Raising Capital

RAISING CAPITAL D. Vance Copyright 2018

Raising Capital
Homework Packet

You must show your work. Answers alone DO NOT demonstrate mastery or knowledge.

David E. Vance 2019

Module I Borrowing Capacity Name ___________________________

Banks grant loans based on a company’s credit history, ability to generate cash, and collateral. Banks see collateral as a secondary source of payment in case a company defaults. Banks calculate borrowing capacity as assets, less ineligible assets. Ineligible assets include (i) loans to officers, directors and employees, (ii) pre-paid expenses, (iii) intangible assets such as patents and copyrights, (iv) goodwill and (v) accounts receivable over a certain age usually 60 to 90 days depending on the bank and the economy. This calculation gives Tangible Assets. Most companies have non-bank liabilities like (i) accounts payable, (ii) accrued payroll, (iii) non-bank leases, (iv) mortgages. Tangible assets less non-bank liabilities equals Tangible Net Worth. Banks multiply Tangible Net Worth times some factor. This factor is often 80% when the economy is good and 70% when the economy is bad, but this factor varies from bank to bank. Tangible Net Worth times this factor is the Borrowing Capacity. Bank debt is subtracted from Borrowing Capacity to find the Remaining Capacity. Bank debt includes things like short and long term bank loans and a line of credit. A line of credit is a short term loan that can be used to finance seasonal costs or some other short term need like a payroll. The Remaining Capacity is the maximum amount that can be borrowed on a line of credit. Complete Bob’s Borrowing Capacity Analysis.

 

Bob’s Autoworld Balance Sheet

Assets

Cash 60

Accounts Receivable 300

Pre-paid Expenses 10

Loans to Officers 30

Inventory 350

Plant Property and Equipment 400

Patents 10

Goodwill 40

Land 100

Total Assets 1,300

Liabilities

Accounts Payable 210

Accrued Payroll 10

Line of Credit 190

Bank Term Loan 200

Leases, Non-bank 50

Mortgages, Non-Bank 240

Total Liabilities 900

Equity 400

_____

Total Liabilities & Equity 1,300

Bank loan terms:

Accounts receivable > 90 days excluded

Bank factor 80%

Accounts Receivable Aging:

0 to 30 days 130

31 to 60 days 120

61 to 90 days 40

91 and over 10

Module II Factoring Name___________________

One method of financing sales when bank financing is not available is factoring. Factoring with recourse is usually structured as a loan against the value of an account receivable. If the factor cannot collect the amount of the invoice, the factor can return the account to the company originating the invoice and get the amount of the loan returned. Factors charge a fee for accounts factored, plus interest on the amount advanced. The exact rates and fee formulation varies from factor to factor.

Suppose a factor charges a base fee of 3% of the invoice amount plus 15% on the amount advanced from the day of the advance until the invoice is collected. The factor advances 80% of the amount of an invoice. For an invoice of $20,000 which takes 50 days to collect, The advance would be $16,000 ($20,000 invoice x 80%). The base fee would be $600 (3% x $20,000). The interest charge would be $328.77($16,000 advance x 15% x 50 days / 365 days). The factor’s total charges would be $928.77($600 + $328.77). The Factor will remit the amount collected less the advance and the factor’s charges. In this case, the company originating the invoice would get an additional remittance of $3,071.23 ($20,000 collected – $16,000 advance – $928.77 factor charges).

A company factors a $100,000 invoice with factor that charges 2% of the invoice amount as a base fee and 18% interest on the advance from the time of the advance until the time the account is collected. The company advances 85% of the invoice amount. It takes the factor 45 days to collect the account.

1. What is the amount of the advance?

2. What is the amount of the base fee?

3. How much is the interest on the advance?

4. Does the company originating the invoice get any additional payment? If so, how much?

Module III Asset Based Lenders Name______________________

Asset based lenders evaluate risk and reward differently than banks and so they may lend when banks will not. Whereas banks are interested in historical, current and future cash flow, asset based lenders focus on the quality and marketability of assets used to secure a loan. Asset based lenders are sometimes called commercial credit companies. Asset based lenders each have their own personality and lending criterion so it is important for a company to carefully consider the criterion each use.

Transamerica Business Capital is an asset based lender. It makes loans that range from $10 to $150 million. Characteristics of companies that qualify for Transamerica financing include:

( Actively involved management, with a track record of good performance in the company’s industry

( Adequate assets. Cash is not considered an asset which can be used as collateral.

( Historical profitability that is “spotted” to consistent

( Moderate to high financial leverage

( Realistic projections, consistent with historical data

Required Loan To Asset Value(s)

( Accounts receivable, up to 80% of accounts receivable less than 60 days old.

( Inventory, up to 75% of eligible (lower of cost or market) inventory

( Machinery and Equipment – up to 60% of appraised, orderly liquidation value.

( Real Estate – up to 65% of appraised fair market value less any mortgage.

Terms and Repayment

( Repayment consistent with liquidation of assets and up to seven years

( Rate: Floating rate over prime rate.

Proxima Comics specializes in Spanish language comic books. They have four different comic books each of which is published monthly. Profits have been $3 million, a loss of $2 million, and a profit of $4 million on sales of $18 million, $21 million, and $24 million respectively. They want to borrow $8 million to purchase rights to publish Marvel Comics in Spanish and finance additional production and working capital. Their balance sheet in thousands follows:

Asset to Max Prior Amount

Assets Loan % Collateral Claims of Loan

Cash 60

Accounts Receivable (all under 60 day) 8,000

Inventory 440

Furniture & Fixtures 500

Printing Machinery 6,000

Real Estate 10,000 _________

25,000

Liabilities

Accounts Payable 300

Bank Loan 4,000

Mortgage Real Estate 5,700

10,000

Equity

Capital at Par and Paid In Capital 3,000

Retained Earnings 12,000

15,000

Does Proxima get a loan? [ ] Yes [ ] No If so, how much?

A commercial credit company’s lien is subordinate to prior liens. Compute the amount that would be available for each asset assuming no liens. Subtract the mortgage from the remaining real estate value, subtract bank loans from other assets, the most liquid asset first. Balances due trade creditors (Accounts payable) liabilities are not secured (there is no lien for this debt).

New Module IV Sale & Lease Back Name _______________________

Sometime companies that need to raise money do not have good enough credit for a bank loan. If they have a substantial owner occupied real estate they may use that in a sale and leaseback arrangement to raise ready cash.

