23 Feb A new software start-up, Lutoj, Inc., is developing a new smart home software product. Lutoj believes revenue must reach $5 million in Year 3 for the product to be viable. LutojÕs operating
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MGMT 4072 Ð ASSESSING FINANCIAL NEEDS ASSIGNMENT A new software start-up, Lutoj, Inc., is developing a new smart home software product. Lutoj believes revenue must reach $5 million in Year 3 for the product to be viable. LutojÕs operating margin (EBIT/Sales) is 20%, the tax rate is 30%, and asset turnover is 5X. The founders have $200,000 between them for initial equity funding. Assume Lutoj will pay no dividend. 1. With no other financing, will the $200,000 of founder investment be sufficient to achieve the Year 3 sales target? If not, what level of initial equity investment would be required? (hint: use sustainable growth equation or goal seek) 2. Assume Lutoj cannot raise additional equity, but will use debt to achieve the scale necessary to reach the Year 3 sales target. They can borrow at an 8% interest rate before tax. How much debt will initially be required? (hint: use sustainable growth equation or goal seek) Hint: AssumptionsYear 1HintInitial equityFrom problem statementOperating marginFrom problem statementTurnoverFrom problem statementLeverageNo debt = 1.0Retention rateNo mention of dividends so 100%Tax rateFrom problem statementInterest rateFrom problem statement (part 2)Year 1 Financial ResultsSalesMultiply starting assets by turnoverStarting AssetsInitial equity * LeverageStarting EquityInitial equityDebtStarting assets – Initial equityNet Income((Sales * Operating margin) – interest expense) * (1-Tax rate)Return on sales (ROS)Net income / SalesReturn on assets (ROA)Net income / Starting assets
