fiesta w132

Cost of capitalCalculation of Fiesta's cost of capital:Company beta =1.5Long-term Government rate = 5.75%Cost of equity = LT government bond rate + beta * 6%Cost of equity =14.75%Cost of debt =10.50% before taxWeighted average cost of capital = (LTD/(LTD+EQ)) * cost of debt (1 - tax rate) + (EQ/(LTD+EQ)) * cost of equityWeighted average cost of capital =10.45%LTD =$ 4,915.0046.29%EQ5,703.6053.71%LTD+EQ =$ 10,618.60

Fiesta ProformasTHESE ARE THE FIESTA CARDS PROFORMAS BEFORE THE ENVELOPE MACHINE, HUMOUR DESIGNS,AND WEST COAST FINANCING DECISIONS.EXHIBIT 1

FIESTA CARDS, LTD.INCOME STATEMENTS

Actual DataProjected Data199719981999200020012002

Net sales16,11025,53032,50539,00046,50056,000Cost of goods sold11,38017,57021,08025,00029,50035,000Gross profit on sales4,7307,96011,42514,00017,00021,000Selling, delivery, and warehousing2,0303,5854,7455,8006,9508,000General and administrative1,0951,8902,2502,5002,8003,250Earnings before interest and taxes1,6052,4854,4305,7007,2509,750Interest9901,2101,5251,7501,7501,925Income before income taxes6151,2752,9053,9505,5007,825Provision for income taxes (48%)2956121,3941,8962,6403,756Net income3206631,5112,0542,8604,069

Interest Rate =EXHIBIT 2

FIESTA CARDS, LTD.BALANCE SHEETS


Cash400740480500500500Accounts receivable5,84011,76514,02516,77019,99524,080Inventory5,0007,41511,17513,26015,81019,040Prepaid expenses85235385390465560TOTAL CURRENT ASSETS11,32520,15526,06530,92036,77044,180Net fixed assets1,8054,4154,8655,0005,0005,000Subsidiaries- 01,0601,0601,0601,0601,060Other long-term assets370755725750750750TOTAL ASSETS13,50026,38532,71537,73043,58050,990

Bank loans4,6458,85712,15613,90715,71716,338Accounts payable3,0055,4956,1207,4108,83510,640Accrued expenses and payroll taxes4509201,2551,5601,8602,240Income tax payable2154451,2051,6802,0003,400Current portion of long-term debt235700865865865865Other current liabilities- 0375495500500500TOTAL CURRENT LIABILITIES8,55016,79222,09625,92229,77733,983Long-term debt1,5755,5054,9154,0503,1852,320TOTAL LIABILITIES10,12522,29727,01129,97232,96236,303Common stock1,5851,6351,7401,7401,7401,740Retained earnings1,7902,4533,9646,0188,87812,947TOTAL LIABILITIES & NET WORTH13,50026,38532,71537,73043,58050,990

Humour ProformasYOU NEED TO COMPLETE THE HUMOUR DESIGNS PROFORMASEXHIBIT 3HUMOUR DESIGNS, INC.INCOME STATEMENTS


Net sales8,3509,15010,00011,00012,10013,310Cost of goods sold4,9655,4006,0006,6007,2607,986Gross profit on sales3,3853,7504,0004,4004,8405,324Selling, delivery, and warehousing2,1002,3602,4002,6402,9043,194General and administrative560600700770847932Earnings before interest and taxes7257909009901,0891,198Interest150190200210210210Income before income taxes575600700780879988Provision for income taxes (48%)276288336374422474Net income299312364406457514Dividends160160190- 0- 0- 0Earnings retained139152174406457514

