In 2013, two sisters, Amy and Maizie Moore founded Amazing Frozen Yogurt Company ltd, which was based on the idea of applying the microbrew or microbatch strategy to the production and sale of frozen yogurt.  Amy and Maizie began producing small quantities of unique flavors and blends in limited editions.  Revenues were $800,000 in 2013 and grew at a rate of 50% per annum 2020.  

Because Amy and Maizie were selling premium frozen yogurt containing premium ingredients, each small cup of yogurt sold for $3.50 and the cost of producing the frozen yogurt averaged $1.50 per cup.  Administrative expenses, including Marlon’s salary and expenses for an accountant and two other administrative staff, were at $180,000 in year 2013.  Marketing expenses, largely in the form of behind-the-counter workers, in-store posters, and advertising in local newspapers, were $200,000 in year 2013. Both sets of expenses were projected to grow at an annual rate of 25% up to 2020. 

An investment in bricks and mortar was necessary to make and sell the yogurt.  Initial specialty equipment and the renovation of an old warehouse building in Lower Downtown, referred to as LoDo, cost $4,500,000 at the beginning of 2012. In 2013, $50,000 was invested in inventories.  In early 2013, an additional $500,000 was spent on equipment to support the increased frozen yogurt sales.  As a result, depreciation expenses were $500,000 in year 2013 and continued on a straight line basis up to and including 2020.  Interest expenses in 2013 were $300,000 on borrowed capital of $3,000,000 and the applicable interest rate continued until 2020. The balance of the capital expenditure was contributed by way of equity. The average tax rate paid by the company is 30 percent of taxable income. If additional equity capital is to be raised the Directors are confident that this could be done at 10%, the same rate that existed from 2013.

The Directors of see the opportunity to increase the company’s growth rate but this would entail them attracting additional capital. They are thinking of doing so by listing Amaizing Yougurt Company on the local Junior Stock Market in 2022.

Required  

1. Determine the number of cups of frozen yogurt sold each year.                                               

2. Calculate the estimated dollar amounts of gross profit and net profit for Amazing Frozen Yogurt over     the period 2013 - 2020.                                                                                                                 

3. Calculate the gross profit margins and net profit margins in 2013 to 2020. Briefly describe what has occurred between the two years.                                                                                           

4. List three things that the company will be required to do in preparation for Stock Market listing                                                                                  

5. Name three obstacles that the company is likely to face in Jamaica 2022 in its  bid to attract new equity capital                                                       

6. Calculate Amazing Yogurts weighted average cost of capital (WACC) 

7. Using the calculated cost of capital in question 6, determine the project’s:

(i) Net present value (NPV)

(ii) Internal rate of return  

(ii) Discounted payback period                                                                                                  

8. As a Financial Manager, which one of the three investment methods used in question 7 above would you place the greatest reliance on? 

9. Give at least two reasons for choosing this method and at least two reasons each for rejecting each of the other two methods.