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Project – Phase 1 – To Do

FNCE 390 – Project – Phase 1
GREENGO LTD.
Formation of Business
I Introduction
For several years now you have been working with three “boot-strap” business operations involved in
the manufacture of agricultural crop nutrients. As a “hopeful my big day” business investor you have recently joined
a boutique venture capital firm. You believe your time has come and have convinced the venture firm
partners that there is unlimited potential if these three businesses are combined (your fellow school mates).
You have also convinced your school mates that there are many potential benefits by combining the three operations
and gaining access to your firms venture capital funding. Believing you, they have asked you to “make it happen “
and complete the combination. Your documented project plan and implementation steps are outlined below:
The business’s will combine effective February 1, 2022 into a single incorporated entity. You will create a
February 1, 2022 Opening Balance sheet reflecting the closing of the business combination transaction.
The businesses will then transition operations from “as is” to an integrated entity over the next year.
You will develop the forecast income statement for the first year of operations using the assumptions provided for the
year ended January 31, 2023 as well as the January 31, 2023 Balance Sheet. You are doing this as you
believe it will take one year to establish operations before heading down the growth plan you have in mind. Financial
performance for the first year is based on 2022 combined results of the individual businesses with certain adjustments
you expect to see from the formation of the new company.
II Project Plan
A Combination process – Entries for Column H
1 Complete the column “Combined As Is” Balance Sheet by adding the respective balances of the individual entities. `
Column H reflects the totals of columns B-D-F
2 Complete the column “Combined As Is” Income Statement by adding the respective balances of the individual entities.
Column H reflects the totals of columns B-D-F
3 Review the “Combined As Is” Ratios (each entity has formulas to work with)
Test check accuracy of ratios in Column H
B Incorporation process – revaluation adjustments reflect in Column J – new Balance column K
1 The incorporation process has been structured such that an incorporated entity created by your firm will acquire
the operations of each entity. As such all assets are revalued to their fair market values at the time of
acquisition. The fair market values are:
Cash All cash balances of original operations paid to founders – Combined cash = $0
Opening Balance Sheet cash = $0
Accounts receivable Accounts receivable are revalued at 7% higheras no allowance for doubtfuls
Inventory Inventory is revalued at 9% lower due to obsolete raw materials
Prepaid expenses Transfer $105,000 to Inventory as goods received day of transaction.
Deferred revenue Reduce by 20% to reflect work completed – record change to venture capital
short term loan as is considered a purchase adjustment
Land combined revised market value per appraisal 2,010,000
Building combined revised market value of 2,450,000
Equipment increase combined market value to 975,000
Vehicles revised market value 380,000
Accumulated depreciation Adjusted all historical balances to a zero balance as assets are revalued
and reflect a new starting value
Goodwill and intangibles Add $330,000 for goodwill
Accounts payable Due diligence discovered an additional $280,000 in payables
Income taxes payable Nones
Deferred tax liability Add $415,000 for tax effect of transaction as deferred tax liability
Term loan No change
Mortgage No change
Current portion of debt No change
Due to relatives Convert 20% of balance to share capital – repay 80% using venture capital
short term loan
Proprietorship capital Convert full balances to share capital
Partnership capital Convert full balances to share capital
Share capital Proprietor + Partnership capital + 30% of due from relatives converted
Retained Earnings None as the start-up of new legal entity
Venture capital loan Balancing figure of all other balance sheet balances and adjustments
C 2022-2023 Operations – Operational Changes – reflect in 2022-2023 adjustments column (Column P)
1 Revenues will increase by $7,200,000
2 Gross profit will be 29% based on 2022-2023 pro forma ending revenues
3 Selling costs will increase by 11% of incremental sales
4 Administrating costs will increase by 8% of incremental cost of sales
5 Amortization will increase by $180,000 per annum (in addition to historical)
6 Interest expense will increase based on venture capital short term loan balance at 9% interest rate
7 Income taxes will be 24% of combined incomes as now an incorporated entity – split as
follows – 25% deferred – 75% current – adjust balance sheet accounts for these amounts
8 Adjust final accounts receivable balances to reflect a 45 day collection cycle – difference to cash (use 360 days)
9 Adjust final inventory balances to reflect 57 days on hand – difference to cash (use 360 days)
10 Adjust final accounts payable balances to reflect a turnover ratio of 72 days – difference to cash (use 360 days)
11 Acquired new formulation equipment for $154,000 and financed 100% with a new term loan at end of year.
Term loan is repayable over five years and life of equipment will be 10 years.
