What price should Aquarius sell for? Suggestions: - Develop a common size income statement and balance sheet. - Use the percentages (when applicable) to develop pro forma income statements and balance sheets. Use the percentages and information given in the case to develop a cash flow statement. - The cash flow formula is (Revenues - Costs - Depreciation) (1 - Tax Rate) + Depreciation - Incremental Working Capital Incremental Capital Expenditures They asked the Greens for information about their past sales, and spent consider- able time researching information about growth potential and competition in the area. They found that drinks were generally priced as a commodity; most bars charged about the same prices for the drinks they served, an average of $4.50 per drink. Even though overall alcohol sales were declining, the Greens believed that their pub's sales would increase. The pub was in an especially desirable location, in their opinion, and the recent closure of several nearby bars due to rezoning and construction expected to contribute to increased sales. The Greens anticipated sales of $200,000 for the upcoming year, a slight decline of about 3 percent, followed by growth of 15 percent the following year, 10 percent the year after that, 5 percent for the next five years, and 3 percent after that. The forecast of declining sales for the upcoming year reflected anticipated roadway con- struction projects proposed for their area. They believed the pub would see a temporary decrease in patronage, but that it would rebound quickly, eventually reaching a steady 3 percent growth rate in a few years. Year Ending 2005 2004 2006 Assets Cash Accounts Receivable Inventory Other Current Assets Total Current Assets Plant, Property and Equipment Depreciation Net PP&E Other Assets Total Assets $ 11,642 2,006 7,407 1,171 22,226 32,546 3,444 29,102 18,347 $ 69,674 $ 13,537 2,483 8,090 1,171 25,281 40.050 4,005 36,045 18,583 $ 79,909 S 16,456 2,822 9,193 1,171 29,642 45,511 4,551 40,960 21,117 $ 91,718 Liabilities Notes Payable Accounts Payable Reserved for Owners' Taxes Other Current Liabilities Total Current Liabilities Long-Term Debt Total Liabilities Owners' Equity Total Liabilities/Owners' Equity $ 8,473 5,098 2,067 4,684 20,321 15,672 35,993 33,681 $ 69.674 $ 9.457 6,484 2,403 6,024 24,367 12,467 36,834 43,075 $ 79,909 $ 13,458 7,343 2.731 5.944 29,475 18,022 47.497 44,221 $ 91,718 Exhibit 2 Aquarius Ales Income Statement Year Ending 2005 $172,468 62,564 900 Sales Cost of Goods Sold Vending Revenues Gross Profit Selling, General, and Administrative Expense Depreciation Expense Earnings before Interest and Taxes Interest Expenso Profit before Taxes Taxes (30 percent Net Incomo 2004 $145,022 50,758 800 $ 95,064 56,725 700 37,640 2,220 35,420 10,626 $ 24,794 $110,804 67,452 750 42,602 1,874 40,728 12,218 $ 28,509 2006 S205,668 69,765 775 $136.677 78,024 800 57,853 2,701 55,152 16,546 $ 38,606 What price should Aquarius sell for? Suggestions: - Develop a common size income statement and balance sheet. - Use the percentages (when applicable) to develop pro forma income statements and balance sheets. Use the percentages and information given in the case to develop a cash flow statement. - The cash flow formula is (Revenues - Costs - Depreciation) (1 - Tax Rate) + Depreciation - Incremental Working Capital Incremental Capital Expenditures They asked the Greens for information about their past sales, and spent consider- able time researching information about growth potential and competition in the area. They found that drinks were generally priced as a commodity; most bars charged about the same prices for the drinks they served, an average of $4.50 per drink. Even though overall alcohol sales were declining, the Greens believed that their pub's sales would increase. The pub was in an especially desirable location, in their opinion, and the recent closure of several nearby bars due to rezoning and construction expected to contribute to increased sales. The Greens anticipated sales of $200,000 for the upcoming year, a slight decline of about 3 percent, followed by growth of 15 percent the following year, 10 percent the year after that, 5 percent for the next five years, and 3 percent after that. The forecast of declining sales for the upcoming year reflected anticipated roadway con- struction projects proposed for their area. They believed the pub would see a temporary decrease in patronage, but that it would rebound quickly, eventually reaching a steady 3 percent growth rate in a few years. Year Ending 2005 2004 2006 Assets Cash Accounts Receivable Inventory Other Current Assets Total Current Assets Plant, Property and Equipment Depreciation Net PP&E Other Assets Total Assets $ 11,642 2,006 7,407 1,171 22,226 32,546 3,444 29,102 18,347 $ 69,674 $ 13,537 2,483 8,090 1,171 25,281 40.050 4,005 36,045 18,583 $ 79,909 S 16,456 2,822 9,193 1,171 29,642 45,511 4,551 40,960 21,117 $ 91,718 Liabilities Notes Payable Accounts Payable Reserved for Owners' Taxes Other Current Liabilities Total Current Liabilities Long-Term Debt Total Liabilities Owners' Equity Total Liabilities/Owners' Equity $ 8,473 5,098 2,067 4,684 20,321 15,672 35,993 33,681 $ 69.674 $ 9.457 6,484 2,403 6,024 24,367 12,467 36,834 43,075 $ 79,909 $ 13,458 7,343 2.731 5.944 29,475 18,022 47.497 44,221 $ 91,718 Exhibit 2 Aquarius Ales Income Statement Year Ending 2005 $172,468 62,564 900 Sales Cost of Goods Sold Vending Revenues Gross Profit Selling, General, and Administrative Expense Depreciation Expense Earnings before Interest and Taxes Interest Expenso Profit before Taxes Taxes (30 percent Net Incomo 2004 $145,022 50,758 800 $ 95,064 56,725 700 37,640 2,220 35,420 10,626 $ 24,794 $110,804 67,452 750 42,602 1,874 40,728 12,218 $ 28,509 2006 S205,668 69,765 775 $136.677 78,024 800 57,853 2,701 55,152 16,546 $ 38,606