A) Quarterly purchase budget for 2022

Purchase Budget (in millions)

Q4/21 Q1/22 Q2/22 Q3/22 Q4/22 Q1/23
Sales 0.47 0.5 0.75 0.85 0.9 1.2
COGS 0.35 0.525 0.595 0.63
Desired End 0.55 0.225 0.255 0.27 0.36
Beginning 0.55 0.225 0.255 0.27
Required purchases 0.025 0.555 0.61 0.72

Purchase disbursement (in millions)

Q4/21 Q1/22 Q2/22 Q3/22 Q4/22
Old Payments 0.17 0.01 0.222 0.244
New Payments 0.015 0.333 0.366 0.432
Total payments 0.185 0.343 0.588 0.676
Accounts Payable 0.17 0.01 0.222 0.244 0.288

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% of sales (gross profit
margin 30%).

B) Prepare quarterly general, administration and selling budget

2022 (in millions) Q1 Q2 Q3 Q4

Admin cost (non-fixed) 10% of sales 0.05 0.075 0.085 0.09
Capital lease installment 0.02 0.02 0.02 0.02
Interest on outstanding lease liability 0.00175 0.006 0.005 0.004
Depreciation 0.01 0.01 0.01 0.01
Total general, Admin & Selling Expenses 0.08175 0.111 0.12 0.124

Non-cash Expenses
Less Depreciation -0.01 -0.01 -0.01 -0.01
Cash disbursement for General, Admin &
Selling Expenses 0.07175 0.101 0.11 0.114

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 C) Prepare quarterly cash budget

(in millions) Q4 2021 Q1 2022 Q2 2022 Q3 2022 Q4 2022

Beginning 0.15 0.3280 0.3331 0.32530

Collections 0.47 0.50 0.75 0.85

Total cash available 0.6200 0.82795 1.0831 1.1753
Disbursements

Total payments - Production (0.19) (0.343) (0.59) (0.68)

Admin costs (0.05) (0.08) (0.09) (0.09)

Capital lease installment (0.02) (0.02) (0.02) (0.02)

Interest (0.00175) (0.0015) (0.00125) (0.00100)

Tax (0.0353) (0.0554) (0.0635) (0.0676)

Total disbursements (0.292) (0.4949) (0.7578) (0.8546)

Surplus/deficiency (Closing) 0.15 0.3280 0.3331 0.3253 0.3207

D) Prepare the pro forma income statement for 2022.

PL Statement FY 2022 (in millions)

Sales 3.00
COGS (2.10)
Gross Profit 0.900
General, Administration and Selling (0.30)
EBITDA 0.600
Depreciation (0.04)
EBIT 0.560
Interest 0.01
Profit before tax 0.55
Tax expense (0.22)
Net profit 0.3327

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 E) Prepare the end of the year 2022 pro forma balance sheet.

Balance sheet
0.
Cash (in millions) 32 A/P 0.29
0. 0.
A/R 90 Capital lease liability 06
Inventories 0.36 Total liabilities 0.35
0.
Net fixed assets* 10 Equity 1
0.
Retained earnings 33
1.
Total equity 33
1. Total liabilities and
Total assets 68 equity $1.68

F) Based on your projections for the four quarters of 2023, 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 is the maximum amount needed?

Answer: As per my calculations in the cash budget, ALMA.com does not have to request for a loan
from the bank in 2022. Because the company should be having money surplus for the four quarters
of 2022, while still having an ending balance of $0.15M in each quarter.

G) 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 for 2022.

Cash Burn (in millions)

COGS + Change in inventories 2.10
plus General, Administrative & Selling Expenses 0.30
plus Interest expenses 0.0055
Lease expense 0.08
less Change in payables (0.118)
plus Taxes 0.2218
2.5893

Cash Build
Net Sales 3.00
less: Change in receivables 0.43

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 2.57

Net Cash Built/Burn

Cash Burn 2.59
Cash Build 2.57
Cash burn (0.0193)

Alma.com will be spending more cash on expenses more than the cash it generates from its selling
activities in 2022. Which means that their operating costs are higher than their revenues.

