Describe how a company's capital structure can impact the organizational health (recall the mock Subway income statement from Module 5)

Subway Mock Income Statement Sales COGS (op. exp) Labor Royalties Marketing Controllables Rent $1,000,000 $280,000 $260,000 $50,000 $40,000 $190,000 $80,000 $100,000 (28% expenses attributable to the sale) (26%) (5%) (4% national and local) (19% variable costs: R&M, alarm, cc fees...) (5-8% max if > $1m) (10% of revenue, store level) EBITDA Subway Mock Income Statement Sales $1,000,000 COGS (op. exp) $280,000 (28% expenses attributable to the sale) Labor $260,000 (26%) Royalties $50,000 (5%) Marketing $40,000 (4% national and local) Controllables $190,000 (19% variable costs: R&M, alarm, cc fees...) Rent $80,000 (5-8% max if> $1m) EBITDA $100,000 (10% of revenue, store level) SG&A (op. exp) $30,000 (3% spread over 10 stores, legal, acctg, mgt exp.) Capex $2,000 (.002% spread over 10 stores, remodels, equip) + other income retail or t-shirts EBITDA $68,000 (+ 9 other stores, excludes financing structure) Subway Mock Income Statement EBITDA Interest Depreciation EBT Taxes Net Income $68,000 $20,000 $10,000 $38,000 $13,300 $24,700 (+ 9 other stores) (depends on financing structure and rate) (excluded from EBITDA historical inv. decision) (taxable earnings, geography, S v. C corp.) (35%) (2.5% every $1 in is $.025 in owner's pocket) *EBIT is used for consulting or heavy service based industries *EBITDA is for more capital intense industries Subway Why Interest is a Drain Paid cash for stores #1 and #2 Store #3 required loan of $200,000 Short-term loan 5 years (I misspoke on the narration, sorry) Interest rate = 7% Interest payment = $12,000 / month = Stores #1 and #2 generated $10,000/ month Used cash to pay loan, so became a breakeven business Can't afford SG&A without putting money in Subway Mock Income Statement EBITDA $68,000 (+ 9 other stores) Interest $20,000 (depends on financing structure and rate) Depreciation $10,000 (excluded from EBITDA historical inv.) EBT $58,000 (taxable earnings, geography, S v. C corp.) Taxes $13,300 $20,300 $20,300 (35%) Net Income $24,700 62.5% every $1 in, is $.025 for owner) $37,700 (that's 1 $13,000, now $.0375 on the $1)