Petite Shop (B) D. Wesley Balderson, University of Lethbridge Now that Alice Wood has a better idea of the market potential and market share for her proposed retail store, she wants to be satisfied that the Petite Shop will provide an adequate return on her investment of $25,000. She begins investigating the typical costs she would incur in operating the store. Alice thinks she can operate her new store with one other full-time person and sorte part-time help at an estimated monthly cost of $2000. In looking at potential rental costs, she came across a retail outlet for lease on a busy street in the central business district of Prince George that seems ideal for the Petite Shop. She learns that the site leases for $20 per square foot with no royalty payments except $550 per year to cover municipal taxes. The estimated utility expenses the owner provided were $300 per month, and the insurance for the retail shoe store that had previously been located there was $1500 per year. Although Alice is excited about the potential of this site, she estimates she will need to spend approximately $12,000 for leasehold Improvements, of which $8000 will be depreciable items (20 percent). When obtaining the secondary information from Prince George City Hall, she learned that the business licences will be $100. Alice estimates all miscellaneous expenses, such as stationery, bad debt expense, credit expense, and telephone, to be about $5000 per year. These figures are based on her experience in the store she currently works in. Alice knows she will have to borrow some Coney to purchase inventory. She visited her local bank and found out that the interest rate for a business loan was 10 percent. She also learned that until she had a more concrete proposal, her banker was not interested in considering her for a loan. He mentioned that in addition to leasehold Improvements, she would need one-fourth of the year's cash expenses as operating funds. Although a bit surprised at the bank's reaction, Alice is determined to prepare such a proposal. She knows the new store will need to be promoted but does not know how much she should spend on advertising. The banker suggested the average for ladies' clothing stores was about 2 percent of sales and gave her a copy of a recent Dun and Bradstreet financial ratio sheet to assist her (Table 1). TABLE 1 Key Business Ratios, Canada-Corporations LINE OF BUSINESS CLOTHING, WOMEN'S (Number of concerns reporting) Cost of goods sold Gross margin Current assets to current debt Profits on sales Profits on tangible net worth Sales to tangible net worth Sales to inventory Fixed assets to tangible net worth Current debt to tangible net worth Total debt to tangible net worth (2,323) 58.4% 41.6 1.4 2.7 15.6 5.9 5.7 63.6 127.6 177.3 Alice now finds herself in the same dilemma she was in when determining market potential and market share. She has a lot of information but is not sure how to use it. Questions 1. Using the information presented in Petite Shop (A) and this case, prepare an estimated Income statement and return on investment calculation for the Petite Shop's first year of operation. 2. What areas has Alice overlooked in her investigation? 3. Given your analysis, what would you recommend to Alice? Petite Shop (B) D. Wesley Balderson, University of Lethbridge Now that Alice Wood has a better idea of the market potential and market share for her proposed retail store, she wants to be satisfied that the Petite Shop will provide an adequate return on her investment of $25,000. She begins investigating the typical costs she would incur in operating the store. Alice thinks she can operate her new store with one other full-time person and sorte part-time help at an estimated monthly cost of $2000. In looking at potential rental costs, she came across a retail outlet for lease on a busy street in the central business district of Prince George that seems ideal for the Petite Shop. She learns that the site leases for $20 per square foot with no royalty payments except $550 per year to cover municipal taxes. The estimated utility expenses the owner provided were $300 per month, and the insurance for the retail shoe store that had previously been located there was $1500 per year. Although Alice is excited about the potential of this site, she estimates she will need to spend approximately $12,000 for leasehold Improvements, of which $8000 will be depreciable items (20 percent). When obtaining the secondary information from Prince George City Hall, she learned that the business licences will be $100. Alice estimates all miscellaneous expenses, such as stationery, bad debt expense, credit expense, and telephone, to be about $5000 per year. These figures are based on her experience in the store she currently works in. Alice knows she will have to borrow some Coney to purchase inventory. She visited her local bank and found out that the interest rate for a business loan was 10 percent. She also learned that until she had a more concrete proposal, her banker was not interested in considering her for a loan. He mentioned that in addition to leasehold Improvements, she would need one-fourth of the year's cash expenses as operating funds. Although a bit surprised at the bank's reaction, Alice is determined to prepare such a proposal. She knows the new store will need to be promoted but does not know how much she should spend on advertising. The banker suggested the average for ladies' clothing stores was about 2 percent of sales and gave her a copy of a recent Dun and Bradstreet financial ratio sheet to assist her (Table 1). TABLE 1 Key Business Ratios, Canada-Corporations LINE OF BUSINESS CLOTHING, WOMEN'S (Number of concerns reporting) Cost of goods sold Gross margin Current assets to current debt Profits on sales Profits on tangible net worth Sales to tangible net worth Sales to inventory Fixed assets to tangible net worth Current debt to tangible net worth Total debt to tangible net worth (2,323) 58.4% 41.6 1.4 2.7 15.6 5.9 5.7 63.6 127.6 177.3 Alice now finds herself in the same dilemma she was in when determining market potential and market share. She has a lot of information but is not sure how to use it. Questions 1. Using the information presented in Petite Shop (A) and this case, prepare an estimated Income statement and return on investment calculation for the Petite Shop's first year of operation. 2. What areas has Alice overlooked in her investigation? 3. Given your analysis, what would you recommend to Alice