There are two key questions in a sale and lease back (i) what is the most the investor will pay for the building? and (ii) what will the seller have to pay in monthly lease payments to keep using the building? Commercial lease payments are usually triple net meaning the lessor must pay the property taxes, insurance and utilities in addition to the basic lease payment.

The most an investor will pay for a building in a sale and lease back transaction is the net amount the investor could raise if he or she sold the building immediately. Starting with a building’s fair market value, the following items must be deducted (i) any outstanding mortgages, (ii) the real estate broker’s fee for selling the property, commercial real estate sales are often around 10% of price, (iii) some reserve for price uncertainty, and (iv) costs to clean up and refurbish the property for sale.

Suppose a company has a building with a fair market value of $1,200,000. It is willing to enter a 20 year lease, with even monthly payments. The property is subject to a $300,000 mortgage. A sales brokerage commission of 10% is typical for the type of property in question. The reserve for price uncertainty is 2.5%. It would cost $20,000 to clean up the property for sale, and the investor needs a 15% return to do the deal.

1. What is the maximum net value of the building to the investor?

2. Suppose the investor believes it will take six months to seize, clean-up and sell the building and he or she wants to discount the maximum net value of the building to reflect this holding period. With this in mind, what is the most the investor should offer for the building? Use simple interest for the discounting.

Hint: Maximum Offer = Maximum Net Value / (1 + Interest Rate x Holding Period in Months/12 Months per Year). Example: The maximum net value of a building is $100,000. The investor needs a return of 12% per year. She believes she it will take 4 months to seize, clean and sell the building. The max she should offer is:

Max Offer =$100,000 / (1 + 12% x 4 months/12 months) = $100,000 / (1 + 4%) = $100,000 / 1.04 = $96,154.

3. What is the seller / leasee’s monthly payment?

Module V Budgeting A Name _______________________

Investors are going to want to see a company’s budget from the current time until they exit the investment. Sales are the hardest thing to estimate, but after sales are estimated, an entrepreneur should know how to translate sales into Net Income and Cash Flow. The format for a budget is:

 

Income Budget:

Sales $10,000,000

Less Cost of Goods Sold $6,000,000

Subtotal Gross Profit $4,000,000

Less Overhead

Selling & Marketing Costs $800,000

Other Overhead $1,600,000

Total Overhead $2,400,000

Earnings before Interest & Tax $1,600,000

Less Interest $200,000

Earnings before Tax $1,400,000

Income Tax $574,000

Net Income $826,000

A company has a sales forecast of $200,000, $600,000 and $1,200,000 in years 1, 2 and 3. COGS% is 55%. Selling and Marketing Costs are $30,000 + 8% of sales. Other overhead is $200,000 + 1% of sales. Interest is $20,000 in each year. The combined federal and state income tax is 40%. Ignore tax loss carry forward.

1. Complete the income statement budget.

Income Statement Year 1 Year 2 Year 3
Sales

 

     
Cost of Goods Sold

 

     
Gross Profit

 

     
Overhead      
Selling and Marketing Costs

 

     
Other Overhead

 

     
Total Overhead

 

     
Earnings before Interest & Tax (EBIT)

 

     
Interest

 

     
Earnings Before Tax (EBT)

 

     
Income Taxes

 

     
Net Income

 

     

Module VI Budgeting B Name ___________________

Investors want to see a company’s cash flow projections as well as its pro forma income statement. Cash flow may be estimated as Net Income plus Depreciation, Amortization and Depletion. Net Income is sales less a series of expenses. Most of those expenses translate into writing checks and that means expending cash. But there are a group of expenses (i) Depreciation, (ii) Amortization and (iii) Depletion that are accounting entries and do not involve the expenditure of cash. Since these items do not use cash, they must be added back to Net Income to estimate cash flow. Depreciation and Amortization can be found on a company’s Statement of Cash Flow.

Laurel & Hardy Inc. Income Statement

 

Year 1  

Year 2  

Year 3  

Year 4
Sales 500,000   1,500,000   2,500,000   4,000,000
Cost of Goods Sold 300,000   900,000   1,500,000   2,400,000
Gross Profit 200,000   600,000   1,000,000   1,600,000
Overhead              
Selling & Market Expense 83,000   149,000   215,000   314,000
Other Overhead 310,000   330,000   350,000   380,000
Total Overhead 393,000   479,000   565,000   694,000
                 
Earnings before Interest & Taxes (EBIT) -193,000   121,000   435,000   906,000
Interest Expense Net 30,000   50,000   90,000   110,000
Earnings before Taxes (EBT) -223,000   71,000   345,000   796,000
               
Income Taxes (Federal & State) 0   29,820   144,900   334,320
Net Income -223,000   41,180   200,100   461,680

Laurel & Hardy, Inc. have Depreciation and Amortization of $80,000, $100,000, $120,000 and $140,000 in years 1 through 4 respectively.

1. Estimate Laurel & Hardy’s cash flow for the following years?

Cash Flow: Year 1 Year 2 Year 3 Year 4

Investors believe Earnings before Interest and Taxes, Depreciation and Amortization (EBITDA) is an important measure of a company’s operations independent of its financing or tax strategy. The first part of EBITDA, the EBIT, is found on the Income Statement. Depreciation and Amortization can be found on the Statement of Cash Flows.

2. Estimate Laurel & Hardy’s EBITDA.

EBITDA: Year 1 Year 2 Year 3 Year 4

3. Companies are often unrealistic when constructing a budget. Sales are the hardest thing to estimate. Expenses are easier to estimate. Given a company’s Other Overhead (OO), Financing Costs (FC), Target Profit (TP), Gross Margin (GM), and Selling & Marketing Costs as a percentage of sales (SC%), a model can be used to estimate the Required Sales to achieve a company’s goals. The equation for this is:

Required Sales = (OO + FC + TP) / (GM –SC%). Given a company with Other Overhead of $3M, Financing Costs of $0.5M, Target Profit of $2M, Gross Margin is 45% and SC% is 11%, what is Required Sales?

Module VII Angel Investors Name_________________________

1. What is an angel investor?

a. An individual who raises funds to rescue troubled companies.

b. A business consultant who advises troubled companies in exchange for stock.

c. Wealthy private individuals investing their own money

d. All of the above.

