Read the scenario in the teaching notes share with us your o

Read the scenario in the teaching notes, share with us your opinion about? • • What you would do if you were Miho? • If Miho decides to sell, what percentage of her equity she should offer Amy in exchange for $30,000? Reference: An Example of Bagel Shop A Japanese girl, Miho, would like to open a bagel shop in Tokyo selling the genuine American bagel. Based on her research and observations on other bagel stores in Tokyo, she decides to sell plain bagels at $1.65. She also estimates the variable cost per bagel is $.45, and the total fixed cost is $4800 per month. Now she wants to know what is the break-even point for her bagel business based on these assumptions. More Reference material: To Sell or Not to Sell The Japanese girl, Miho, in the earlier bagel case, estimates that she would need to invest about $50,000 to purchase the necessary supplies and equipment. She has $20,000 in savings, but still needs additional $30,000. One of her best friends, Amy, is willing to write her the check of $30,000, if she is willing to sell Amy an equity stake in the business. Miho really likes the idea of owning her bagel business outright. But, Miho is not sure what percentage of her total equity she should offer Amy in exchange for $30,000. Here are Miho’s estimates about her bagel business for the first year: ? an average of 6000 bagels per month at $1.65 each ? The variable cost per bagel is $.45 ? The monthly fixed cost is $5,000 ? Tax @ 25% So, the estimated annual net profits are $ 19,800. After adjustment, the annual net cash flow is $20,000. Optional activity #1: Read the above scenario, think about: • What you would do if you were Miho, sell or borrow? • If Miho decides to sell, what percentage of her equity she should offer Amy in exchange for $30,000? You may try the discounted future cash flows approach to calculate the business value first, then decide on the percentage. Whether or not to take debt vs. equity is dependent upon many factors, including whether funding sources are available, the interest rate, the duration of the loan, the amount of the money you need, the percentage of ownership in exchange of the amount of investment, potential of the business (operation years and growth), etc. Thus, to make a sound decision, you probably need to do some research yourselves on 9 1. What is the typical interest rate for commercial loans?

Solution

Details Available Shop Bagel Selling Price 1.65 Variable Cost 0.45 Fixed Cost Per month              4,800 Investment Required            50,000 Savings Available            20,000 Addl. Requirement            30,000 Business Forecast Available to determine % equity 1st Year 6000 Bagels / Month                1.65 Monthly Fixed Cost              5,000 Tax 25% Estimated Annual net profit            19,800 Annual Net cash flow            20,000 Ans 1 Breakeven Point Total Contribution                1.20 (Sell Price - Variable Cost) No of Units to be sold per month to recover the Fixed Cost              4,000 (Fixed cost / Contribution) Ans 2 Discounted Cash Flow Approach Initial Cash Outflow          -50,000 Cash Inflow Per month              1,650 Period                    12 Interest 6% http://www.c-loans.com/borrowers-investors/commercial-mortgage-rates-compared-to-home-loan-rates Net Present Value (1 year)            13,833 Payback Period               -3.61 It will take Approximately 3 years and 8 Months to recover the initial cost Monthly Cash Inflow Sales (1.65 * 6000)              9,900 (Assumed the sales is received and incurred same Month) Variable Cost (0.45 * 6000)              2,700 (Assumed the cost is paid and incurred same Month) Gross Profit              7,200 Less : Fixed Cost              5,000 EBIT / Month              2,200 Annual EBIT            26,400 (EBIT * 12) Tax @ 25%              6,600 Net Profit            19,800 Cash flow per month              1,650 (Assuming all Cost and revenue are paid in same month) Depending on various factors, she should offer a 49% equity to her friend considering that the investment shall be rwpaid within a period of 3 years and 8 months Also The control should be in the hands of Miho