D Balance Sheet Steps – balancing everything
1 Columns B through to L will balance at the Balance Sheet level – ignore income statement effects.
2 Columns N & P must reflect the income statement changes and will balance by recording the balance amount in cash
If you leave cash blank – the figure reflected in line 57 * -1 should work. Once cash adjusted – line 57 = 0
3 Column R will balance if 1 and 2 above are balanced
E Your Management Report
Upon completion you are to prepare a brief report and include as an Appendix your completed Template
Your report should address the following:
1) describe 3 benefits of incorporation into a larger entity
2) 3 areas of financial improvement you want to address going forward based on ratio analysis
3) identify 3 potential conflicts that could arise between management and your venture capital
firm
4) considering your growth plans – what senior management positions would you consider
necessary to ensure credibility in the financial community? Maximun size is 6 members.
5) Build the Year 1 cash flow statement to support the change in cash for Year 1
statement section and add as Appendix
6) Should dividends be considered at this time.
Maximum Report length is 2 pages plus Appendices
F Project Responsibility
As you develop the project you are required to report to the Venture Capital Senior Manager to ensure work
is progressing correctly. You are encouraged to ask for assistance at any time – email with questions
and proposed solutions. DO NOT LEAVE THIS TO LAST MOMENT. Good practice for mid-term preparation.
Each column must balance at the balance sheet level. Working on a column by column basis will
be most effective with the respective columns cross adding.
If a formula exists in a cell – do not alter it. If unsure of what to do – contact the Senior Manager.
The cells with require work by you.

GREENGO Template

GREENGO LTD. Owner: Mary Oilseed Partners: Helen Lamb (75%) + Heather Legg (25%) Shareholder: Nicolas Gold Balance Sheet Opening As Is = Combined + Corporate Tax Effect Operational Changes Including Corporate Tax Forecast Results
Start-up Balance Sheets Canola Grow (proprietorship) Sugar Sap (partnership) BannerCrop Inc. Combined Revaluation GREENGO LTD. First Year Feb 1 2022 – Jan 31 2023 Adjustments GREENGO LTD.
January 31 2022 February 1 February 1
2022 2022 2021 As Is Adjustments Opening Operations 2022-2023 Jan 31 2023
Assets
Current assets
Cash $ 65,000 $ 75,000 $ 35,000 $ 175,000 $ (175,000) $ – 0 $ 1,046,400.00 $ 1,046,400 Balancing Figure
Accounts receivable 1,375,000 1,200,000 1,080,000 $ 3,655,000 255,850 3,910,850 238,080,000 241,990,850
Inventory 1,115,000 1,350,000 900,000 $ 3,365,000 (269,200) 3,095,800 1,904,640,000 1,907,735,800
Prepaid expenses 55,000 105,000 60,000 $ 220,000 325,000 545,000 545,000
2,610,000 2,730,000 2,075,000 7,415,000 136,650 7,551,650 1,046,400 2,142,720,000 2,151,318,050
Property, plant and equipment
Land 610,000 500,000 525,000 1,635,000 375,000 2,010,000 2,010,000