2. About how much do angel investors usually invest?

a. $5,000 to $10,000

b. $25,000 to $250,000

c. $500,000 to $2,500,000

3. What kind of return on investment do angel investors typically require?

a. 8% to 12% per year

b. 15% to 20% per year

c. 30% to 35% per year

4. The equation for the exit payoff is FV = PV x (1+k)n where FV is the exit payoff, PV is the present value of the amount invested, k is the return demanded by the investor and n is the number of years until the exit.

An entrepreneur needs $25,000 for five years. An angel investor needs 30% per year to make the investment worthwhile. How much of a payoff will the investor need to get at exit?

5. One of the things an investor is likely to ask is how fast a company is growing. The growth rate of sales is given by the equation: g = (FV / PV) (1/n) -1 where PV is the first year of sales to be considered and FV is the last year of sales to be considered; n is the number of years between the first and last year. A company has sales of $250,000. Four years later it has sales of $5,000,000. What is its growth rate?

6. An investor might make demands that are unreasonable. One way an entrepreneur can measure reasonableness is to compute the yield the investor is demanding. The yield, k, can be computed with the following equation: k = (FV / PV) (1/n) -1 where FV is the payoff the investor demands, PV is the amount invested and n is the number of years between the investment and the exit. Suppose an investor wants ten times their money back in four years. What rate of return are they demanding?

Module VIII Venture Capital 1 of 2 Name ________________________

Only about 1% of companies that apply for venture capital funding actually receive it. In addition to risk, reward, transaction size and time to exit, venture capitalists look for very high growth companies, in certain industries like communications and computers, drugs, genetics and life sciences and a smooth exit, that is a predictable exit strategy. Characterize the following companies as to their likelihood of receiving venture capital funding.

1. Warren Bickle is assembling a chain of grocery stores in underserved, inner city areas. His stores average about 80,000 square feet which is about two thirds the size of a typical grocery store. His profit margin is 6% as compared to the average grocery store profit margin of 4.5%. Sales of his 40 stores are about $90 million. He wants to raise $30 million in new capital which will allow him to buy or build 9 new stores and increase sales another $20 million.

What is the probability of getting venture capital?

[ ] Very likely [ ] Likely [ ] Not likely [ ] Never going to happen.

Reasoning:

Growth: [ ] Very high [ ] Insufficient Competition: [ ] Intense [ ] Little

Market: [ ] Very large [ ] Insufficient Product [ ] Novel [ ] Not Novel

2. Dr. Sidney Drake, a pathologist for Jefferson University Hospital has noticed that the cell structure of people who have died of “old age” is remarkable different from young people who have died in auto accidents. Specifically, he noticed degradation in the number and quality of Mitochondrial DNA; structures within cells that convert the chemical energy from food into a form that cells can use. He found a way to reverse the aging process in cell cultures, and in mice. He recently started a company called Mitoyoung to develop and sell drugs to reverse the aging process. He thinks he will be ready for human trials in three years. He needs $40 million to see him through clinical trials and FDA approval which should be complete in about six years.

What is the probability of getting venture capital?

[ ] Very likely [ ] Likely [ ] Not likely [ ] Never going to happen.

Reasoning:

Growth: [ ] Very high [ ] Insufficient Competition: [ ] Intense [ ] Little

Market: [ ] Very large [ ] Insufficient Product [ ] Novel [ ] Not Novel

3. Allison & Company sells and maintains hydraulic systems used in construction equipment. Allison’s sales for the last three years have been $15 million, $17 million and $20 million. Allison’s profit margin is 11%. Allison needs $2.5 million to retire a bank loan and another $.5 million for working capital to support expansion.

What is the probability of getting venture capital?

[ ] Very likely [ ] Likely [ ] Not likely [ ] Never going to happen.

Reasoning:

Growth: [ ] Very high [ ] Insufficient Competition: [ ] Intense [ ] Little

Market: [ ] Very large [ ] Insufficient Product [ ] Novel [ ] Not Novel

Module VIII Venture Capital 2 of 2 Name ________________________

4. Quantum Technologies has found a reliable way to use “quantum entanglement” to transmit information instantly, not at the speed of light, but instantly. Quantum entanglement does not need satellites or fiber optic cable, only a refrigerator sized device at each end of the transmission. Quantum has a prototype system up and running which has been bouncing ultra definition (4k) movie files back and forth between their Lab in Ong’s Hat, New Jersey and rented space in Santa Barbara, California. DARPA (Defense Advanced Research Project) has signed a $5 million contract for ten demonstration systems. Quantum needs $30 million to commercialize its technology.

What is the probability of getting venture capital?

[ ] Very likely [ ] Likely [ ] Not likely [ ] Never going to happen.

Reasoning:

Growth: [ ] Very high [ ] Insufficient Competition: [ ] Intense [ ] Little

Market: [ ] Very large [ ] Insufficient Product [ ] Novel [ ] Not Novel

5. Healthsafe Technologies has developed an environmentally friendly, allergy free way to dry clean cloths. It has been buying up dry cleaning chains and individual dry cleaners to consolidate the industry and is implementing their technology in acquired dry cleaners. It owns 40% of the dry cleaners in the Boston metro area, 30% of the dry cleaners in the Philadelphia metro area, 60% of the dry cleaners in the Baltimore area and 80% of the dry cleaners in the Trenton area. Healthsafe has found that once it achieves a 40% share of any market, it can increase prices by 50%. Profit margins in its Boston, Baltimore and Trenton stores are 15% as compared to the average dry cleaner profit margin of 4.5%. Healthsafe wants to raise $20 million to purchase another 10% of the dry cleaners in the Philadelphia metro area.

What is the probability of getting venture capital?

[ ] Very likely [ ] Likely [ ] Not likely [ ] Never going to happen.

Reasoning:

Growth: [ ] Very high [ ] Insufficient Competition: [ ] Intense [ ] Little

Market: [ ] Very large [ ] Insufficient Product [ ] Novel [ ] Not Novel

6. Venture Real Estate rehabilitates and flips homes. Its strategy is to purchase the two or three worst homes in good neighborhoods, bring them up to community standards and sell them. Typically kitchens and bathrooms must be gutted and replaced, hardwood floors installed and new, larger windows installed. Typically homes are purchased at 70% of the target sales price, 15% of the target sales price is budgeted for rehabilitation, and 15% is the target profit. So far, Venture Real Estate has purchased, rehabilitated and sold 30 properties. Sales for the last three years were $2,000,000; $4,000,000 and $6,000,000. Profits for the last three years were $300,000; $600,000 and $1,200,000. Venture Real Estate needs $3,000,000 to reach sales of $12,000,000.

