I. Introduction Having already established the technical and marketing aspects of the study, EALA Inc.

will now try to incorporate all pertinent information gathered to determine the financial feasibility of PantSaloon. A comprehensive discussion of key quantitative indicators will be presented in this part of the study. This section will start off by presenting information regarding the project’s total cost, initial capital requirements, the correct mix of financing as well as sources for such. Assumptions were already made regarding several factors concerning the financial projections. Financial statements and analysis of such will also follow. This will provide insight regarding the financial potential of PantSaloon as a business. The analysis and detailed evaluation of all generated projections is the basis for EALA Inc.’s conclusion that PantSaloon is financially sound and capable of competing in the industry.

A. Executive Summary

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At this stage of the feasibility study PantSaloon has already proven to be of attractive demand and doable production. This is now the section of our study where we push that further into determining the financial feasibility of this whole business. To arrive at the decision of whether to go or not to go with this business the group did a financial analysis starting of with calculating the total investment needed to start it all up. This amounted to Php 1,948,965. This figure already includes all the necessary registration expenses, operation. Based on the resulting projections as reflected by the financial statements, particularly the Income Statement, it turns out that EALA Inc. stands to earn a positive net income in its first year of operations. Though the amount is relatively small, it signals that the business can stand to gain more as it continues its operations despite the additional cost of the 12% VAT and corporate taxes. In addition, the net present value, computed for the operating cash flows for Years 1 to 10 is found to be positive and greater than zero. The internal rate of return computed for resulted to 283%, and the payback period for the business is 1 year. As such, it is determined that the company would earn a return greater than 22%, communicating an attractive market value to the investors and increased wealth for the owners. Financial Ratios were derived to assess the performance of PantSaloon. Based from the resulting liquidity, activity, debt, and profitability ratios, PantSaloon’s business operations are indeed efficiently and effectively managed. It can be concluded based on the results of the financial analysis that PantSaloon is a promising business venture. fixed assets like sewing machines, initial marketing expenditure and as well as the initial working capital needed for

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II. Financial Study A. Initial Investment (see Table 1) Total initial investment required to start the business is estimated to be Php 1,948,965. This amount includes registration fees, fixed assets, preoperating/promotion expenses, as well as initial working capital requirements necessary to start up the business. Payments for legal transactions with the SEC, BIR, DTI and Local City Government comprise the registration fees. Purchases made for the equipments, furniture and fixtures for the office, plant and the store as well as the delivery van are also included in the initial investment. Renovations and construction works of the office as well as the store site is also part of the initial costs. The pre-operating costs consist of outlays for promotional activities, most specifically the initial print materials and the expenses for the launching of the store which will be conducted through a ribbon cutting ceremony. The required initial working capital is composed of payments for supplies and purchases of materials for initial production runs. A month’s worth of salary payments and a two-month deposit for the store rent will also form part of the initial investment. Cash on hand (set at 500,000) will also be required for other pre-operating expenses which will arise prior to start of business.
Table 1| Initial Investment Costs

Registration Fees SEC BIR DTI Business Permit Total Registration Fees Fixed Assets Office Equipment 4 in 1 machine Computer Set Furniture and Fixtures Cabinets Chairs and table

3,189 500 515 7,472 11,676

12,000 60,000 2,500 29,000

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Sofa Fire extinguisher Leasehold Improvements Total Office Assets Store Equipment Sewing machine Edging machines Buttonholers Jeans software Computer set Chairs and worktables Phone Safety deposit box Furniture and Fixtures Display materials 2-seater sofa Chair Center table Floor lamp Lighting system Fire extinguisher Air conditioning unit Leasehold Improvements Vehicle Total Store Assets Total Fixed Assets Initial Advertising Costs Print Materials Ribbon Cutting Total Initial Advertising Costs Initial Working Capital Current Assets Cash on Hand Supplies Materials Prepaid Rent Total Current Assets Production Costs Variable Indirect Labor (Washing: Outsource) Total Variable Costs Fixed Direct Labor (wages) Indirect Labor (Designer) Rent Expense Utilities Transportation