Buildings 250,000 700,000 600,000 1,550,000 900,000 2,450,000 2,450,000
Equipment 160,000 550,000 130,000 840,000 135,000 975,000 154,000 1,129,000
Vehicles 80,000 200,000 90,000 370,000 10,000 380,000 380,000
1,100,000 1,950,000 1,345,000 4,395,000 1,420,000 5,815,000 – 0 154,000 5,969,000
Less: Accumulated amortization
Accumulated amortization – Buildings – 0 (150,000) (200,000) (350,000) – 0 (350,000) (280,092) (115,900) (745,992)
Accumulated amortization – Equipment (40,000) (85,000) (80,000) (205,000) – 0 (205,000) (111,465) (46,124) (362,589)
Accumulated amortization – Vehicles (80,000) (100,000) (80,000) (260,000) – 0 (260,000) (43,443) (17,977) (321,420)
(120,000) (335,000) (360,000) (815,000) – 0 (815,000) (435,000) (180,000) (1,430,001)
980,000 1,615,000 985,000 3,580,000 1,420,000 5,000,000 (435,000) (26,000) 4,538,999
Goodwill and other intangibles – 0 – 0 – 0 – 0 330,000 330,000 330,000
$ 3,590,000 $ 4,345,000 $ 3,060,000 $ 10,995,000 $ 1,886,650 $ 12,881,650 $ 611,400 $ 2,142,694,000 $ 2,156,187,049
Liabilities and Shareholders’ Equity
Current liabilities
Accounts payable $ 2,090,000 $ 1,515,000 $ 1,909,900 $ 5,514,900 $ 280,000 $ 5,794,900 $ 1,390,776 $ 7,185,676 $ 14,371,352
Deferred revenue 125,000 130,000 210,000 $ 465,000 (93,000) 372,000 372,000
Income taxes payable – 0 – 0 – 0 $ – 0 – 0 – 0 2,350,393 5,845,230 8,195,624
Venture short term loan – due on demand – 0 – 0 – 0 $ – 0 2,676,650 2,676,650 2,676,650
Current portion of long term debt 100,000 45,000 50,000 $ 195,000 – 0 195,000 195,000
2,315,000 1,690,000 2,169,900 6,174,900 2,863,650 9,038,550 3,741,169 13,030,906 25,810,626
–
Term loan payable 400,000 400,000 – 0 800,000 – 0 800,000 800,000
Refinance term loan – 0 – 0 – 0 – 0 – 0 – 0 – 0
Mortgage payable – 0 650,000 500,000 1,150,000 – 0 1,150,000 1,150,000
Due to Relatives 300,000 1,000,000 440,000 1,740,000 (2,141,300) (401,300) – 401,300
700,000 2,050,000 940,000 3,690,000 (2,141,300) 1,548,700 – 0 – 0 1,548,700
Less: portion due within one year (100,000) (45,000) (50,000) (195,000) – (195,000) – – (195,000)
600,000 2,005,000 890,000 3,495,000 (2,141,300) 1,353,700 – 0 – 0 1,353,700
Deferred income taxes – 0 – 0 – 0 – 415,000 415,000 2,350,393 1,948,410 4,713,804
2,915,000 3,695,000 3,059,900 9,669,900 1,137,350 10,807,250 6,091,563 14,979,316 31,878,129
Shareholders’ Equity
Proprietorship Capital 675,000 – 0 – 0 675,000 675,000 1,350,000 1,350,000
Partnership Capital – 0 650,000 – 0 650,000 650,000 1,300,000 1,300,000
Share capital – 0 – 0 100 100 682,610 682,710 682,710
Retained earnings – 0 – 0 – 0 – 0 – 0 10,341,731 24,679,861 35,021,592
675,000 650,000 100 1,325,100 2,007,610 3,332,710 10,341,731 24,679,861 38,354,302
3,590,000 4,345,000 3,060,000 10,995,000 3,144,960 14,139,960 16,433,294 39,659,178 70,232,432
– 0 – 0 – 0 – 0 (1,258,310) (1,258,310) (15,821,894.61) 2,103,034,822.10 2,085,954,617
GREENGO LTD. AS IS
Income Statement Canola Grow (proprietorship) Sugar Sap (partnership) BannerCrop Inc. Combined First Year Operating Adjustments GREENGO LTD.
