Question

An entrepreneur is going to open a new venture. He estimates that he needs cash in hand of $50,000, inventory of $50,000 and fixed assets of $500,000. His suppliers allow him to pay 50% of the inventory late. He can borrow 200,000 from a bank with an annual rate of 10%. Please help the entrepreneur to figure out the amount of equity that he needs and construct his start-up balance sheet .

The entrepreneur also estimates that on average he can sell 10,000 products each year. The product is priced at $200. The cost of goods sold per unit is $100. His estimated operating cost is $500,000 in the first year (not including depreciation) Depreciation is 10 % of total gross fixed assets. Income tax is 30%. Please help the entrepreneur to prepare a pro forma income statement for the first year.

Use the above information to calculate the break even point, return on equity and return on assets

Answer 1

Start Up Balance sheet		Start up Balance sheet		At the end of the year
	Asset
	Current Assset
	Cash	50000		401000
	Accounts Receivable
	Inventory	50000		50000
	Total current assets
	Fixed assets	500000		450000
	Total assets	600000		901000
	Liabilities & stockholder's equity
	Current Liabilities
	Accounts payable	25000		25000
	Bank Loan	200000		200000
	Equity	375000	Balancing figure	676000
	Total Liabilities & stockholder's equity	600000		901000
Proforma Income statement'
	Sales	2000000
	Cost of goods sold	1000000
	Contribution Margin	1000000
	Less : Fixed Expenses
	Operating expenses	500000
	Depreciation	50000
	Total fixed expenses	550000
	Operating Income	450000
	Less : Interest	20000
	Income before taxes	430000
	Less : Income taxe expenses	129000
	Net Income	301000
Break-even Points
in Units	Fixed expenses/Contribution per unit
	=550000/100	5500
in Dollars	=5500*200	1100000
Return on equity
	=Net Income/Average equity%
	=301000/((375000+676000)/2)%
	57.27878211	%
Return on assets
	=Net Income/Average total assets%
	=301000/((600000+901000)/2)%
	40.1065956	%