What is the probability of getting venture capital?

[ ] Very likely [ ] Likely [ ] Not likely [ ] Never going to happen.

Reasoning:

Growth: [ ] Very high [ ] Insufficient Competition: [ ] Intense [ ] Little

Market: [ ] Very large [ ] Insufficient Product [ ] Novel [ ] Not Novel

Module IX Company Valuation Name ________________________

Investors want to get the most equity they can in exchange for their investment; entrepreneurs want to give up as little equity as possible. The negotiation often turns on a fair valuation of the company at the time the investor exits. Like real estate, companies are often valued by looking at comparables. Comparable companies are those in the same industry as the company being valued. The EBITDA multiplier method is the number of dollars the market will pay for a dollar of EBITDA. The EBITDA Multiplier = Σ Market Cap/ Σ EBITDA. Another method of valuing companies is to see what the market will pay for a dollar of Sales. This is done with the Sales Multiplier = Σ Market Cap / Σ Sales. A third way to estimate company value is to determine what the market will pay for one dollar of Net Income. The Net Income Multiplier = Σ Market Cap / Σ Net Income. Market Cap is the number of outstanding shares times the share price.

Comparable Companies Table – All Values are in Millions Except Share Price

Company Sales EBITDA Net Income Shares Price Market Cap
Adams Industries $200.0 $60.0 $30.0 5.00 $42.00 $210.0
Baker Corporation $300.0 $80.0 $40.0 5.00 $60.00 $300.0
Charles, Inc. $120.0 $40.0 $30.0 2.00 $55.00 $110.0
Delta Systems, Inc. $180.0 $50.0 $30.0 20.00 $10.00 $200.0
Epsilon Industries $200.0 $50.0 $30.0 40.00 $5.00 $200.0
             
Totals $1,000.0 $280.0 $160.0     $910.0

1. Based on comparable information what is the EBITDA Multiplier?

2. Based on comparable information what is the Sales Multiplier?

3. Based on comparable information what is the Net Income Multiplier?

Once a series of multipliers is computed, a company’s value can be estimated. To estimate company value with the EBITDA multiplier method, multiply the company’s EBITDA times the EBITDA Multiplier as shown in the following equation: CoVal = EBITDA x EBITDA Multiplier. Another way to estimate a company’s value is to multiply its Sales times the Sales Multiplier as shown in the following equation: CoVal = Sales x Sales Multiplier. A third way to estimate company value is to multiply its Net Income times the Net Income Multiplier as shown in the following equation: CoVal = Net Income x Net Income Multiplier.

4. Camden Corporation has EBITDA of $32 million. Estimate its value using the EBITDA Multiplier.

5. Camden Corporation has Sales of $110 million. Estimate its value using the Sales Multiplier.

6. Camden Corporation has Net Income of $18 million. Estimate its value using the Net Income Multiplier.

Module X Investor Equity Name ________________________

Once the entrepreneur has determined how much capital he or she needs and for how long; the investor has determined the return he or she needs; and the entrepreneur and investor have agreed on the value of the company at exit; the next issue is how much equity the entrepreneur should give up in his or her company. The percentage of equity or Equity% = Payoff at Exit / Company Value.

1. The investor needs $390,000 at exit and the investor has agreed that the company will be worth $8,000,000 at that time. How much equity does the entrepreneur need to give up to so the investor meets his or her goals?

2. Sophisticated investors usually demand Convertible Preferred Stock in exchange for their investment. Convertible Preferred Stock pays dividends equal to the face value of the stock times its coupon rate. The investor’s total payoff equals these dividend payments plus the value of common stock at exit. The stream of dividend payments represents an annuity. Those dividend payments plus reasonable interest on those payments become part of the investor’s total payoff. First compute the Total Payoff an investor needs at exit as though there were one investment in common stock with and one payoff at exit. Second, compute the dividend which is Dividend = Coupon Rate x Face Value. Total Payoff = Investment x (1+k)n . The dividend stream represents an annuity. Dividends should be reinvested in some safe instrument like CDs. The future value of the annuities FV = Dividend x FVIFA(i, n) where FVIFA is the Future Value Interest Factor for an Annuity, i is the interest rate at which dividends are reinvested and n is the number of years over which dividends are paid. The future value of the annuity becomes part of the investor’s Total Payoff. Total Payoff = Dividends and accumulated interest + Exit Payoff. The Exit Payoff is used to determine the amount the investor should receive at exit. Total Payoff – Dividends & Interest = Exit Payoff. The percentage of equity the investor should receive, %Equity = Exit Payoff / CoVal.

An investor needs a 25% yield on her investment of $400,000. The investment is structured as Convertible Preferred Stock with a coupon rate of 17%. The investor expects to exit her investment in four years, at which time the company should be worth $13,000,000. Assume preferred dividends can be safely invested in MetLife CDs which yield 5% per year. What percent of equity should the entrepreneur give up to meet the investor’s goals? Time to exit (n) is four years.

Module XI Share Issues Name ___________________________

Companies issue stock to raise capital. The issues are (i) how many shares should be issued and (ii) what is a fair price for the stock? The amount raised (Amt) should be the number of new shares (NS) times price (P). But we also know that underwriters buy stock at a discount and sell it at full price. The real issue what should the price and number of shares be to raise a given amount after the underwriters discount and other fees and costs of going public (F). One can use the equation Eq1: Amt = P x (1-F) x NS. We also know that price can be estimated by dividing the amount raised plus the company’s value (CoVal) by the number of old outstanding shares (OS) plus new shares. This estimate of price can be given by equation Eq2: P = (CoVal + Amt) / (OS + NS). Equation Eq1 can be re-written as equation Eq3: P = Amt / ((1 –F) x NS). Since Eq2 equals price and Eq3 equals price, the two equations can be set equal to each other giving Eq4. Amt / ((1 –F) x NS) = (CoVal + Amt) / (OS + NS). With some algebra, equations for NS, (Eq.4) and P (Eq.5) emerge.

Eq.4 NS = (Amt x OS) / [(CoVal +Amt) x (1-Fee) –Amt]. Eq.6 P = Amt / ((1 –Fee) x NS).

1. A company has a market value of $50 million and 3,000,000 shares outstanding. It wants to raise $10 million in new capital. The underwriter fees and other expenses of going public are expected to be 7%.

a. How many shares will they have to issue?

b. What will be the share price?

2. Dilution is an issue for early investors. Subsequent rounds of equity investment usually reduces the percentage of the company owned by the early investors. This reduction of ownership percent is called dilution.