4,000 1,700 15,000 124,200 30,000 15,000 5,000 20,000 30,000 5,710 2,000 1,700 15,000 6,000 2,000 4,000 1,500 8,000 1,700 17,000 293,629 300,000 758,239 882,439 80,500 30,000 110,500 500,000 53,500 39,885 75,000 668,385 15,000 15,000 48,000 20,000 12,500 9,090 3,000

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Repair and Maintenance Total Fixed Costs Total Production Costs Administrative Costs Office Supplies Salaries Insurance Communications Utilities Total Administrative Costs Total Initial Working Capital TOTAL INITIAL INVESTMENT COST B. Assumptions for Financial Projections Rates Growth rate.

0 92,590 107,590 1,000 162,000 1,875 1,500 2,000 168,375 944,350 1,948,965

The group will assume an annual 2 percent growth rate on sales

based on a professional opinion of Mr. Victorino Caluza, the owner of Viktor Jeans. Corporate income tax rate. Income tax is set at a constant rate of 32 percenti. Cost of debt. For this study, we used the following as the cost of debt: Cost of debt = 15%

Direct from the PNB loan application for start-up businesses, the lending rate would range from 13% - 15% depending on how risky is the proposed business. In the case of PantSaloon a pessimistic standpoint was taken and therefore would be applying the 15% rate on the loan. Cost of equity. The group used the following formula to determine the cost of equity: Cost of Equity = Cost of Debt + Risk-free Rate = 15% + 7% = 22%

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The cost of equity is estimated to be higher than the cost of debt due to the increased required return desired by investors. As such, to determine the cost of equity, risk-free rate is added to the after-tax cost of debt. Risk-free rate is found by averaging the 90-day T-bill rates for the past five years (2001-2005).ii Inflation rate. For selected items in the financial statements, the projected national inflation rate of 7.5%iii is used; the inflation rate of the clothing industry, pegged at 1.02% is also used. Dividend policies. Dividends
th

amounting
th

to

P100,

000

is

distributed

to

stockholders starting from the 6 up to the 10 year of operations as income is seen to be at a considerably favorable level. D. Projected Financial Statements 1. Income Statement Accounts (see Appendix 1 for the Pro-forma Income

Statements) Sales. The selling price of the PantSaloon jeans was determined through the survey conducted. The pre-determined average regular selling price of Php 1000.00 per shirt will remain constant throughout the ten-year projection. The discount price (50% of regular price) of Php 500 shall also be kept constant. Net sales is computed by dividing Gross Sales by 1.12 (at 12% VAT rate) Sales Forecast. The sales forecast is based on the estimated production capacity that PantSaloon has, the percentage of which was shown in the Market Study. The percentage of the effective demand that will be targeted will be kept at a constant rate. EALA Inc. estimates that 95% of the items offered for sale at regular price will be sold. The remaining unsold items shall be offered for sale throughout the year at a 50% discount. It is estimated that 99% of these will be sold within the year.

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Unsold items will be passed on to the following year and will be included in the items to be offered for discount sale for that year. All sales are made on cash basis. returns. Cost of Goods Sold. The Product Costing Schedule shows the computation of each unit of jeans produced. The direct material cost component of each unit has been adjusted for inflation for the ten-year projection. The cost of goods sold for the promotional discount sale shall be based on First in First out (FIFO) basis. Wherein, the unsold items from the previous year will first be exhausted before the unsold items from regular sales of the present year. Advertising Expenses. Advertising expenses will be set at Php 30,000 on years 2, 3, 5, 7, 8, 9, 10; Php 110,500 at year 1 and Php 100,500 on year 6. This amount will be allocated to the various promotional activities that EALA Inc. plans to implement annually. Depreciation Expense. The straight-line method of depreciation was used to depreciate each fixed asset owned by PantSaloon. It was assumed that all of these very fixed assets have a salvage value equal to zero. The estimated useful life of the fixed assets are based on information provided online sources and vendors of the corresponding fixed assets. Repair & Maintenance. Annual Repair and Maintenance cost shall be set at PhP35, 000 annually. This assumption was approved as by Lorenzo Sison, Jr., a Certified Public Accountant, based on the analysis he made on the nature and estimated life of the fixed assets. It is also assumed that there will be no sales

