Question
Asoftwarestartup,Lutoj,Inc.,isdevelopinganewsmarthomesoftware product.Lutojbelievesrevenuemustreach$5millioninYear3fortheproducttobeviable.Lutoj'soperatingmargin(EBIT/Sales)is20%,thetaxrateis30,and assetturnoveris5X.Thefoundershaveatotalof$200,000forinitialequity funding.AssumeLutojwillpaynodividend.(15 points) a. Withnootherfinancing,willthe$200,000offounderinvestmentbesufficienttoachievetheYear3salestarget?Ifnot,whatlevelofinitialequityinvestment wouldberequired? b. AssumeLutojcannotraiseadditionalequity butwillusedebtto achievethescalenecessarytoreachtheYear3salestarget.Theycanborrowatan8%annualinterestratebeforetax.Howmuchdebtwillinitiallyberequired?
- Asoftwarestartup,Lutoj,Inc.,isdevelopinganewsmarthomesoftware
product.Lutojbelievesrevenuemustreach$5millioninYear3fortheproducttobeviable.Lutoj'soperatingmargin(EBIT/Sales)is20%,thetaxrateis30,and
assetturnoveris5X.Thefoundershaveatotalof$200,000forinitialequity
funding.AssumeLutojwillpaynodividend.(15 points)
a. Withnootherfinancing,willthe$200,000offounderinvestmentbesufficienttoachievetheYear3salestarget?Ifnot,whatlevelofinitialequityinvestment
wouldberequired?
b. AssumeLutojcannotraiseadditionalequity butwillusedebtto
achievethescalenecessarytoreachtheYear3salestarget.Theycanborrowatan8%annualinterestratebeforetax.Howmuchdebtwillinitiallyberequired?
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