Feasib Financial

Executive Summary 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, fixed assets like sewing machines, initial marketing expenditure and as well as the initial working capital needed for operation. EBIT-EPS

Looking at the financial statements yearly projections, most importantly PantSaloon’s Income Statement, the group can expect to earn _____________. This alone signals that, despite the additional cost of the 12% VAT and corporate taxes, the business can stand to gain more as it continues its operations. In addition, computing the net present value with the use of the projected operating cash flows for Years 1 to 10 showed to be _____________. Aside from that, the internal rate of return resulted to 29%, and the payback period for the business is 4.56 years. Given such parameters, it is determined that the company would earn a return ________, communicating an attractive market value to the investors and increased wealth for the owners. On the other hand, to assess the performance of PantSaloon financial ratios were calculated. Based from the resulting liquidity, activity, debt, and profitability ratios, PantSaloon’s business operations would indeed deem to be efficient and effective. A sensitivity analysis

It can be concluded from all of these that PantSaloon is a promising business venture to pursue.

Financial Study Initial Investment (see Exhibit 1) Total initial investment required to start the business is estimated to be Php 1,948,965. This amount includes registration fees, fixed assets, pre-operating/promotion expenses, as well as initial working capital requirements necessary to start up the business. As a requirement to any other business like PantSaloon payments for legal transactions with the SEC, BIR, DTI and Local City Government before operation are needed to be settled as part of the registration fees. All purchases of equipments, machines, furnitures and fixtures for the office and the store are also included in the initial investment. Construction works and any possible renovations of both the office and store are well accounted for. Lastly, included in the total PantSaloon investment was the company vehicle’s acquisition cost. The pre-operating costs consist of expenditures for marketing expenses. This is mostly the initial promotional materials necessary to advertise and the expenses for the launching of the store to the target market. The required initial working capital would be primarily allocated to the initial production runs which is further comprised of payments for supplies, purchases of direct materials, and payments for indirect labor. A month’s worth of salary payments and a 6-month rent deposit for the store will also form part of the initial investment. Set at Php 500,000, other pre-operating expenses may arise prior to the start of business and thus the need for the cash on hand.

Exhibit1

PROJECT COST- INITIAL INVESTMENT EALA Incorporated Projected Cost - Initial Investment 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 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 centertable floorlamp lighting system fire extinguisher airconditioning unit Leasehold Improvements

Cost 3,189 500 515 7,472 11,676

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

Vehicle Total Store Assets Total Fixed Assets

300,000 758,239 882,439

Initial Advertising Costs Print Materials Ribbon Cutting Total Initial Advertising Costs

80,500 30,000 110,500

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 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

EBIT-EPS Analysis (see Exhibit 2)

500,000 53,500 39,885 75,000 668,385 15,000 15,000 48,000 20,000 12,500 9,090 3,000 0 92,590 107,590 1,000 162,000 1,875 1,500 2,000 168,375 944,350 1,948,965

Part of this feasibility study, especially this financial section, is to find capital to finance the business. And, breaking down capital we know that we have two sources, which are equity and debt. With this in mind, the next step would be determining the optimal capital structure suitable for PantSaloon and EBIT-EPS Analysis is one approach to determine this. EBIT-EPS Analysis puts emphasis on the firm’s profits before income and taxes. The EBIT-EPS approach allows for the use of different options to choose the mix of capital structure that yields the highest EPS. From the EBIT-EPS table

EXHIBIT 2 EBIT-EPS ANALYSIS

Assumptions for Financial Projections

Rates Growth rate 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%

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 Cost of Capital The cost of capital is computed through the weighted average of the firm’s debt and equity capital costs, using the optimal capital structure of 70% debt and 30% equity. The weighted average cost of capital is computed as follows:

WACC

= x% (cost of debt) + y% (cost of equity) = 70% (15%) + 30% (22%) = z%

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

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

Projected Financial Statements A. Income Statement Accounts (see Appendix 1 for the Pro-forma Income Statements) 1. Sales On the average, a pair of PantSaloon jeans would sell for Php ________. But it should be noted that this is an average price because with customization price is a function of the complexity and intricacy of the design that the customer specifies. This was determined from the numerous survey conducted to take a peek to the target market’s tastes and preferences. Net sales is computed by deducting VAT Output Tax of 12%. 2. Sales Forecast (see Appendix 11 ) The sales forecast is based on the estimated production capacity that PantSaloon has and the concluded market demand for the product, the percentages 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 as well. EALA Inc. estimates that ____% of the items offered for sale at regular price will be sold. The remaining unsold items shall be __________. It is estimated that _____% of these will be sold within the year.

Unsold items will be ______________. All sales are made on a cash basis. And, it is also assumed that there will be no sales returns. 3. Cost of Goods Sold (see Exhibit 12)

4. Advertising Expenses

5. Depreciation Expense (see Exhibit 5) 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. 6. Repair & Maintenance Annual Repair and Maintenance cost shall be set at PhP 10,000 for both store and office annually. This assumption was approved or calculated _____________. 7. Rent Expense (see Exhibit 9) This cost will only include the rental fees charged by the owners of the building to its tenants. Incorporated in the ten-year projections of this account is the national economy’s

inflation (pegged at 7.5%).