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Rent Expense. This cost will only include the rental fees charged by the J & R Commercial Center to its tenants. The ten-year projections were adjusted to reflect the national economy’s inflation (pegged at 7.5%). Administrative Expense. Position in the company and the level of responsibilities that each job entails make salaries and wages vary from one employee to another. Employees are paid every 15th and 30th of the month. EALA Inc. will give wage increase starting on the 3rd year on the basic pay of all its employees. These salary increases are meant to offset the effects of increases in the inflation rate. SSS Contribution. EALA Inc. will pay SSS contributions for its employees, contribution will vary depending on the salary bracket that each employee belongs to. PhilHealth Contribution. As mandated by law, EALA Inc. will give PhilHealth benefits to its employees and his/her legal dependents to cover part of hospitalization cost and other medical expenses. The company’s contribution for each employee is based on Phil Health Premium Rates. Employee Benefits. As mandated by P.D. 851, employees shall be entitled to receive 13th month pay which should amount to not less than 1/12 of the total basic salary he/she receives within a calendar year provided he/she has already worked in the company for at least one month. The 13th month pay of all EALA Inc. employees will amount to the same monthly salary they receive. Utilities Expense. Expenses for utilities consist of total costs incurred annually for gasoline, telephone, and electricity usage in the plant and office. Supplies Expense. The items under this account consist of office supplies such as paper, pens, ink and cleaning materials for the office, plant and stores.

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Miscellaneous Expense. Annual miscellaneous expense will consist of fees paid for renewal of legal permits from the local government and other regulatory agencies. 2. Balance Sheet Accounts Current Assets Inventory. The cost of ending inventory for the each succeeding years shall consist of unsold items from the previous year and purchases made for materials for the beginning of the next year. Supplies on Hand. Supplies on hand are remainders from last month’s supplies. Prepaid Rent. At the pre-operation period, prepaid expense refers to the payments made for rent. There will no longer be pre-payments at the succeeding years because raw materials and other inputs to production will be paid as they are picked up from the suppliers. Fixed Assets Office Assets. Office assets include 4-in-1 office machine, personal computer, fire extinguishers; furniture and fixtures such as chairs and tables, sofa, and filing cabinets. Store Assets. Store assets include sewing machines, edging machines,

buttonholers, jeans software, computer set, chairs and worktables, phone, safety deposit box, display materials, 2-seater sofa, chair, centertable, floorlamp, lighting system, fire extinguisher, and airconditioning unit. Vehicle. EALA Inc. will use a light commercial van for delivery. The market value of the said vehicle at the time of acquisition is quoted at 300,000 and has 10 years remaining usable life and it will be depreciated using the straight-line method.

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Intangibles. The cost of leasehold improvements is listed under these Leasehold improvements accounts for the renovation of the store. depreciated over its estimated useful life. Current Liabilities Interest Payable. The interest at year end for the first two years of projection amounts to the monthly interest payment of the annual 15% interest on the loan principal of Php 198,965. VAT Output Tax Payable. This account, at year-end consists of the output tax for the last month of the year. Long-term Loan. The principal amount of the loan is Php 198,965. The interest rate is 15% per annum and the maturity is set at Year 2. Stockholder’s Equity Capital Stock. Total capital stock is equals to Php 1,315,270.90 with P10 par value per share. E. Sources of Financing Having a total initial investment cost of Php 1,948,965, the initial contribution of the incorporators of EALA Inc. will not be sufficient to fund the project. As such, additional investments from potential investors as well as from institutions are necessary to execute the said project. With the contribution of EALA Inc. proponents amounting to Php 1,000,000, the company still needs Php 948,965 to finance the PantSaloon project. Fortunately, some venture capitalists are supportive of EALA Inc.’s business venture. 1. Leonila T. Amposta Vice-President for Operations, Bank of the Philippine Islands This will also be