An entrepreneur starts a company with 100,000 shares authorized and grants himself 50,000 shares. The entrepreneur raises $30,000 from 3 friends and grants them 5,000 shares each. A year later, an angel investor is granted 10,000 shares in exchange for $100,000.

a. What percentage of the company did the friends own initially?

b. What percentage of the company did the friends own after the angel investor was granted shares? In other words, what was their ownership interest diluted down to?

Original Shares Post-Angel Investment

Owner 50,000 50,000

Friends 15,000 15,000

Angels 0 10,000

______ ______

65,000 75,000

Module XII SBIC Name ________________________

Small Business Investment Companies (SBIC) are chartered by the Small Business Administration to provide funds to “small” businesses as defined by the Small Business Administration. SBICs are listed at the website:

http://www.sba.gov/content/sbic-directory-0 . SBICs are listed by state. State links are near the bottom of the webpage. Most SBIC prefer to invest close to home. For each of the following companies find the SBIC which matches the company in terms of stage of investment, industry, transaction size, and location.

1. Marion Foods, located in Marlton, New Jersey makes premium chocolate, peanut and butterscotch based candies with a long shelf life. Sales for the last three years have been $160,000; $640,000 and $1,920,000. Profits for the last three years have been $8,000; $44.800 and $172,800. They need $1.5 million in capital to expand production ($1.2 million for plant and equipment and $.3 million for working capital.)

SBIC Name/Contact: Address:

Phone or Email:

2. Smart Machines, Inc. located in Roswell, Georgia, custom designs computer controlled machines for factories. For the last three years sales have been $11.5 million; $13.0 million and $14.5 million. Profits have been $690,000; $910,000 and $1,160,000. Smart Machine’s needs $2.5 million to buyout Sysmachines, Inc., a competitor located in Gainesville, Georgia.

SBIC Name/Contact: Address:

Phone or Email:

3. Neila Technologies , located in Roswell, Arizona manufactures and installs security equipment including motion sensors, surveillance cameras, infrared and magnetic field sensors. Sales for the last three years have been $2,100,000; $1,800,000 and $1.700,000. Profits have been $210,000, $5,000 and a loss of $50,000. Declining sales were attributed to their failure to adapt their technologies to web based monitoring systems. Last year they developed state-of-the-art web based systems which they believe will triple sales in the next two years. However, they ran out of cash before deployment of their new products and had to seek Chapter 11 bankruptcy protection (also called Debtor-in-possession bankruptcy). They need $1.1 million to restructure and bring their new technology to market

SBIC Name/Contact: Address:

Phone or Email:

Module XIII Capital Required Name ____________________

Capital is needed to finance assets as shown in the accounting equation: Assets = Liabilities + Equity. The more assets a company has, the more capital is required to finance them. There are two ways to test whether a company has too many assets. One is Return on Assets (ROA) which is a measure of the efficiency of generating net income (NI) from assets. The other test is Asset Turnover (AT) which is the efficiency of generating sales from assets. If these ratios are low compared to comparable companies then either a company has too many assets or it is inefficient.

ROA =((NI +Interest x (1-Tax Rate))/((A2 + A1)/2); AT=Sales/((A2+A1)/2).

Marian Manufacturing has Sales of $50M, Net Income (NI) of $4M, Interest of $1M, Assets this year (A2) were $56M and last year (A1) were $54M. Its tax rate is 35%.

1. What is its Return on Assets (ROA)?

2. What is its Asset Turnover (AT)?

The appropriate or target level of assets needed to generate a particular NI or Sales may be estimated by using the industry average ROA and AT. Target Assets ROA method = (NI + Interest x (1-Tax Rate))/Industry Average ROA;

Target Assets AT method = Sales/Industry Average AT.

For Marian Manufacturing’s industry, average ROA is 9.2% and the industry average AT is .98.

3. What is the target assets using the ROA method?

4. What is the target assets using the AT method?

Excess Assets ROA method = Average Assets – ROA Target Assets;

Excess Assets AT method = Average Assets –AT Target Assets.

5. How much excess assets does Marian have, if any, using the ROA method?

6. How much excess assets does Marian have, if any, using the AT method?

Module XIV Internal Sources of Cash 1 of 2 Name _________________

Knowing a company has excess assets, and finding them and converting them to cash is another issue. Three large asset pools to examine are: Accounts Receivable (AR), Inventory (I) and Plant, Property and Equipment (PP&E). For each pool, some measure of efficiency is needed so that a company can be compared against its competitors. These measures are:

AR Turns = Credit Sales/((AR2+AR1)/2); Inventory Turns = COGS/((I2+I1)/2); and PP&E Turns=Sales/((PP&E2+PP&E1)/2).

Larry Fine and Company sells electrical connectors to other businesses so all its sales are credit sales. It has sales of $80M, Accounts Receivable of $12M this year and $11M last year, COGS of $58M, Inventory this year of $18M and last year of $17M, PP&E of $41M this year and PP&E1 of $39M last year.

1. What is Larry’s AR Turns?

2. What is Larry’s Inventory Turns?

3. What are Larry’s PP&E Turns?

The appropriate level of AR, Inventory or PP&E may be set with reference to industry norms using the following equations: Target AR = Credit Sales/Industry Average (Ind.Avg.) AR Turns; Target Inventory = COGS/Ind. Avg. Inventory Turns; Target PP&E=Sales/Ind. Avg. PP&E Turns.

For Larry Fine & Company’s industry: Industry Average AR Turns=10; Industry Average Inventory Turnover is 4.2 and Industry Average PP&E Turns is 2.2.

4. What should Larry’s target level of AR be?

5. What should Larry’s target level of Inventory be?

6. What should Larry’s target level of PP&E be?

Module XIV Internal Sources of Cash 2 of 2 Name _________________

Excess AR, Inventory or PP&E may be estimated by subtracting target values from actual average values.

7. What is the Excess AR, if any for Larry’s:

8. What is the Excess Inventory, if any, for Larry’s

9. What is the Excess PP&E, if any for Larry’s

Another way to view Accounts Receivable, Inventory and PP&E are as asset pools that cash can be squeezed out of. By setting a target amount to be raised (Amt. Raised) from each asset pool, new performance standards can be set. Once performance standards are set, staff and management can work toward those goals, assuming they are reasonable.

Target AR Turns = Credit Sales /(Avg. AR – Amt Raised); Target Inventory Turns = COGS/(Avg. Inventory –Amt Raised).

