PART B

Presented below is the latest income statement and balance sheet for Verbose, a rapidly growing start-up business.

The founder is required to provide a forecast income statement and balance sheet for each of the next 3 years and has asked for your assistance. Details are as follows:

• In line with the rapid growth that Verbose has been experiencing, revenue is expected to double each year over the next 3 years

• Expenses are forecast to be equal to 70% of revenues

• The tax rate on profits is 30% each year

• Receivables are equal to 25% of revenue each year

• Inventories are equal to 20% of revenue each year

• Plant, property, and equipment (PPE) is steady $100,000 each year

• There is no depreciation on PPE over the next 3 years

• There are no payables or borrowings over the next 3 years.

• Share capital remains at $169,000 per year.

Required

1. Construct the income statement and balance sheet for Verbose for each of the next 3 years. Based on these forecasts, what will be the cash at bank balance at the end of year 3? Based on your calculations, when meeting the founder, what advice would you give with respect to the business/operating model of Verbose?

2. Suppose at the meeting the founder reveals that a major equity investor expects a dividend of $40,000 at the end of 3 years, and Verbose will need to  increase its PPE by $80,000 at the end of year 3 to support revenue growth beyond that year. The founder also believes Verbose needs a minimum cash at bank balance of $9,000 to support contingencies. What is the minimum amount of debt that Verbose will need to raise at the end of year 3 given this information?