ALMA.com is an e-commerce service for teenagers’ video games, television programs, and other
material, intended to be both educational and enjoyable. Valuable product information and detailed
review comments are combined with a wide selection of productsfor purchase to help families make their
children’s educational and entertainment decisions. A team of leading educators and experts provide
reviews and comments on the productssold by the firm. ALMA.com targets highly educated, convenienceoriented, and value-conscious families with children under the age of fifteen, estimated to be about 40
percent of Internet users. The firm is using a warehouse distribution model and channels that stems higher
net margins, as well as greater selection and convenience for customers, when compared to traditional
retailers and competitors.
Venture capital of $1M was obtained to start up operations in 2021; a second round of venture
financing of $0.14M (capital lease of warehouse facilities) helped ALMA.com to move through its survival
stage. Because of relatively high marketing expenditures aimed at gaining market share, the firm is
expected to suffer net losses for the first two years 2021 and 2022. However, net profit margins are
expected to average 12% per year beginning in Year 2023.
The management team is headed by Ms. Alma Serah, who serves as the president of the venture
and controls about 35% of the ownership of the firm. Ms. Serah has more than twenty years of experience
in high-tech industries, including previous positions with prestigious corporations such as Microsoft. She
holds a Bachelor Degree in Electrical Engineering and a Master Degree in Computer Engineering from top
educational institutions in the world. Nelma Bradman, director of technology, has more than twelve years
of experience in software development and integration. Dalma Loman has almost ten years of experience
in business development and sales in the software industry. Salma Norman, director of marketing, was
responsible for the marketing communications function and the Internet operations of a large software
company for nine years. Management strives for continual improvement in ease of user interface,
personalized services, and amount of information supplied to customers.
ALMA.com balance sheet as of the end of 2021 is expected to be as follows:
Balance Sheet as of December 31, 2021 (In Millions)
Cash 0.15 Accounts payable 0.17
Accounts receivable 0.47 Capital Lease Liability* 0.14
Inventories 0.55 Total Liabilities 0.31
Net fixed assets* 0.14 Equity 1.00
Total assets $1.31 Total Liabilities and Equity $1.31
*Represents the capital lease of tools and equipment (warehouse facilities)
After discussions with the company’s marketing manager and finance manager, sales over each
quarter of 2022 are forecasted to be:
Quarter Sales Forecast (In Millions)
Q1 $ 0.50
Q2 $ 0.75
Q3 $ 0.85
Q4 $ 0.90
Total $ 3.00
All sales are made on credit terms of net 90 days and are collected the following quarter. No bad
debts are anticipated. The accounts receivable on the balance sheet at the end of 2021 thus will be
collected inQuarter 1, 2022. Quarter 1, 2022 sales will be collected inQuarter 2, and so on.
Inventory on hand represents a minimum operating level (safety stock), which the company
intends to maintain. ALMA.com’s policy is to maintain ending inventory at the end of each quarter equals
to 30% of next quarter’s expected sales. Purchases are paid 60% in the same quarter and 40% in the next
quarter. Cost of goods sold averages 70% ofsales (gross profitmargin 30%).
General, Administration and Selling cash expenses average 10% of sales. Depreciation is $0.01M
per Quarter. The annual interest rate on outstanding lease liability is 5%. Interest expense is paid quarterly.
Ms Alma Serah assumes taxes are paid quarterly and the income tax rate is 40% for budgeting purposes.
The capital lease installment is 0.08M per Year (0.02 per quarter). There are no additional capital
expenditures planned during 2022, and no equity payouts will be paid. The company’s desired end-ofquarter minimum cash balance is $0.15M. Ms Serah hopes to meet any cash shortages during the period
by an agreed $0.15M open line of credit with the bank at 4%.
a. Prepare quarterly purchase budget for Q1, Q2, Q3, and for Q4 ending December 31, 2022 Assume
that forecasted salesforthe first quarter of 2023 = $1.2 million.
b. Prepare quarterly general, administration and selling budget for Q1, Q2, Q3, and for Q4 ending
c. Prepare quarterly cash budgetfor Q1, Q2, Q3, and for Q4 endingDecember 31, 2022.
d. Prepare the pro forma income statement for the year endingDecember 31, 2022.
e. Prepare the end of the year 2022 pro forma balance sheet.
f. Based on your projections for the four quarters of 2022, indicate (1) whether new bank borrowing
(open line of credit) will be needed and (2) if borrowing is needed, when does the need start
occurring and what isthe maximumamount needed?
g. An analysis of the cash conversion cycle should also help Alma Serah understand what has been
happening to the operations of ALMA.com. Prepare an analysis of the conversion periods for the
three components of the cash conversion cycle for 2022. Explain what has happened in terms of
each component of the cycle during 2022. Ms. Serah should be interested in knowing whether
ALMA.com. has been building or burning cash. Comment on the cash build, cash burn, and the net
cash build/burn position for2022.