10. Larry’s wants to squeeze $2M out of AR. What is their target AR Turns?

11. Larry’s wants to squeeze $3M out of inventory. What is their target Inventory Turns?

Abstract measures like AR Turns and Inventory Turns must be translated into something understandable to the ordinary person if one wants to get employees to help meet new performance targets. The average number of days it takes to collect accounts receivable is DSO = 365 days/AR Turns. The average number of days something is in inventory is Days in Inventory (DII). DII = 365/Inventory Turns.

12. If Moe Co. had AR Turns of 11, what is its DSO?

13. If Moe Co. had Inventory Turns of 4.5, what is its DII?

Module XV Bonds Name ________________________

Bonds pay interest twice per year and the entire face value of the bond at maturity. Bond indenture agreements may require the issuer to make monthly payments into a trust fund so there is enough money set aside to retire the face value of the bond at maturity. This trust fund is called a sinking fund. Pmt is the monthly payment that, with interest, will be enough to retire the face value of the bond by the time the bond matures.

The equation is: FV = Pmt x FVIFA (i, n) where FV is the face value of the bond, Pmt is the sinking fund payment, the amount that must be solved for, FVIFA is the Future Value Interest Factor of an Annuity, i, is the period interest rate on the trust fund, and n is the number of payments into the trust fund. The period interest rate, i = annual percentage rate / number of periods per year, and n = number of years x number of periods per year.

1. Machinery Corporation of America is going to issue $10 million of twenty year bonds. The bond indenture agreement (the contract with the bondholders) provides that the company must make monthly payments into a sinking fund. The sinking fund pays 6% annual percentage rate. What should their monthly sinking fund payments be? Use the FVIFA table at the end of this homework pack.

A bond’s value is the sum of two cash streams, the present value of semi-annual interest payments, plus the present value of the Face Value of the bond. Each bond interest payment, Payment = Bond Coupon Interest Rate x FV / 2 payments per year. The value of a bond Vb = Payment x PVIFA (k, n) + FV x PVIF (k, n). PVIFA is the Present Value Interest Factor of an Annuity, k is the period discount rate, n is the number of periods, and FV is the Face Value of the bond. The period discount rate k = annual discount rate / 2 periods per year; n = number of years x 2 the number of periods in the year. The discount rate may be higher or lower than the bonds Coupon rate.

2. Machinery Corporation of America issues a $10 million, twenty year bond with a coupon rate of 6.2% per year. Bonds of similar risk yield (are discounted) at 6% per year. What is the value of this company’s bond? Use the PVIFA and PVIF tables at the end of this homework pack.

Module XVI Commercial Paper Name ________________________

Commercial paper is non-interest bearing notes used for working capital which mature in less than nine months. As such they are exempt from securities registration.

The reason that only companies with the best credit can issue commercial paper is the only thing backing up the promise to pay is the integrity and cash flow of the company issuing the commercial paper. The amount realized is the present value (PV) of the face value (FV) of the notes. The present value formula is:

PV = FV /((1+k)n However, since notes are for less than one year, n is the fraction of a year. For example for a 6 month note, n = .5 (6 months/12 months); for a 20 day note, n= .05479 (20 days/365 days). When n is adjusted, k must also be adjusted, k = Annual percentage rate x fraction of a year. For a 6 month note k = Annual discount rate x (6 months/12 months). Suppose the annual discount rate is 5%; k = 5% x .5 = 2.5%. If the annual discount rate were 5% on a 20 day note k= 5% x (20/365) = 0.274% CAUTION: Do not round. Take calculations to 6+ decimal places.

1. A company wants to issue $10 million of commercial paper due in three months. The prevailing interest rate for investments of this risk is 4.4%. Ignore transaction costs. How much should the company expect to realize on the sale of this commercial paper?

2. Commercial paper is usually placed (sold) by investment banks for client companies. A typical fee might be 0.125%, so on a $1,000,000 of commercial paper, the fee might be about $1,250 ($1,000,000 x 0.125%). The fee is based on the face amount of the commercial paper, not the net proceeds to the company.

A company wants to issue $15 million of 30 day commercial paper. The prevailing interest rate for commercial paper of similar risk is 5.1%. How much should the company expect to realize on the sale of these notes after the discount to the buyer and paying the investment banker’s commission of 0.125%?

Module XVII PIPE Transactions Name _____________________________

A PIPE Transaction is a Private Investment in a Public Entity. PIPEs are often last resort financing for publically traded companies in financial difficulty, but not yet in bankruptcy. Investors will make a private investment, often in the form of Convertible Preferred stock or Convertible bonds on the condition that they can convert their investment to common shares at their discretion and that those shares will be registered by the company so they may be sold to the public.

Thor Corporation, a 115 year old builder of industrial furnaces, is in trouble; can’t get a bank loan; can’t sell bonds; and can’t issue new stock. Their current stock price has dropped to $8 from last year’s price of $35. They need $12 million to restructure into a more streamlined and profitable business. A hedge fund agrees to invest $12 million in the form of convertible preferred stock; shares to be registered in three months and sold in six months. If the hedge fund converts, they will own 3 million shares of Thor Corporation stock. It is anticipated that by the time Thor’s shares can be registered and sold, its stock price will drop to $7 per share.

1. What will be the market value of the investor’s Thor stock when they sell it?

2. How much will the investor make in dollars of profit once they complete the sale of Thor stock.

3. What is the investor’s return on investment (as a percent of invested capital)?

4. What is the investor’s annualized return on investment considering the whole transaction only tied up her money for six months?

Note: About 25% of PIPE investors lose their entire investment. Not all investors do well.

Module XVIII Strategy Name _____________________________

Page 1 of 2

A large part of strategy is knowing what to do under the appropriate circumstances. It is clear there are many options for financing a company other than through banks. What is the most appropriate strategy for each of the following circumstances?

1. Signal company has been building and installing back-up electrical generators for fifteen years. They have shown steady profits each year and about 7% growth in sales and profits. They have decided to expand by building a manufacturing facility in Texas (a state with no corporate income tax). They need $20 million to build the new facility, for manufacturing equipment and working capital.

Which is the most appropriate funding source? And why in terms of risk and transaction size.