EXHIBIT 4HUMOUR DESIGNS, INC.BALANCE SHEETS

199719981999200020012002ASSETSCash135115175175175175Accounts receivable2,7203,0653,2003,5203,8724,259Inventory2,6753,1003,0003,3003,6303,993Prepaid expenses65110125138151166TOTAL CURRENT ASSETS5,5956,3906,5007,1337,8288,594Net fixed assets2,1802,4502,5002,7503,0253,328TOTAL ASSETS7,7758,8409,0009,88310,85311,9219911,545LIABILITIESBank loans- 0228454722548358Accounts payable8801,1001,0001,1001,2101,331Income taxes payable75100100Current portion of long-term debt250275325- 0- 0Other current liabilities605665575633696765TOTAL CURRENT LIABILITIES1,8102,3682,4542,4542,4542,454Long-term debt1,7452,1002,0002,0002,0002,000TOTAL LIABILITIES3,5554,4684,4544,4544,4544,454Common stock800800800800800800Retained earnings3,4203,5723,7464,1524,6095,122TOTAL LIABILITIES & NET WORTH7,7758,8409,0009,4069,86310,376

Env Machine Project EvaluationEXHIBIT 6FIESTA CARDS, INC.ENVELOPE MACHINE PROPOSALCost of envelope machine:$ 1,000,000Life of machine10yearsEquipment loan10.50%Loan repayment5YearsNet working capital investment at peak$ 795,000Cost of envelopes avoided at full capacity ($000)$ 3,000,000This is approximately equal to the 1999 envelopes purchasedProduction expenses at full capacity:Materials$ 1,630,000Warehousing$ 187,500Labour$ 182,500Depreciation (straight line)$ 100,000(For the purpose of this exam, assume that CCA is equal to the depreciation)Annual reduction in Cost of envelope$ 900,000Envelope Machine Project Evaluation19992000200120022003200420052006200720082009

Sales (no change)- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0Cost of envelope (reduction)Other cost of goods sold (no change)- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0Gross profit (increase)SG&A (no change)- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0- 0Depreciation (increase)Earnings before interest & taxesTaxNet incomeAdd: DepreciationCashflow from operationLess: Investment in envelope machineLess: Investment in Net working capitalFree cash flow

NPVIRR

Acctg effects of Env MachineIncremental accounting effects of Envelope Machine Project

On Income Statement200020012002

Cost of goods sold avoided$ 3,000,000$ 3,000,000$ 3,000,000Production cost of envelopes$ 2,100,000$ 2,100,000$ 2,100,000Interest expense$ 105,000$ 84,000$ 63,000

On Balance Sheet Year-End Balances200020012002

Net fixed assets$ 1,000,000$ 900,000$ 800,000Equipment loan$ 800,000$ 600,000$ 400,000

Fiesta + Env MachineTHESE ARE THE FIESTA CARDS PROFORMAS BEFORE THE ENVELOPE MACHINE, HUMOUR DESIGNS,AND WEST COAST FINANCING DECISIONS.ACCOUNTING EFFECTS OF ENVELOPE MACHINE

On Income Statement200020012002

Cost of goods sold avoided3,0003,0003,000Production cost of envelopes2,1002,1002,100Interest expense1058463

FIESTA CARDS, LTD.FIESTA CARDS, LTD.INCOME STATEMENTS WITHOUT ENVELOPE MACHINEINCOME STATEMENTS WITH ENVELOPE MACHINE

Projected Data200020012002200020012002200020012002

Net sales39,00046,50056,000Net salesCost of goods sold25,00029,50035,000Cost of goods soldGross profit on sales14,00017,00021,000Gross profit on salesSelling, delivery, and warehousing5,8006,9508,000Selling, delivery, and warehousingGeneral and administrative2,5002,8003,250General and administrativeEarnings before interest and taxes5,7007,2509,750Earnings before interest and taxesInterest1,7501,7501,925InterestIncome before income taxes3,9505,5007,825Income before income taxesProvision for income taxes (48%)1,8962,6403,756Provision for income taxes (48%)Net income2,0542,8604,069Net income


Net fixed assets1,000900800Equipment loan800600400FIESTA CARDS, LTD.FIESTA CARDS, LTD.BALANCE SHEETS WITHOUT ENVELOPE MACHINEBALANCE SHEETS WITH ENVELOPE MACHINE

Projected Data200020012002200020012002200020012002

Cash$ 500$ 500$ 500CashAccounts receivable16,77019,99524,080Accounts receivableInventory13,26015,81019,040InventoryPrepaid expenses390465560Prepaid expensesTOTAL CURRENT ASSETS$ 30,920$ 36,770$ 44,180TOTAL CURRENT ASSETSNet fixed assets$ 5,000$ 5,000$ 5,000Net fixed assetsSubsidiaries1,0601,0601,060SubsidiariesOther long-term assets750750750Other long-term assetsTOTAL ASSETS$ 37,730$ 43,580$ 50,990TOTAL ASSETS

