24 Jul DETERMINE THE IMPACT OF RISING INTEREST RATES ON FUTURE PERFORMANCE
Garnett Jackson the founder and CEO of Tech Tune-Ups stared t the window as he finished his custom Show more Garnett Jackson the founder and CEO of Tech Tune-Ups stared t the window as he finished his customary peanut butter and jelly dwich contemplating the dilemma currently facing his firm. ech Tune-Ups is a start-up firm offering a wide range of com- ter services to its clients including online technical assistance ote maintenance and backup of client computers through the temet and virus prevention and recovery. The firm has been ghly successful in the 2 years since it was founded; its reputation fair pricing and good service is spreading and Mr. Jackson lieves the firm is in a good position to expand its customer base idly. But he is not sure that the firm has the financing in place to rt that rapid growth. Tech Tune-Ups main capital investments are its own powerful mputers and its major operating expense is salary for its consul- ts. To a reasonably good approximation both of these factors w in proportion to the number of clients the firm serves. Currently the firm is a privately held corporation. Mr. Jackson his partners two classmates from his undergraduate days have tributed $250000 in equity capital largely raised from their nts and other family members. The firm has a line of credit a bank that allows it to borrow up to $400000 at an interest of 8%. So far the firm has used $200000 of its credit line. If when the firm reaches its borrowing limit it will need to raise ity capital and will probably seek funding from a venture capi- firm. The firm is growing rapidly requiring continual invest- t in additional computers and Mr. Jackson is concerned that it approaching its borrowing limit faster than anticipated. 525 Mr. Jackson thumbs through past financial statements and esti- mates that each of the firms computers costing $10000 can sup- port revenues of $80000 per year but that the salary and benefits paid to each consultant using one of the computers is $70000. Sales revenue in 2011 was $1.2 million and sales are expected to grow at a 20% annual rate in the next few years. The firm pays taxes at a rate of 35%. Its customers pay their bills with an average delay of 3 months so accounts receivable at any time are usually around 25% of that years sales. Mr. Jackson and his co-owners receive minimal formal salary from the firm instead taking 70% of profits as a dividend which accounts for a substantial portion of their personal incomes. The remainder of the profits are reinvested in the firm. If reinvested profits are not suffi- cient to support new purchases of computers the firm borrows the required additional funds using its line of credit with the bank. Mr. Jackson doesnt think Tech Tune-Ups can raise venture funding until after 2013. He decides to develop a financial plan to determine whether the firm can sustain its growth plans using its line of credit and reinvested earnings until then. If not he and his partners will have to consider scaling back their hoped-for rate of growth negotiate with their bankers to increase the line of credit or consider taking a smaller share of profits out of the firm until further financing can be arranged. Mr. Jackson wiped the last piece of jelly from the keyboard and settled down to work. Can you help Mr. Jackson develop a financial plan? Do you think his growth plan is feasible? Prepare a 700-1050 word response plus Excel spreadsheet for the Mini-case at the end of Chapter 18 in Fundamentals of Corporate Finance (Brealey). Specifically the Learning Team will need to follow all assumptions in the Mini-case precisely and carefully to complete the following: a. Identify the steps necessary to financially plan and forecast for 2005 2006 and 2007 b. Project future years using the growth rate assumptions in the Mini-case c. Determine what type and amount of financing may be required taking into account the impact on leverage ratios d. Determine the impact of rising interest rates on future performance e. Assess alternative capital structures and impact on debt ratio and return on equity. f. Separately after completing (a) through (e) above explain how outsourcing certain cost of goods sold items would impact this planning and budgeting process. Show less
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