This fun exercise is an opportunity for you to show your understanding of financial projections and calculating cash flows. Please feel free to visit me during office hours to clarify material and check your work, but please don't email me your answers. Feel free to work with your classmates, but just know that relying too heavily on others' work might hurt you on future exams! Exercise: This is a common situation in the real world. Assume that you are an analyst covering a "recurring revenue" type firm. Recurring revenue firms typically earn revenues from customers over multiple periods. For instance, cable companies pay to acquire new customers, and the customers pay for services over a recurring time period. You will notice that this format is cost-driven, meaning that certain costs drive revenue! As an analyst, you want to know a) the financing needs for the firm, and b) how much the firm is worth. "Note that we would typically build this model on a monthly basis, but this exercise gets to the concept without you using Excel. As a "star analyst," you have used your skills to observe the financial metrics of the firm's competitors, industry trends and macroeconomic trends. Also, you have listened to and critiqued the firm's latest quarterly conference call. You incorporated all of this information to generate the following assumptions: Assumptions 2020 2021 ARPU - Average Revenue per User (annual, beginning customers) $ Customer Assumptions 1,200 $ 2022 1,500 $ 1,800 Customer Acquisition Expense (per new customer) $ 400 $ Customer Churn (% of beginning customers who quit service) 10% 450 $ 20% 450 20% Cost of Goods Sold per User (use beginning customers) $ 400 $ 500 $ 600 SG&A expense: Total Customer Acquisition Marketing Expense Other SG&A expenses Capital Expenditures (Capex) $120,000 $150,000 $ 180,000 $ 80,000 $100,000 $ 100,000 "Success-Based" Capex (capital expenditures/new customer) $ "Maintenance" Capex Depreciation (% of lagged fixed assets) Interest Expense (% of lagged NP and LTD) Average Tax Rate Required Cash Days Sales in Inventory Days Sales in Receivables Days Payables Outstanding Capital Structure Decisions Equals Depreciation Expense 800 $ 600 $ 500 10% 10% 10% 10% 10% 10% 25% 25% 25% Equal to Accounts Payable 73 28 73 248 73 40 45 45 30 30 30 Dividend Payout Ratio 0% 10% 25% Planned LTD (year end) 500,000 600,000 700,000 Equity Account (Par+ APIC) 2,750,000 2,750,000 2,600,000