Ms. Alma Serah is planning to leverage equity capital with debt during the years 2023, 2024 and
2025. She is keen to know whether ALMA.com will add economic value. Therefore, in order to assess the
effects of its leveraging debt strategy, ALMA.com prepared a projected Statement of Financial Position
(Balance Sheet) and Income Statement for the years 2023, 2024 and 2025 based on certain assumptions
and eventsthat are likely to happen in the future.
The interest rate on capital lease is 5%. The average expected interest rate on the bank loan during
2023 – 2025 is 4%. For long-term debt, the real interest rate is estimated to be 3%; the inflation premium
is 4%; and ALMA.com’s default/liquidity risk premium over government bonds is estimated to be 5%. The
cost of common equity was estimated using the risk-free long-term government bond rate plus
investmentriskpremiumof 5.8%. The income tax rate = 40%.
Followingare the projected statements of income and financial position for 2023, 2024 and 2025:
Projected Statement of Income (2023 – 2025)
INCOME STATEMENT 2023 2024 2025
Revenues $3.44M $7.50M $12.30M
Cost of Goods Sold 2.55 5.20 8.72
Gross Profit 0.89 3.30 3.58
General and Marketing Expenses 0.26 0.34 0.36
Research and Development 0.05 0.05 0.05
Depreciation 0.06 0.09 0.12
EBIT 0.57 1.87 3.05
Interest Expense 0.07 0.11 0.18
EBT 0.50 1.76 2.87
Income Taxes 0.20 0.70 1.15
Net Income (Loss) 0.30 1.06 1.72
Projected Statement of Financial Position (2023 – 2025)
BALANCE SHEET 2023 2024 2025
Cash $ 1.15 M $ 1.87 M $ 3.95 M
Accounts Receivable 0.35 1.00 1.50
Inventories 0.50 0.48 1.40
Total Current Assets 2.00 3.35 6.85
Net fixed assets* 0.15 0.35 0.57
Total Assets 2.15 3.70 7.42
Accounts payable 0.44 0.59 1.13
Accrued Liabilities 0.16 0.38 0.52
Total Current Liabilities 0.60 0.97 1.65
Capital Lease Liability* 0.13 0.30 0.60
Bank Loan 0.12 0.45 0.70
Long-Term Debt 0.20 0.50 1.50
Total Non-Current Liabilities 0.45 1.25 2.80
Total Liabilities 1.05 2.22 4.45
Venture Capital 1.00 1.00 1.00
Additional Paid-in Capital 0 0.30 0
Retained Earnings 0.10 0.18 1.97
Total Equity 1.10 1.48 2.97
Total Liabilities and Equity 2.15 3.70 7.42
*Represents the capital lease of tools and equipment (warehouse facilities)
h. Determine the financial structure weightsfrom ALMA.com’s 2025 statement of financial position for
the three interest-bearing debt components and the common equity.
i. Calculate ALMA.com’s weighted average cost of capital (WACC)
j. Estimate ALMA.com’s economic value added (EVA). Did ALMA.com expect to build or destroy
economic value in 2025? [Hint: Consider whether ALMA.com is adding economic value in terms of
its net operating profit after taxes (NOPAT)*and its weighted average cost of capital (WACC).
k. Alma.com investors have been approached by an outside investor who wants to invest $3.0M in the
venture at the end of 2021. What percentage of ownership in the venture should ALMA.com
investors give up to the outside investor for a $3.0M new investment? Alma.com financial analysts
predict that Operating Cash Flows are expected to be $0.21M in 2022, $0.55M in 2023, $0.60M in
2024 and $0.76M in 2025. The analysts further predict that the company’s cash flows are expected
to grow at 1% annual rate indefinitelybeyond 2025. [Hint: Use Projected Free Cash Flow].