Cash Conversion Cycle for 2022 (Quarterly)

CCC Quarterly for 2022

Q1 Q2 Q3 Q4

Net Sales 0.50 0.75 0.85 0.90

Inventory 0.23 0.26 0.27 0.36
Days 40.5 30.6 28.58824 36

Net sales 0.50 0.75 0.85 0.90

Receivables 0.50 0.75 0.85 0.90
Days 90 90 90 90

COGS 0.35 0.53 0.60 0.63

Payables 0.01 0.222 0.244 0.288
Days 2.571429 38.05714 36.90756 41.14286

CCC 127.9286 82.54286 81.68067 84.85714

Cash Conversion Cycle for 2022 (Yearly)

Inventory to sale conversion period

Net Sales 3
Average Inventory 0.455
Days 55.35833

Purchase to payment conversion period

COGS 2.1
Average Accounts Payables 0.229
Days 39.80238

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 Sale to cash conversion period
Net sales 3
Average Accounts Receivables 0.685
Days 83.34167

Cash Conversion Cycle

Inventory turnover 55.35833
Plus: Receivables turnover 83.34167
Less: Payables turnover 39.80238
CCC 98.89762

Receivables turnover in ALMA.com for 2022 is projected to be 83 days, which is considered a long period
to collect their cash. There I would recommend ALMA.com to change their collection policy or provide
buyers with discount if they pay their debts earlier.

Cash conversion cycle measures the time required to convert inventory into cash. The CCC in ALMA.com
is 99 days. The company should work on shortening the number of days it converts inventory into cash.

H) Determine the financial structure weights from ALMA.com’s 2025 statement of financial
position for the three interest-bearing debt components and the common equity.

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 Debt FY25 Interest Weight Debt / Total Debt
Capital Lease Liability 0.60 5% 21.4%
Bank Loan 0.70 4% 25.0%
Long-Term Debt 1.50 12% 53.6%
Total Debt (Non-current liabilities) 2.80

Equity FY25 Interest

Venture capital 1.00
12.8%
Retained Earnings 1.97
Total Equity 2.97
Debt plus equity (Total capital) 5.77
Weight of Debt 48.5%
Weight of Equity 51.5%

Return on debt for long-term debt

Long term debt
real interest rate over government bonds 3%
inflation over government bonds 4%
default/liquidity risk premium over government bonds 5%
Rd on Long term debt 12%

Equity
real interest rate over government bonds 3%
inflation over government bonds 4%
Nominal rate 7%
add:investment risk premium 5.80%
Re 12.8%

I) Calculate ALMA.com’s weighted average cost of capital (WACC)

Income Tax Rate 40%

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 Debt Rate 8.5%
Weight of Debt 49%
Return on Debt 2.5%

Equity Rate 12.8%

Weight of Equity 51%
Return on equity 7%

WACC 9.06%

Calculating the WACC helps a company understand how much each source of its capital out of (debt
and equity) is costing them. The WACC is used to assess the value of new investments.

J) Estimate ALMA.com’s economic value added (EVA).

The formula used to calculate the economic value added of ALMA.com is EVA = NOPAT – (WACC *
capital invested)

EBIT 3.05
Tax 40%
NOPAT 1.83

WACC 9.06%
Capital Invested 5.77
After tax cost of dollar used 0.52296

EVA 1.3

K) What percentage of ownership in the venture should ALMA.com investors give up to the outside
investor for a $3.0M new investment? (Using projected free cash flow)

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 Year 1 Year 2 Year 3 Year 4 Year 5 = T
Free cash flow =
Terminal Value =
operating cash flow - investing 2022 2023 2024 2025
Last FCF*(1+g)/(WACC-g)
cash flow
Operating cash flow 0.21 $0.55 0.6 0.76 3.7246
investing cash flow 0 0.11 0.29 0.34
Free cash flow 0.21 $0.44 0.31 0.42
PV Factor (based on WACC) 0.917 0.842 0.772 0.708
PV 0.1926 0.3705 0.2393 0.2974 3.72
Firm Value 4.824

Firm value 4.8244

Less: debt of end of 2021 0.14
Firm value without debt 4.68
New investment value 3
New investor share 39%

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