Question
Jeremy Slacker started the Del Fuego Surf Shop on January 1 after determining that business school classes conflicted with his preferred activity. He invested
Jeremy Slacker started the Del Fuego Surf Shop on January 1 after determining that business school classes conflicted with his preferred activity. He invested 52,000 of his own savings (equity) and borrowed 42,000. For simplicity, assume any additional borrowing or repayments occur at year end. Jeremy will pay the lender interest annually at a rate of 8 percent based on the average annual balance. On January 1 he purchased the shop and equipment, both will be depreciated to zero over 10 years (straight-line). o Because of the fantastic weather in Del Fuego, Jeremy expects sales to occur uniformly over the year. Sales will be both for cash (40 percent) and the 1 rest on account. Sales on account are assumed to be collected in two months. Expected annual sales and costs for the two types of surf board are given 12 below. 3 4 Jeremy will maintain inventory equal to 40% of one month's sales. All boards will be purchased from the manufacturer on credit with payment made 15 one month after purchase. 16 17 Annual cash selling, general, and administrative expenses are 18,000 fixed plus 10 % of revenues. 18 19 Jeremy's tax rate is 25 % 201 21 Jeremey wants a yearend cash balance equal to 150 % of yearend accounts payable. 22 23 24 25 Initial Equity Investment $ 26 Initial loan 94,000 42,000 27 Interest rate 28 29 Shop and equipment 30 31 Percentage cash sales 32 33 34 Expected Annual Sales (units)) 35 Retail Price (per unit) 36 Purchase cost (per unit) 37 38 First year's profit 39 End of year loan balance 40 End of year cash balance 41 End of year Assets 42 43 8% 100,000 40% Zuma Coronado 1,300 600 $550 400 $800 540 $ 150,105 38,640 Inventory as a % of one month's sales 40% Annual selling and admin expenses: Variable (as a % of revenues) Fixed 10% $ 18,000 Tax Rate Cash balance as a % of A/P 25% 150%
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