Bank loans16,08115,71716,338Bank loansAccounts payable7,4108,83510,640Accounts payableAccrued expenses and payroll taxes1,5601,8602,240Accrued expenses and payroll taxesIncome tax payable1,6802,0003,400Income tax payableCurrent portion of long-term debt865865865Current portion of long-term debtOther current liabilities500500500Other current liabilitiesTOTAL CURRENT LIABILITIES28,09629,77733,983TOTAL CURRENT LIABILITIESLong-term debt4,0503,1852,320Long-term debtTOTAL LIABILITIES32,14632,96236,303TOTAL LIABILITIESCommon stock1,7401,7401,740Common stockRetained earnings3,8446,70410,773Retained earningsTOTAL LIABILITIES & NET WORTH37,73043,58050,990TOTAL LIABILITIES & NET WORTH

Fiesta + Humour FIESTA CARDS WITHOUT HUMOUR, WC OR EMHUMOUR DESIGNS, INC.FIESTA CARDS WITH HUMOUR

INCOME STATEMENTSINCOME STATEMENTSINCOME STATEMENTSProjected DataActual DataProjected DataProjected Data200020012002199719981999200020012002200020012002

Net sales39,00046,50056,000Net sales8,3509,15010,00011,00012,10013,310Net sales50,00058,60069,310Cost of goods sold25,00029,50035,000Cost of goods sold4,9655,4006,0006,6007,2607,986Cost of goods sold31,60036,76042,986Gross profit on sales14,00017,00021,000Gross profit on sales3,3853,7504,0004,4004,8405,324Gross profit on sales18,40021,84026,324Selling, delivery, and warehousing5,8006,9508,000Selling, delivery, and warehousing2,1002,3602,4002,6402,9043,194Selling, delivery, and warehousing8,4409,85411,194General and administrative2,5002,8003,250General and administrative560600700770847932General and administrative3,2703,6474,182Earnings before interest and taxes5,7007,2509,750Earnings before interest and taxes7257909009901,0891,198Earnings before interest and taxes6,6908,33910,948Interest1,7501,7501,925Interest150190200210210210Interest1,9601,9602,135Income before income taxes3,9505,5007,825Income before income taxes575600700780879988Income before income taxes4,7306,3798,813Provision for income taxes (48%)1,8962,6403,756Provision for income taxes (48%)276288336374422474Provision for income taxes (48%)2,2703,0624,230Net income2,0542,8604,069Net income299312364406457514Net income2,4603,3174,583Dividends160160190- 0- 0- 0Earnings retained139152174406457514

BALANCE SHEETSBALANCE SHEETSBALANCE SHEETSProjected DataProjected Data200020012002199719981999200020012002200020012002

Cash500500500Cash135115175175175175Cash675675675Accounts receivable16,77019,99524,080Accounts receivable2,7203,0653,2003,5203,8724,259Accounts receivable20,29023,86728,339Inventory13,26015,81019,040Inventory2,6753,1003,0003,3003,6303,993Inventory16,56019,44023,033Prepaid expenses390465560Prepaid expenses65110125138151166Prepaid expenses528616726TOTAL CURRENT ASSETS30,92036,77044,180TOTAL CURRENT ASSETS5,5956,3906,5007,1337,8288,594TOTAL CURRENT ASSETS38,05344,59852,774Net fixed assets5,0005,0005,000Net fixed assets2,1802,4502,5002,7503,0253,328Net fixed assets7,7508,0258,328Subsidiaries1,0601,0601,060Subsidiaries- 0- 0- 0- 0- 0- 0Subsidiaries1,0601,0601,060Other long-term assets750750750Other long-term assets- 0- 0- 0- 0- 0- 0Other long-term assets750750750TOTAL ASSETS37,73043,58050,990TOTAL ASSETS7,7758,8409,0009,88310,85311,921TOTAL ASSETS47,61354,43362,911

