In: Finance
MINI CASE: Jen and Larrys Frozen Yogurt Company (Revisited) In…
MINI CASE: Jen and Larry’s Frozen Yogurt Company
(Revisited)
In 2010, Jennifer (Jen) Liu and Larry Mestas founded Jen and
Larry’s Frozen Yogurt Company, which was based on the idea of
applying the microbrew or microbatch strategy to the production and
sale of frozen yogurt. Jen and Larry began producing small
quantities of unique flavors and blends in limited editions.
Revenues were $600,000 in 2010 and were estimated at $1.2 million
in 2011.
Because Jen and Larry were selling premium frozen yogurt containing
premium ingredients, each small cup of yogurt sold for $3, and the
cost of producing the frozen yogurt averaged $1.50 per cup.
Administrative expenses, including Jen and Larry’s salaries and
expenses for an accountant and two other administrative staff, were
estimated at $180,000 in 2011. Marketing expenses, largely in the
form of behind-the-counter workers, in-store posters, and
advertising in local newspapers, were projected to be $200,000 in
2011.
An investment in bricks and mortar was necessary to make and sell
the yogurt. Initial specialty equipment and the renovation of an
old warehouse building in lower downtown (known as LoDo) of
$450,000 occurred at the beginning of 2010 along with $50,000 being
invested in inventories. An additional equipment investment of
$100,000 was estimated to be needed at the beginning of 2011 to
make the amount of yogurt forecasted to be sold in 2011.
Depreciation expenses were expected to be $50,000 in 2011, and
interest expenses were estimated at $15,000. The tax rate was
expected to be 25 percent of taxable income.
A. How much net profit, before any financing costs, is the venture
expected to earn in 2011? What would be the net profit if sales
reach $1.5 million? What would be the net profit if sales are only
$800,000?
B. If inventories are expected to turn over ten times a year (based
on cost of goods sold), what will be the venture’s average
inventories balance next year if sales are $1.2 million? How much
might the venture be able to borrow if a lender typically lends an
amount equal to 50 percent of the average inventories balance? If
the borrowing rate is 12 percent, how much dollar amount of
interest would have to be paid on the loan?
C. How might the venture acquire and finance the new equipment that
is needed?
D. Identify potential government credit resources for the
venture.
E. Prepare a summary of the benefits and risks of Jen and Larry’s
continued use of credit card financing.
F. Prepare a summary of how the venture might benefit from
receivables financing if commercial customers are extended credit
for thirty days on their purchases.
G. Discuss the impact of potential loan restrictions should the
venture seek commercial loan financing.
H. Comment on how the venture might be evaluated in terms of the
five Cs of credit analysis.