Year Ended January 31 2022 2022 2022 As Is Operations 2022-2023 Jan 31 2023
Revenues $ 7,750,000 $ 14,560,000 $ 7,450,000 $ 29,760,000 $ 29,760,000 $ 36,960,000 $ 66,720,000
$ – 0
Cost of goods sold 5,618,750 10,192,000 5,587,500 $ 21,398,250 8,630,400 8,630,400
Gross profit 2,131,250 4,368,000 1,862,500 8,361,750 21,129,600 36,960,000 58,089,600
27.5% 30.0% 25.0% 28.10% 71.00% 100.00% 87.06%
Expenses
Selling 685,000 2,680,000 995,000 4,360,000 4,839,600 4,065,600 8,905,200
Administrative 815,000 877,000 675,000 2,367,000 2,556,360 – 2,556,360
Amortization 60,000 125,000 70,000 255,000 435,000 180,000 180,000 615,000
Interest 4,750 25,000 97,500 127,250 240,899 240,899 481,797
1,564,750 3,707,000 1,837,500 7,109,250 8,071,859 4,486,499 12,558,357
Income before income taxes 566,500 661,000 25,000 1,252,500 13,057,742 32,473,502 45,531,243
Income tax expense
– current 225,450 2,350,393 5,845,230 8,195,624
– deferred 225,450 2,350,393 1,948,410 4,298,804
Income tax expense – 0 – 0 – 0 450,900 4,700,787 7,793,640 12,494,427
Net income $ – 0 $ – 0 $ 25,000 $ 801,600 $ 8,356,955 $ 24,679,861 $ 33,036,816
Retained earnings, beginning – 0 – 0 (25,000) – 0 3,656,168 – 0 – 0
Less: Dividends – 0 – 0 – 0 – 0 (1,671,391) – 0 – 0
Retained earnings, ending $ – 0 $ – 0 $ – 0 $ – 0 $ 10,341,731 $ 24,679,861 $ 33,036,816
AS IS
GREENGO LTD. Canola Grow (proprietorship) Sugar Sap (partnership) BannerCrop Inc. Combined First Year Operating Adjustments GREENGO LTD.
Ratios 2022 2022 2022 As Is Operations 2022-2023 Jan 31 2023
Quick Ratio (General Benchmark: 1:1)
Textbook Definition
Current Assets – Inventory (A) 1,495,000 1,380,000 1,175,000 4,050,000 243,582,250
Current liabilities (B) 2,315,000 1,690,000 2,169,900 6,174,900 25,810,626
Quick Working capital (A-B) (820,000) (310,000) (994,900) (2,124,900) 217,771,624
Quick Ratio (A/B) 0.65 0.82 0.54 0.66 9.44
Current Ratio (General Benchmark: 2:1)
Current assets 2,610,000 2,730,000 2,075,000 7,415,000 2,151,318,050
Current liabilities 2,315,000 1,690,000 2,169,900 6,174,900 25,810,626
Working capital 295,000 1,040,000 (94,900) 1,240,100 2,125,507,424
Current ratio 1.13 1.62 0.96 1.20 83.35
Debt / Equity
Total Assets 3,590,000 4,345,000 3,060,000 10,995,000 2,156,187,049
Current + Long-term Debt 2,915,000 3,695,000 3,059,900 9,669,900 31,878,129
Proprietor / Partner / Shareholder Equity 675,000 650,000 100 1,325,100 38,354,302
Current + Long-term Debt / Shareholders Equity 4.32 5.68 30,599.00 7.30 0.83
Current + Long-term Debt as a % of Total Assets (General Range – 40% – 60%) 81.2% 85.0% 100.0% 87.9% 1.5%
Total Equity as a % of Total Assets (General Range – 60% – 40%) 18.8% 15.0% 0.0% 12.1% 1.8%
Long-term Debt % of Non-current Assets (General Limit: up to 80%)
Long-term Debt 700,000 2,050,000 940,000 3,690,000 1,548,700
Non-current assets 980,000 1,615,000 985,000 3,580,000 4,868,999
71.4% 126.9% 95.4% 103.1% 31.8%
AS IS
GREENGO LTD. Canola Grow (proprietorship) Sugar Sap (partnership) BannerCrop Inc. Combined Revaluation First Year Operating Adjustments GREENGO LTD.