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An Economics graduate, Leonila T. Amposta has been in the banking industry for 30 years. Her work has landed her positions in banks like Far East Bank, Asian Development Bank and Bank of South East Asia, before joining BPI as its VP for Operations. Apart from her expertise in banking, she is interested in starting her own business, particularly in the clothing industry. Hence, PantSaloon’s idea of custom-fit jeans production is indeed appealing to her. She is willing to buy shares of stocks of EALA Inc. amounting to Php 500,000. 2. Atty. Cristina A. Mortel Assistant General Manager for Admin & Chief Legal Counsel, Public Estates Authority Project Manager - CBP1, Macapagal Boulevard Atty. Mortel graduated from Ateneo de Manila University with undergraduate degree of Bachelor of Science major in Mathematics magna cum laude and Bachelor of Laws. She is presently the Assistant General Manager for Admin and Chief Legal Counsel of Public Estates Authority. Like Ms. Leonila T. Amposta, Atty. Mortel is interested in starting her own business or being part of a clothing company. Hence, she is willing to invest Php 250,000 for PantSaloon. Though there are two additional shareholders, the total investing amount is still not enough to finance the project. Thus, EALA Inc. has to find a financial institution that will lend the company enough money to support the project. However, finding a bank that provides a loan for a start-up business like PantSaloon will be difficult hence the incorporators deem it necessary to have a guarantor to help with loan needs. EALA Inc. is fortunate to have a guarantor to support its business venture. 1. Atty. Peter Suchiangco Chief Executive Officer, CyberBay Corporation Atty. Suychiangco is an entrepreneur himself that is why he is supportive to those entrepreneurs who lack financial resources.

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As such, EALA Inc. can now loan a total of Php 198,965 at 15% iv, payable for 2 years. Since the loan is quite small, EALA Inc. decided to borrow it from one bank, specifically Philippine National Bank (PNB). F. NPV Computation The net present value is computed by subtracting the initial project cost from the present value of the operating cash flows for years 1 to 10, discounted at the company’s cost of capital of 20%. The year-end operating cash flows are computed as provided by the cash flow provided from operating activities as indicated by the Statement of Cash Flows. Net Present Value computed for the operating cash flows for years 1 to 10, P146,946,533.77 , is found to be positive and greater than zero. As such, it is determined the owners. G. IRR Computation The Internal Rate of Return is the discount rate that equates the NPV of an investment opportunity with Php0 because the present value of cash inflows equals the project cost or initial investment. The Internal Rate of Return computed for EALA Inc. is 283%. This is the compound annual rate of return that EALA Inc. will earn if it invests in the business and receives the given cash inflows. Since the IRR of 283% is greater than the cost of capital of 22%, EALA Inc.’s business seems to be acceptable. H. Payback Period The payback period is computed to determine the amount of time required for EALA Inc. to recover its initial investment in the business, as calculated from the cash that the company would earn a return greater than 22%, communicating an attractive market value to the investors and increased wealth for

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inflows from operating activities indicated by the Statement of Cash Flows. The yearly cash inflows are accumulated until the initial investment is recovered. EALA Inc.’s payback period is 1 year.

I. Financial Ratio Analysis The information contained in the four basic financial statements (Balance Sheet, Income Statement, Statement of Retained Earnings, and Statement of Cash Flows) is important to many interested parties who regularly need to have relative measures of EALA Inc.’s operating efficiency. Conducting a ratio analysis involves methods of calculating and interpreting financial ratios to analyze and monitor EALA Inc.’s performance. 1. Liquidity Ratios Liquidity ratios measure the ability of a company to pay short term liabilities. This includes the current ratio and quick ratio Current Ratio. The current ratio measures EALA Inc.’s ability to meet its short term obligations. It is computed as follows: Current Ratio= Current Assets Current Liabilities Generally, the higher the current ratio, the more liquid a firm is deemed to be. As for EALA Inc., its current ratio has been increasing throughout the years, thus enabling it to become more liquid in the long run. Quick Ratio. The Quick Ratio is sometimes called the "acid-test" ratio and is one of the best measures of liquidity. It is figured as shown below: Quick Ratio = Current Assets - Inventory