8. Administrative Expense (see Exhibit 6) Due to the varying level of responsibilities that each job description entails, the salaries and wages for each employee and manager to one another differ as well. However, all employees and managers will receive their pay every 15th and 30th of the month. In addition, to compensate for the expected national inflation or price increase for the basic goods PantSaloon will give 3% increase every 2 years on top of the basic pay of all its employees and managers. 9. SSS Contribution (see Exhibit 6) PantSaloon will be paying SSS contributions for all its employees and executives. This contribution will, however, depend on the salary pay grade or bracket each employee belongs to. Of course, the higher the salary bracket the higher the contribution. And since PantSaloon will be giving a 3% increase every two years this would mean that SSS Contributions could increase over the years as well. 10. PhilHealth Contribution (see Exhibit 6 ) PantSaloon Inc. will give PhilHealth benefits to its employees and his/her legal dependents. Mandated by law, this is given to cover part of hospitalization cost and other medical expenses. The company’s contribution for each employee is based on Phil Health Premium Rates. 11. Employee Benefits (see Exhibit 6)

The 13th month pay of all PantSaloon employees will amount to the same monthly salary they receive. P.D 851 supports this very company policy. It states that 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. 12. Utilities Expense (Exhibit 10) What comprise this account are those expenses or costs related to PantSaloon’s annual electricity, water, telephone and gasoline both in the shop and office. 13. Supplies Expense(see Appendix 8) Other materials, aside from those vital for the creation or production of the very product, like pens, bond papers, ink, etc fall under this expense or account. These are all necessary for the company’s day-to-day transactions as a business entity. 14. Miscellaneous Expense (see Appendix 7) Annual miscellaneous expense will consist of fees paid for renewal of legal permits from the local government and other regulatory agencies. These are all requisite for the continuous operation of the business. B. BALANCE SHEET ACCOUNTS Current Assets 1. 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. The purchase of materials at the end of the year will be good for 250 units and will be held constant for the ten-year projection.

2. Supplies on Hand. (See Appendix 8)

3. Prepaid Expense. At the pre-operation period, prepaid expense refers to the payments made for rent only. There will no longer be pre-payments at the succeeding years because rent will now be paid at the end of each operating month. Fixed Assets 4. Office Assets Office assets include 4-in-1office machine, personal computer, fire extinguishers; furniture and fixtures such as chairs and tables, and filing cabinets. 5. Store Assets Store assets include several sewing machines, display materials, mannequins, lighting system, and fire extinguishers. Leasehold improvements accounts for the construction and renovation of the store.

7. Vehicle PantSaloon will use a company vehicle for transportation. This vehicle has a market value of Php 300,000 and has a usable life of 10 years as well. To depreciate this fixed asset, a straight-line method will be applied.

8. Intangibles The cost of leasehold improvements is listed under these Leasehold improvements account, which takes into account all renovations of the store. This will also be depreciated over its estimated useful life. Current Liabilities 1. Rent Payable The store rent for the last month of the year shall be paid at the beginning of the next year. 2. Utilities Payable The amounts under this account at year-end shall carry the electricity, and water consumed by PantSaloon for the last month. 3. Interest Payable This accounts for the periodical interest payments for the long-term loan availed from a bank. PantSaloon will be paying an annual rate of 15% to its ___-year loan amounting to Php ___________. 4. VAT Output Tax Payable This account, at year-end consists of the output tax for the last month of the year. 5. Long-term Loan

PantSaloon, aside from having several investors, will be availing a loan from a bank. This said ____-year loan will have a principal amount of Php ________. Consistent with our EBIT-EPS analysis, this debt will represent now the ___% of the capital structure mix of equity and debt. Stockholder’s Equity Capital Stock Total capital stock equals to Php 900,000 with P10 par value per share.

Sources of Financing

NPV Computation Net Present Value is one of the discounted cash flows methods used to evaluate a particular investment or project. The underlying concept behind NPV is the time value of money. With the use of a cost of capital and yearly expected cash flows received from the investment or project, one can weigh through the NPV whether or not one is pursuing a worthwhile venture. The NPV is computed by discounting first all the yearly cash flows with the given cost of capital. Adding all these discounted cash flows gives you now the present value of the investment. Subtracting now this present value figure to the initial project cost results to the net present value. A project the yields a positive NPV is a worthwhile investment. In PantSaloon’s case, the 10 yearly cash flows would be discounted using the 22% cost of capital that was computed using WACC. Adding these would arise to the present value figure we would then be subtracting to the initial project cost of Php ________.

IRR Computations

The Internal Rate of Return ( IRR ) is the discount rate that equates the NPV of an investment opportunity with $0 because the present value of cash inflows equals the project cost or initial investment. The IRR computed for PantSaloon, Inc. is ____%. This is the compound annual rate of return that PantSaloon, Inc. will earn if it invests in the business and receives the given cash inflows. Since the IRR of _____% is greater than the cost of capital of 20%, PantSaloon, Incorporated’s business seems to be acceptable.

Payback Period The payback period is the amount of time required for PantSaloon, Inc. to recover its initial investment in the business. The yearly cash inflows are accumulated until the initial investment is recovered. Magnum, Inc.’s payback period is 4.56 years.