Bank loans13,90715,71716,338Bank loans800228454722548358Bank loans14,62916,26516,696Accounts payable7,4108,83510,640Accounts payable8801,1001,0001,1001,2101,331Accounts payable8,51010,04511,971Accrued expenses and payroll taxes1,5601,8602,240Accrued expenses and payroll taxes- 0- 0- 0- 0- 0- 0Accrued expenses and payroll taxes1,5601,8602,240Income tax payable1,6802,0003,400Income taxes payable75100100- 0Income tax payable1,6802,0003,400Current portion of long-term debt865865865Current portion of long-term debt250275325325325325Current portion of long-term debt1,1901,1901,190Other current liabilities500500500Other current liabilities605665575633696765Other current liabilities1,1331,1961,265TOTAL CURRENT LIABILITIES25,92229,77733,983TOTAL CURRENT LIABILITIES2,6102,3682,4542,7792,7792,779TOTAL CURRENT LIABILITIES28,70132,55636,762Long-term debt4,0503,1852,320Long-term debt1,7452,1002,0002,0002,0002,000Long-term debt6,0505,1854,320TOTAL LIABILITIES29,97232,96236,303TOTAL LIABILITIES4,3554,4684,4544,7794,7794,779TOTAL LIABILITIES34,75137,74141,082Common stock1,7401,7401,740Common stock- 0- 0- 0- 0- 0- 0Common stock1,7401,7401,740Retained earnings6,0188,87812,947Retained earnings3,4203,4203,4203,4203,4203,420Retained earnings9,43812,29816,367TOTAL LIABILITIES & NET WORTH37,73043,58050,990TOTAL LIABILITIES & NET WORTH7,7757,8887,8748,1998,1998,199TOTAL LIABILITIES & NET WORTH45,92951,77959,189

Fiesta + WCFIESTA CARDS WITHOUT HUMOUR, WC OR EMFIESTA CARDS WITH WEST COAST FINANCING

INCOME STATEMENTSEFFECTS OF WEST COAST FINANCINGINCOME STATEMENTSProjected DataProjected Data200020012002200020012002200020012002

Net sales39,00046,50056,000Net sales39,00046,50056,000Cost of goods sold25,00029,50035,000Cost of goods sold25,00029,50035,000Gross profit on sales14,00017,00021,000Gross profit on sales14,00017,00021,000Selling, delivery, and warehousing5,8006,9508,000Selling, delivery, and warehousing5,8006,9508,000General and administrative2,5002,8003,250General and administrative2,5002,8003,250Earnings before interest and taxes5,7007,2509,750Earnings before interest and taxes5,7007,2509,750Interest1,7501,7501,925-500-500-500Interest1,2501,2501,425Income before income taxes3,9505,5007,825Income before income taxes4,4506,0008,325Provision for income taxes (48%)1,8962,6403,756Provision for income taxes (48%)2,1362,8803,996Net income2,0542,8604,069Net income2,3143,1204,329

BALANCE SHEETSBALANCE SHEETSProjected DataProjected Data200020012002200020012002200020012002

Cash500500500Cash500500500Accounts receivable16,77019,99524,080Accounts receivable16,77019,99524,080Inventory13,26015,81019,040Inventory13,26015,81019,040Prepaid expenses390465560Prepaid expenses390465560TOTAL CURRENT ASSETS30,92036,77044,180TOTAL CURRENT ASSETS30,92036,77044,180Net fixed assets5,0005,0005,000Net fixed assets5,0005,0005,000Subsidiaries1,0601,0601,060Subsidiaries1,0601,0601,060Other long-term assets750750750Other long-term assets750750750TOTAL ASSETS37,73043,58050,990TOTAL ASSETS37,73043,58050,990

