From the case booklet, read the Bubble & Bee case, and create the four forecasts listed in the case. These are based on whether you have sales growth or not, and whether you buy or build extra space for expansion. Then calculate the ratios listed in the final page to analyze which decision would be preferable. When calculating the ratios, you do not need to take the average for the balance sheet items as listed in Exhibit $5,$ but can just calculate them with the formulas we used in class.Consequently, in the past few years less effort was focused on building and

maintaining the wholesale accounts. This in part resulted in a slowing of revenue growth

in $2014.$ Alarmed at what this could mean for the future of the company, new and

focused attention was given to expanding and building their online presence.

Greenwood and Thomas were confident that revenue growth of $15\%$ per year would be

achievable over the next three years with the renewed focus on the online business.

The expectation of revenue growth would require the expansion of operating

facilities. Operations were located in two rented $3,000$ square foot facilities. Expansion

to a $10,000$ square feet facility was estimated to meet anticipated growth over the next

three to five years. Two possibilities considered for expansion were renting additional

space or buying a $10,000$ square foot building to house all B&B operating and office

requirements. The finished building would cost roughly $$1,100,000.$

Financial considerations of the two options included:

Additional Rental Space $-$ Rent an additional $4,000$ square foot facility. This

would add $$30,000$ of annual rent cost to the existing annual rent cost of

$$45,000.$

Building Purchase $-$ Borrow $$990,000$ for the building for $20$ years at a $5\%$ all

fee included interest rate. Greenwood as a woman entrepreneur could apply for

an SBA $504$ loan at a fixed rate of $5\%$ with a $90\%$ loan to value ratio. This loan

would require personal guarantees on the entire $$990,000$ amount for both

Greenwood and Thomas. The difference between the building cost and loan

amount would be paid from operating cash in $2015.$ For financial modeling

purposes, the annualized total loan payments $($principal and interest$)$ would be

$$79,440.$ Interest and principal payments would be as follows:Through $2014,$ B&B financed all business growth from operating cash flow with

very small and limited periods of debt financing. Both Greenwood and Thomas were

more willing to take out a loan rather than find an investor. This was mainly due to

concerns about an investor influencing the direction, values and mission of $B$&$B.$

To analyze its two options and to prepare the required lender documents, B&B

needed pro forma financial statements for the next three years $,$ and $2017).$

Refer to Exhibit $3$ for $2013$ and $2014$ Balance Sheets, and $2014$ Income Statements and

Cash Flow Statements. The Balance Sheet, Income Statement and Cash Flow pro forma

financial modeling templates can be found in Exhibit $4.$

Other assumptions used to enable building of pro forma financial statements were:

Revenue $-$ The base scenario was revenue growth of $15\%$ for the next three

years. Both unit demand and average price were used to calculate the $15\%$

growth. A second scenario of no growth in unit demand was also needed for

internal use and comparison purposes.

Cost of Goods Sold as a percent of sales: $20\%$ of sales in $2015$ and $21\%$ in $2016$

and $2017.$

Selling expense as a percent of sales: $25\%$ in $2015,26\%$ in $2016,$ and $27\%$ in

General and Administrative Expenses:

Variable expenses as percent of sales: $5\%$ for all three years

Fixed expenses in both the rent and buy options increasing $$50,000$ each

year due to additional employee related costs

Rent Option

Buy Option

Depreciation:

$*$The building would be depreciated over $30$ years on a straight line basis.

Corporate Taxes were not applicable due to LLC status

Ending receivables balance as a percent of sales: $2\%$ for each year

Ending Inventory balance as a percent sales: $8\%$ for each year

Ending accounts payable as a percent of sales: $4\%$ for each year

$$100,000$ PP&E investment at the beginning of $2016$ to finance the new

equipment. This would be depreciated over $10$ years at $$10,$