cost structure that wil apply to this new business is estimated at: Cost structure per garment On ) Wholesale Selling Price Materials Labour and subcontracting Prime Cost Gross Profit Table 6: Estimated Cost Structure. Most Likely 1000 400 200 Worst case 1000 450 Best Case 1000 350 150 500 500 600 400 250 700 300 11. Administrative costs including rent are estimated at 150,000 per year. 12. Selling and distribution costs are a mix of fixed 200,000 per annum and 100 per piece of furniture sold. 13. All costs incurred are assumed to be paid immediately. 14. All figures are stated exclusive of sales taxes. Question 1 (40 marks) Given the long term capital requirements, propose a capital structure of Andreas Pelekanos (Contemporary Epiplo Design) label, advising Petra Marble on the number of shares you propose to issue. You need to maintain an adequate under the circumstances gearing (leverage) and to take into consideration all the other parameters referred to in the case