Bank loans13,90715,71716,338(5,000)(5,000)(5,000)Bank loans8,90710,71711,338Accounts payable7,4108,83510,640Accounts payable7,4108,83510,640Accrued expenses and payroll taxes1,5601,8602,240Accrued expenses and payroll taxes1,5601,8602,240Income tax payable1,6802,0003,400Income tax payable1,6802,0003,400Current portion of long-term debt865865865Current portion of long-term debt865865865Other current liabilities500500500Other current liabilities500500500TOTAL CURRENT LIABILITIES25,92229,77733,983(5,000)(5,000)(5,000)TOTAL CURRENT LIABILITIES20,92229,77733,983Long-term debt4,0503,1852,320Long-term debt4,0503,1852,320TOTAL LIABILITIES29,97232,96236,303(5,000)(5,000)(5,000)TOTAL LIABILITIES24,97232,96236,303Common stock1,7401,7401,740525052505250Common stock6,9906,9906,990Retained earnings6,0188,87812,947Retained earnings6,0188,87812,947TOTAL LIABILITIES & NET WORTH37,73043,58050,990TOTAL LIABILITIES & NET WORTH37,98043,58050,990

Fiesta + Humour + Env MachineACCOUNTING EFFECTS OF ENVELOPE MACHINEOn Income Statement200020012002

Cost of goods sold avoided3,0003,0003,000FIESTA CARDS WITHOUT HUMOUR, WC OR EMHUMOUR DESIGNS, INC.Production cost of envelopes2,1002,1002,100FIESTA CARDS WITH HUMOUR AND EMInterest expense1058463INCOME STATEMENTSINCOME STATEMENTSINCOME STATEMENTSProjected DataProjected DataProjected Data200020012002200020012002200020012002200020012002

Net sales39,00046,50056,000Net sales11,00012,10013,310Net salesCost of goods sold25,00029,50035,000Cost of goods soldCost of goods soldGross profit on sales14,00017,00021,000Gross profit on salesGross profit on salesSelling, delivery, and warehousing5,8006,9508,000Selling, delivery, and warehousingSelling, delivery, and warehousingGeneral and administrative2,5002,8003,250General and administrativeGeneral and administrativeEarnings before interest and taxes5,7007,2509,750Earnings before interest and taxesEarnings before interest and taxesInterest1,7501,7501,925InterestInterestIncome before income taxes3,9505,5007,825Income before income taxesIncome before income taxesProvision for income taxes (48%)1,8962,6403,756Provision for income taxes (48%)Provision for income taxes (48%)Net income2,0542,8604,069Net incomeNet incomeDividendsEarnings retained


Net fixed assets1,000900800Equipment loan800600400BALANCE SHEETSBALANCE SHEETSBALANCE SHEETSProjected DataProjected Data200020012002200020012002200020012002200020012002

Cash500500500CashCashAccounts receivable16,77019,99524,080Accounts receivableAccounts receivableInventory13,26015,81019,040InventoryInventoryPrepaid expenses390465560Prepaid expensesPrepaid expensesTOTAL CURRENT ASSETS30,92036,77044,180TOTAL CURRENT ASSETSTOTAL CURRENT ASSETSNet fixed assets5,0005,0005,000Net fixed assetsNet fixed assetsSubsidiaries1,0601,0601,060SubsidiariesSubsidiariesOther long-term assets750750750Other long-term assetsOther long-term assetsTOTAL ASSETS37,73043,58050,990TOTAL ASSETSTOTAL ASSETS

Bank loans13,90715,71716,338Bank loansBank loansAccounts payable7,4108,83510,640Accounts payableAccounts payableAccrued expenses and payroll taxes1,5601,8602,240Accrued expenses and payroll taxesAccrued expenses and payroll taxesIncome tax payable1,6802,0003,400Income taxes payableIncome tax payableCurrent portion of long-term debt865865865Current portion of long-term debtCurrent portion of long-term debtOther current liabilities500500500Other current liabilitiesOther current liabilitiesTOTAL CURRENT LIABILITIES25,92229,77733,983TOTAL CURRENT LIABILITIESTOTAL CURRENT LIABILITIESLong-term debt4,0503,1852,320Long-term debtLong-term debtTOTAL LIABILITIES29,97232,96236,303TOTAL LIABILITIESTOTAL LIABILITIESCommon stock1,7401,7401,740Common stockCommon stockRetained earnings6,0188,87812,947Retained earningsRetained earningsTOTAL LIABILITIES & NET WORTH37,73043,58050,990TOTAL LIABILITIES & NET WORTHTOTAL LIABILITIES & NET WORTH

