ef assignment 02 case 02 solved

7/30/2019 EF Assignment 02 Case 02 Solved

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MINI CASE: LEARNINGBEAM.COM CORPORATION

Learningbeam.com offers e-commerce service for childrens edutainment products andservices. The word edutainment is used to describe software that combines educational and

entertainment components. Valuable product information and detailed editorial comments arecombined with a wide selection of products for purchase to help families make their kidsedutainment decisions. A team of leading educators and journalists provide editorial commentson the products sold by the firm. Learningbeam targets highly educated, convenience oriented,and value conscience families with children under the age of 12, estimated to be about 35 percentof Internet users.

The firms warehouse-distribution model results in higher net margins, as well as greaterselection and convenience for customers, when compared to traditional retailers. Gross profitmargins are expected to average about 30 percent each year. Because of relatively highmarketing expenditures aimed at gaining market share, the firm is expected to suffer net lossesfor two years. Marketing and other operating expenses are estimated to be $3 million in 2006

and $5 million in 2007, respectively. However, during the third year operating cash flowbreakeven should be reached. Net profit margins are expected to average 10 percent per yearbeginning in year 3. Investment in bricks and mortar is largely in the form of warehousefacilities and a computer system to handle orders and facilitate the distribution of inventories.After considering the investment in inventories, the asset intensity or turnover is expected toaverage about two times per year.

Learningbeam estimates that venture investors should earn about a 40 percent averageannual compound rate of return and sees an opportunity for a possible initial public offering inabout six years. If industry consolidation occurs, a merger might occur even sooner.

The management team is headed by Srikant Kapoor who serves as President ofLearningbeam.com and who personally controls about 35 percent of the ownership of the firm.Mr. Kapoor has more than twelve years experience in high-tech industries including previouspositions with US West and Microsoft. He holds a B.S. degree in electrical engineering from theIndian Institute of Technology and an MBA from the Wharton School. Sean Davidson, Directorof Technology has more than ten years of experience in software development and integration.Walter Vu has almost ten years of experience in sales and business development in the softwareindustry including positions at Claris and Maxis. Mitch Feldman, Director of Marketing, wasresponsible for six years for the marketing communications function and the Internet operationsof a large software company. Management strives for continual improvement in ease of userinterface, personalized services, and amount of information supplied to customers.

The total market for children entertainment is estimated to be $35 billion annually. Toysaccount for about $20 billion in annual spending. Summer camps are estimated to generate $6billion annually. This is followed by kids videos and video games at $4 billion each. Kidssoftware sales currently generates about $1 billion per year in revenues and industry sales areexpected to grow at a 30 percent annual rate over the next several years.

Learningbeam has made the following five-year revenue projections:

Year 2006 2007 2008 2009 2010Revenues ($M) $1.0 $9.6 $30.1 $67.8 $121.4


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A. Project industry sales for kids software through the year 2010.2006 Market for Children Entertainment:Toys $20 billionSummer camps 6 billion

Kids videos/games 4 billionKids software sales 1 billionMiscellaneous 4 billionTotal Market $35 billion

Kids Software Sales Growing at 30% annually:Year 2007 Sales = Year 2006 Sales x 1.30; and so forth.

IndustryYear Forecasted Sales2006 $1.00 billion2007 1.30 billion

2008 1.69 billion2009 2.20 billion2010 2.86 billion

B. Calculate the year-to-year annual sales growth rates for Learningbeam and estimate thecompound growth rate over the 2006 through 2010 time period.

Growth Rate = [(Next Year SalesCurrent Year Sales)/Current Year Sales] x 100Learningbeam

Year Forecasted Sales Sales Growth Rate2006 $1.00 million2007 9.60 million 860%2008 30.10 million 214%2009 67.80 million 125%2010 121.40 million 79%

Arithmetic average = (860% + 214% + 125% + 79%)/4 = 320%Compound average (using a financial calculator and point-to-point estimatebetween 2002 and 2006) = 232%[Enter: present value = -1.00; future value = 121.40; number of periods = 4;then solve for %i]Geometric average = [(1 + 860) x (1 + 214) x (1 + 125) x (1 + 79)]1/4 = 208%

C. Estimate Learningbeams expected market share in each year based on the above data.Note: use data for the kids software industry from (A) and for Learningbeam from(B).

Percent ofYear Industry Sales2006 0.1%


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2007 0.7%2008 1.8%2009 3.1%2010 4.2%

D.

Estimate the firms net income (loss) in each of the five years.

Year Net Income (Loss)2006 $-2.70 million2007 -2.12 million2008 3.01 million2009 6.78 million2010 12.14 million

Year 2006: Gross profit is $0.30 million ($1.0 million sales x .30 margin) lessmarketing expenses of $3 million produces a loss of $2.70 million

Year 2007: Gross profit is $2.88 million ($9.6 million x .30 margin) less marketingexpenses of $5 million produces a loss of $2.12 millionYears 2008-2010: Net profit is 10% of that years forecasted sales

E. Estimate the firms return on assets beginning when the net or after-tax income is expectedto be positive.

Millions of Dollars: ReturnYear Net Income / Forecasted Assets = on Assets2006 $-2.70 $0.50 -540.0%2007 -2.12 4.80 -44.0%2008 3.01 15.05 20.0%2009 6.78 33.90 20.0%2010 12.14 60.70 20.0%

Note: Since the asset intensity or turnover is 2.00, total assets will be one-half offorecasted sales. Alternatively, return on assets = net profit margin (10.0%) timesasset turnover (2.0 times) = 20.0%

F. Score Learningbeams venture investor attractiveness in terms of the Industry/MarketFactor Category using the VOS Indicatorguide and criteria set out in Figures 2.6 and2.7. If you believe there are insufficient data, indicate that decision with an N/A.

Industry/Market ScoreMarket Size Potential: kids software sales = $1 billion HighVenture Growth Rate: greater than 30% annually HighMarket Share (Year 3): 1.8% of industry sales LowEntry Barriers: possible timing barriers Average


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G. ScoreLearningbeams venture investor attractiveness in terms of pricing/profitabilityfactors. Follow the instructions in Part F.

Pricing/Profitability ScoreGross Margins: 30% margins are estimated Average

After-Tax Margins: 10% margins are estimated AverageAsset Intensity: 2.0 asset turnovers are estimated AverageReturn on Assets: 20% returns are estimated Average

H. Score Learningbeams venture investor attractiveness in terms of financial/harvest factors.Follow the instructions in Part F.

Financial/Harvest ScoreCash Flow Breakeven: estimated to occur in Year 3 AverageRates of Return: 20% investor returns are estimated AverageIPO Potential: estimated in Year 6 Low

Founders Control: 35% ownership by founder Average

I. Score Learningbeams venture investor attractiveness in terms of management teamfactors. Follow the instructions in Part F.

Management Team ScoreExperience/Expertise: very good in software/tech industries HighFunctional Areas: good except for finance AverageFlexibility/Adaptability: experience suggests flexibility AverageEntrepreneurial Focus: startup risks accepted by founder/team Average

ef assignment 02 case 02 solved

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