[ ] Angel Investor [ ] SBA guaranteed loan [ ] Bank loan [ ] SBIC

[ ] Asset based lender [ ] Venture capital [ ] Corporate bonds [ ] Commercial paper

[ ] IPO [ ] Asset Securitization [ ] Super Priority Loan

How would a bank see this company’s risk? [ ] Very High [ ] High [ ] Medium [ ] Low

What is the cost to the company? [ ] Very high [ ] High [ ] Medium [ ] Low

Typical transaction size for this source? [ ] <$5 M [ ] $5 – $50M [ ] $50-$200M [ ] >$200M

2. Watkins built her first solar-electric system five years ago, just to see if she could do it. A year later she builds a more powerful system that powers her camping trailer. Three years ago she sold her first two systems for $3,000 each, two years ago sales were $30,000, and last year sales were $150,000. She expects sales to be: $500,000, $1,500,000 and $3,500,000 over the next three years. She needs to raise $1,500,000 for plant, equipment and working capital. Her bank has already told her they don’t lend to high-tech companies like hers.

[ ] Angel Investor [ ] SBA guaranteed loan [ ] Bank loan [ ] SBIC

[ ] Asset based lender [ ] Venture capital [ ] Corporate bonds [ ] Commercial paper

[ ] IPO [ ] Asset Securitization [ ] Super Priority Loan

How would a bank see this company’s risk? [ ] Very High [ ] High [ ] Medium [ ] Low

What is the cost to the company? [ ] Very high [ ] High [ ] Medium [ ] Low

Typical transaction size for this source? [ ] <$5 M [ ] $5 – $50M [ ] $50-$200M [ ] >$200M

3. Sinclair manufactures bricks, cement and other non-lumber construction materials. Last year profits were $1.1 billion on sales of $7.5 billion, assets were $5 billion and liabilities were $2 billion. Sinclair needs $200 million to purchase and rehabilitate a facility in Georgia. Free cash flow from the facility should be about $70 million a year.

[ ] Angel Investor [ ] SBA guaranteed loan [ ] Bank loan [ ] SBIC

[ ] Asset based lender [ ] Venture capital [ ] Corporate bonds [ ] Commercial paper

[ ] IPO [ ] Asset Securitization [ ] Super Priority Loan

How would a bank see this company’s risk? [ ] Very High [ ] High [ ] Medium [ ] Low

What is the cost to the company? [ ] Very high [ ] High [ ] Medium [ ] Low

Typical transaction size for this source? [ ] <$5 M [ ] $5 – $50M [ ] $50-$200M [ ] >$200M

Module XVIII Strategy Name _____________________________

Page 2 of 2

4. Over its long life Applegate Technologies, a privately held company, has made personal tape recorders, video cassette recorders, cell phones, televisions, and personal computers. Their product line has lagged behind the market which has accounted for lack-luster performance. However, they have ground breaking video game which involves a wearable 3-D helmet combined a motion sensor vest to inject players into the middle of a very life-like game. Comic-con called it the game of the century. Unfortunately, the company ran out of cash before bringing the game to market and had to file chapter 11 bankruptcy. They need $12 million to restructure and bring the game to market.

Which is the most appropriate funding source? And why in terms of risk and transaction size.

[ ] Angel Investor [ ] SBA guaranteed loan [ ] Bank loan [ ] SBIC

[ ] Asset based lender [ ] Venture capital [ ] Corporate bonds [ ] Commercial paper

[ ] IPO [ ] Asset Securitization [ ] Super Priority Loan

How would a bank see this company’s risk? [ ] Very High [ ] High [ ] Medium [ ] Low

What is the cost to the company? [ ] Very high [ ] High [ ] Medium [ ] Low

Typical transaction size for this source? [ ] <$5 M [ ] $5 – $50M [ ] $50-$200M [ ] >$200M

5. Dreamliner, a Dilworth, Nebraska manufacturer makes and sells Recreational Vehicles (RVs) and Campers that range in price from $15,000 to $150,000. Their average sale is $40,000. Last year their sales were about $600 million. Because banks are reluctant to lend money for the purchase of campers and RVs, Dreamliner provided financing to about 80% of purchasers. Standard terms are 20% down and the balance over 60 months at 12% interest. Dreamliner needs to raise substantial cash so it can continue to finance sales.

Which is the most appropriate funding source? And why in terms of risk and transaction size.

[ ] Angel Investor [ ] SBA guaranteed loan [ ] Bank loan [ ] SBIC

[ ] Asset based lender [ ] Venture capital [ ] Corporate bonds [ ] Commercial paper

[ ] IPO [ ] Asset Securitization [ ] Super Priority Loan

How would a bank see this company’s risk? [ ] Very High [ ] High [ ] Medium [ ] Low

What is the cost to the company? [ ] Very high [ ] High [ ] Medium [ ] Low

Typical transaction size for this source? [ ] <$5 M [ ] $5 – $50M [ ] $50-$200M [ ] >$200M

6. Standard, Inc. is a publically traded manufacturer of paint, epoxy and other coatings used for outdoor and industrial applications. The owner and founder of Standard refused to give up his position as president well into his 90s and failed to reinvest in the company and its products. His children were in their 70s at the time of his passing and relied on others to keep the company going. As a result of poor management and recent marketing setbacks the company deteriorated rapidly. Three years ago the company had a profit of $5 million on sales of $130 million, two years ago it had a loss of $4 million on sales of $135 million and last year it had a loss of $12 million on sales of $140 million. The stock price dropped from a high of $45 per share three years ago to $9 per share now. There are liens or mortgages on most of its assets. The board of directors recently hired a former turnaround consultant to restructure the company. She estimates she will need $10 million to make the company profitable.

Which is the most appropriate funding source; and why in terms of risk and transaction size.

[ ] Angel Investor [ ] SBA guaranteed loan [ ] Bank loan [ ] SBIC

[ ] Asset based lender [ ] Venture capital [ ] Corporate bonds [ ] Commercial paper

[ ] IPO [ ] Asset Securitization [ ] Super Priority Loan

How would a bank see this company’s risk? [ ] Very High [ ] High [ ] Medium [ ] Low

What is the cost to the company? [ ] Very high [ ] High [ ] Medium [ ] Low

Typical transaction size for this source? [ ] <$5 M [ ] $5 – $50M [ ] $50-$200M [ ] >$200M

Answer Key

Module I Borrowing Capacity

Assets 1,300 less Ineligible Assets of 100 = Tangible Assets of 1,200; Tangible Assets – Non-bank Liabilities of 510 = Tangible Net Worth of 690. Tangible Worth x Bank Factor of 80% = Borrowing Capacity of 552. Borrowing Capacity – Bank Debt of 390 = Remaining Capacity of 162.