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Current Liabilities The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, it concentrates on the really liquid assets, with value that is fairly certain. EALA Inc.’s quick ratios are fairly high because of low levels of inventory during those years. In addition, the low variance between the current ratio and quick ratio of EALA Inc. is caused by low inventory asset balances in the balance sheet. 2. Activity Ratios Activity ratios measure the speed with which accounts are transformed into sales or cash. Regarding current accounts, measures of liquidity are not enough because differences in the structure of a company’s current assets and current liabilities can considerably affect its “true” liquidity. Inventory Turnover. Inventory turnover measures the number of times that inventory is replaced during the period. It can be computed as follows: Inventory Turnover= Cost of Goods Sold Average Inventory EALA Inc.’s inventory turnover increases to a great extent through the its operating years. This means that EALA Inc. is transforming its inventory into sales faster. This is acceptable considering the nature of the company’s business which involves products (clothes) that are highly affected by changes in fads or styles and other clothing materials. Total Asset Turnover. The asset turnover is used to measure the ability of the firm to use its assets efficiently by turning it into cash. The computation for this ratio is: Total Asset Turnover= _______Sales________ Average Total Assets

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EALA Inc.’s total Asset Turnover has been decreasing. Though this may be the case, the changes in this ratio from year-to-year are not that critical. 3. Debt Ratios Debt ratios indicate the company’s ability to pay its debts. This is somewhat similar to liquidity except that solvency involves longer time periods. Long-term creditors and stockholders are particularly interested in these ratios. The debt position of a company also indicates the amount of other people’s money being used to generate profits.

Debt Ratio. The debt ratio measures the proportion of total assets financed by EALA Inc.’s creditors. The higher this ratio, the greater the amount of other people’s money being used to generate income. This ratio can be computed as follows: Debt Ratio = Total Liabilities Total Assets EALA Inc.’s Debt Ratio experiences a significant decrease in Year 3 because it no longer pays interest on the money it loaned. Therefore, EALA Inc. has a lesser degree of financial indebtedness and less financial leverage. 4. Profitability Ratios Profitability ratios help people analyze the firm’s profits. The firm is very much

concerned with earning enough revenue that can satisfy its obligations and at the same time provide a satisfactory return on its stockholder’s investments. Gross Profit Margin. The gross profit margin measures the firm’s mark up on its products. It can be gauged by the following formula:

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Gross Profit Margin= Gross Income Sales The relatively stable and consistent figures in EALA Inc.’s Gross Profit Margin is a good sign that the company is maintaining a stable gross profit. This also shows that there is no significant change in the company’s pricing policies. Operating Profit Margin. The operating margin represents the pure profits that are left to the company. This can be determined by the formula below: Operating Profit Margin= Operating Income Sales The Operating Profit Margin in relatively stable for EALA Inc. Net Profit Margin. The return on net sales measure the income provided by sales. It can be measured by computing this formula: Net Profit Margin= Net Income Sales The Net Profit Margin for EALA Inc. has been increasing. The low net profit margins on particular years were due to lower gross income matched with increasing operating expenses. ENDNOTES

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i

In General – Except as otherwise provided in this code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to thirty-five percent (35%) of the taxable income derived in the preceding taxable year from all sources within the Philippines: Provided, That effective January 1, 1998, the rate of income tax shall be thirty-four percent (34%); effective January 1, 1999, the rate shall be thirty-three percent (33%) and effective January 1, 2000 and thereafter, the rate shall be thirty-two percent (32%). - Section 28, paragraphs (A)(4) of the National Internal Revenue Code http://www.chanrobles.com/republicactno9294.html
ii

20012002200320042005T-bill rate (91 days)9.86%5.43%6.03%7.34%6.45%
iii

“Economic Statistics.” [Online] Available http://www.philippinebusiness.com.ph/economic_stats/economy.htm, August 2005
iv

PNB’s interest rate is 15%. The rate may change depending on the bank of choice.

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