Fiesta + Humour + WC

FIESTA CARDS WITHOUT HUMOUR, WC OR EMHUMOUR DESIGNS, INC.FIESTA CARDS WITH HUMOUR AND WC

INCOME STATEMENTSINCOME STATEMENTSEFFECTS OF WEST COAST FINANCINGINCOME STATEMENTSProjected DataProjected DataProjected Data200020012002200020012002200020012002200020012002


BALANCE SHEETSBALANCE SHEETSBALANCE SHEETSProjected DataProjected Data200020012002200020012002200020012002200020012002



Fiesta + WC + EMACCOUNTING EFFECTS OF ENVELOPE MACHINEOn Income Statement200020012002

Cost of goods sold avoided3,0003,0003,000FIESTA CARDS WITHOUT HUMOUR, WC OR EMProduction cost of envelopes2,1002,1002,100FIESTA CARDS WITH EM AND WCInterest expense1058463INCOME STATEMENTSEFFECTS OF WEST COAST FINANCINGINCOME STATEMENTSProjected DataProjected Data200020012002200020012002200020012002200020012002

Net sales39,00046,50056,000Net salesCost of goods sold25,00029,50035,000Cost of goods soldGross profit on sales14,00017,00021,000Gross profit on salesSelling, delivery, and warehousing5,8006,9508,000Selling, delivery, and warehousingGeneral and administrative2,5002,8003,250General and administrativeEarnings before interest and taxes5,7007,2509,750Earnings before interest and taxesInterest1,7501,7501,925InterestIncome before income taxes3,9505,5007,825Income before income taxesProvision for income taxes (48%)1,8962,6403,756Provision for income taxes (48%)Net income2,0542,8604,069Net income


Net fixed assets1,000900800Equipment loan800600400BALANCE SHEETSBALANCE SHEETSProjected DataProjected Data200020012002200020012002200020012002200020012002

Cash500500500CashAccounts receivable16,77019,99524,080Accounts receivableInventory13,26015,81019,040InventoryPrepaid expenses390465560Prepaid expensesTOTAL CURRENT ASSETS30,92036,77044,180TOTAL CURRENT ASSETSNet fixed assets5,0005,0005,000Net fixed assetsSubsidiaries1,0601,0601,060SubsidiariesOther long-term assets750750750Other long-term assetsTOTAL ASSETS37,73043,58050,990TOTAL ASSETS

Bank loans13,90715,71716,338Bank loansAccounts payable7,4108,83510,640Accounts payableAccrued expenses and payroll taxes1,5601,8602,240Accrued expenses and payroll taxesIncome tax payable1,6802,0003,400Income tax payableCurrent portion of long-term debt865865865Current portion of long-term debtOther current liabilities500500500Other current liabilitiesTOTAL CURRENT LIABILITIES25,92229,77733,983TOTAL CURRENT LIABILITIESLong-term debt4,0503,1852,320Long-term debtTOTAL LIABILITIES29,97232,96236,303TOTAL LIABILITIESCommon stock1,7401,7401,740Common stockRetained earnings6,0188,87812,947Retained earningsTOTAL LIABILITIES & NET WORTH37,73043,58050,990TOTAL LIABILITIES & NET WORTH

Fiesta + Humour + WC + EMACCOUNTING EFFECTS OF ENVELOPE MACHINEOn Income Statement200020012002

Cost of goods sold avoided3,0003,0003,000FIESTA CARDS WITHOUT HUMOUR, WC OR EMHUMOUR DESIGNS, INC.Production cost of envelopes2,1002,1002,100FIESTA CARDS WITH HUMOUR, EM AND WCInterest expense1058463INCOME STATEMENTSINCOME STATEMENTSEFFECTS OF WEST COAST FINANCINGINCOME STATEMENTSProjected DataProjected DataProjected Data200020012002200020012002200020012002200020012002200020012002



Net fixed assets1,000900800Equipment loan800600400BALANCE SHEETSBALANCE SHEETSBALANCE SHEETSProjected DataProjected Data200020012002200020012002200020012002200020012002200020012002



fiesta w132

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