Module II Factoring

1. 85,000. 2. 2,000. 3. 1,886.30. 4. 11,113.70.

Module III Asset Based Lending

Yes. Collateral: $7,139=6,400 AR – 4,000 Bank Loan + 330 Inventory +3,600 Printing Machinery + 6,500 Real Estate -5,700 Mortgage.

Module IV Sale and Lease Back

1. Max building value = $730,000, FMV $1,200,000 less Mortgage $300,000 Brokers fees $120,000 Reserve $30,000 Clean up $20,000. 2. Max Offer after discounting Max value for holding period $679,070 equals $730,000 divided by one plus 7.5%. 3. Monthly lease payment $8,942 = $679,070 / PVIFA(1.25%, 240).

Module V Budgeting A

1. Year 1: Sales 200,000 less COGS 110,000 equals 90,000 Gross Profit. Selling and Marketing Costs 46,000, Other Overhead 202,000 total Overhead 248,000. EBIT -158,000 less interest 20,000 gives -178,000 EBT. Less Taxes 0 gives Net Income -178,000. Year 2: Sales 600,000, GOGS 330,000, Gross Profit 270,000, Selling & Marketing 78,000, Other Overhead 206,000, EBIT -14,000, Interest 20,000, EBT -34,000, Taxes 0 Net Income -34,000. Year 3: Sales 1,200,000, COGS 660,000, Gross Profit 540,000, Selling Costs 126,000, Other Overhead 212,000, Total Overhead 338,000, EBIT 202,000, Interest 20,000, EBT 182,000, Taxes 72,800, Net Income 109,200.

Module VI Budgeting B

1. Year 1: NI -223,000 + Depreciation & Amortization (D&A) 80,000 = Cash Flow (CF) -143,000; Year 2: NI 41,180 + D&A 100,000 = CF 141,180; Year 3: NI 200,100 + D&A 120,000 = CF 320,100; Year 4: NI 461,680 + D&A 140,000 = CF 601,680.

2. Year 1: EBIT -193,000 + D&A 80,000 = EBITDA -113,000; Year 2: EBIT 121,000 + D&A 100,000 = EBITDA 221,000; Year 3: EBIT 435,000 + D&A 120,000 = EBITDA 555,000; Year 4: EBIT 906,000 + D&A 140,000 = EBITDA 1,046,000

3. Required Sales = ($3M + $0.5M + $2M) / (45% – 11%) = $16.18M

Module VII Angel Investors

1. c. 2 b. 3. c. 4. $92,823.25, 5. 111.47%, 6. 77.83%

Module VIII Venture Capital

Venture capitalists are looking for 40% per year or more. A company has to have the potential for explosive growth to meet those rates. Grocery stores, hydraulic equipment, dry cleaning establishments and real estate are just not going to provide those growth rates. On the other hand, drugs with the potential to stop or reverse aging, or a means of communicating faster than the speed of light could have explosive growth. While venture capital firms are risk averse and want others to prove concepts before they invest, Drake and Quatum have Technologies both have substantial experimental evidence to indicate their technologies had a good chance of success.

Module IX Company Valuation

1. EBITDA Multiplier 3.25, 2. Sales Multiplier 0.91, 3. Net Income Multiplier 5.67,

4. EMM CoVal 104M, 5. SMM CoVal 100.1M, 6. 102.1M

Module X Investor Equity

1. %Equity 4.875%, 2. Total Payoff 976,562.50, Dividend 68,000, Future Value of Dividends 293,086.80, Exit Payoff 683,475.70, %; Equity 5.2575%

Module XI Share Issues

1a. NS .645163, 1b. P 16.67, 2a. 23.1%, 2b. 20.0%

Module XII SBIC

Answers for this module would negate the exercise, so none will be given.

Module XIII Capital Required

1. ROA=8.45%; 2. AT=.91; ROA Target Assets=$50.54M; AT Target Assets=$51.02M; 5. ROA Excess=$4.46M; AT Excess=$3.98M.

Module XIV Internal Sources of Cash

1. AR Turns=6.96; 2. Inv. Turns=3.31; 3. PP&E Turns=2; 4. Target AR=$8M; 5. Target Inv.=$13.8M; 6. Target PP&E=$36.36M;

7. Excess AR=$3.5M; 8. Excess Inv.=$3.7M; 9. Excess PP&E=$3.64M; 10. Target AR Turns=8.42; 11. Target Inv. Turns=4;

12. DSO=33.2 days; 12. DII=81.1 days.

Module V Bonds

1. Monthly Sinking Fund Payment 21,643.15. 2. Vb 10,231,650.

Module XVI Commercial Paper

1. k=1.1%, n=.25, proceeds=$9,972,687.52 before sales commission; 2. k=.4192%, n=.082192, gross proceeds =$14,994,843.46, sales commission = $18,750, net proceeds = $14,976,093.46

Module XVII PIPES

1. Proceeds = $21 million (3 million shares x $7); 2. Profit = $9 million ($21 million – $12 million); 3. ROI = 75%; 4. Annualized ROI = 150% (75% x (12mo/6mo))

Module XVIII Strategy

Answers for this module would negate the exercise, so none will be given.

Future Value Interest Factor FVIF (i, n)

 

Future Value Interest Factor of an Annuity FVIFA (i, n)

 

Present Value Interest Factor PVIF (k, n)

 

Present Value Interest Factor for an Annuity PVIFA (k, n)

 

Borrowing Capacity Analysis

 

Total Assets:

 

Less Ineligible assets:

 

 

 

 

 

 

Tangible Assets:

 

Less Non-bank Liabilities:

 

 

 

 

 

 

 

Tangible Net Worth:

 

x Factor

 

Borrowing Capacity

 

Less Bank Debt

 

 

 

 

 

Remaining Capacity:

 

 

 

 

 

Costs often bear some relationship to sales. For examples COG% is the percent of each dollar of sales used to make the product or deliver the service.

 

SC% is the percentage of every dollar of sales devoted to Selling and Marketing Costs.

 

Other Overhead is dollars spent on overhead other than selling and marketing costs. Examples of other overhead include office buildings, accounting and management salaries, insurance and so forth. It should rise as sales increase, but not as fast as sales.

 

Interest expense is a function the amount of debt and the interest rate. Federal income tax is 35% federal plus state income taxes which range from 0% to 12%

 

 

Period Interest Rate�

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