Ratios 2022 2022 2022 As Is Adjustments Operations 2022-2023 Jan 31 2023
Accounts Receivable Turnover
Benchmark Based on Customer Base Credit + Selling Terms + Payment Methods
Ending Accounts Receivable Basis
Revenue 7,750,000 14,560,000 7,450,000 29,760,000 66,720,000
Ending Accounts Receivable 1,375,000 1,200,000 1,080,000 3,655,000 241,990,850
Turnover Ratio 6 12 7 8 0.28
Days Outstanding (365 / Turnover Ratio) 64 30 52 44 1,306
Inventory Turnover
Benchmark Based on Inventory Purchasing Practices + Inventory Stock Limits + Sales Objectives
Ending Inventory Basis
Cost sales 5,618,750 10,192,000 5,587,500 21,398,250 8,630,400
Ending Inventory 1,115,000 1,350,000 900,000 3,365,000 1,907,735,800
Turnover Ratio 5 8 6 6 0.00
Days On Hand (365 / Turnover Ratio) 71 48 58 57 79,577.41
Accounts Payable Turnover
Benchmark Based on Purchasing Practices + Financial Policies
Ending Accounts Payable Basis
Cost sales 5,618,750 10,192,000 5,587,500 21,398,250 8,630,400
Ending Accounts Payable 2,090,000 1,515,000 1,909,900 5,514,900 14,371,352
Turnover Ratio 3 7 3 4 0.60
Days To Pay (365 / Turnover Ratio) 134 54 123 93 599
Property, Plant, Equipment (“PPE”) Turnover
Benchmark Based on Production or Sales Objectives
Ending PPE Basis
Revenue 7,750,000 14,560,000 7,450,000 29,760,000 66,720,000
Ending Property, plant, equipment 980,000 1,615,000 985,000 3,580,000 4,538,999
Turnover Ratio 8 9 8 8 14.70
AS IS
GREENGO LTD. Canola Grow (proprietorship) Sugar Sap (partnership) BannerCrop Inc. Combined Revaluation GREENGO LTD. First Year Operating Adjustments GREENGO LTD.
2022 2022 2022 As Is Adjustments Operations 2022-2023 Jan 31 2023
Return on Equity
Ending Equity Basis
Net income – 0 – 0 25,000 801,600 33,036,816
Ending Shareholders Equity 675,000 650,000 100 1,325,100 38,354,302
0.0% 0.0% 25000.0% 60.5% 86.1%
EBT (Earnings Before Taxes)
Earnings before income taxes 566,500 661,000 25,000 1,252,500 45,531,243
Revenue $ 7,750,000 $ 14,560,000 $ 7,450,000 $ 29,760,000 $ 66,720,000
EBT / Revenue 7.31% 4.54% 0.34% 4.21% 68.24%
EBIT (Earnings Before Interest & Income Taxes)
Earnings before income taxes 566,500 661,000 25,000 1,252,500 45,531,243
Interest 4,750 25,000 97,500 127,250 481,797
Earnings before interest and income taxes 571,250 686,000 122,500 1,379,750 46,013,040
Revenue $ 7,750,000 $ 14,560,000 $ 7,450,000 $ 29,760,000 $ 66,720,000
EBIT / Revenue 7.37% 4.71% 1.64% 4.64% 68.96%
EBITDA (Earnings Before Interest + Income Taxes + Depreciation & Amortization)
EBIT 571,250 686,000 122,500 1,379,750 46,013,040
Add: Depreciation and amortization 60,000 125,000 70,000 255,000 615,000
EBITDA 631,250 811,000 192,500 1,634,750 46,628,040
Revenue $ 7,750,000 $ 14,560,000 $ 7,450,000 $ 29,760,000 $ 66,720,000
EBITDA / Revenue 8.1% 5.6% 2.6% 5.5% 69.9%
Times Interest Earned
EBIT 571,250 686,000 122,500 1,379,750 46,013,040
Interest 4,750 25,000 97,500 127,250 481,797
EBIT / Interest 120.26 27.44 1.26 10.84 95.50

Part E

1) Benefits of incorporation into a larger entity:
Shareholders are not liable on the company debts, avoiding legal entanglements
Have a huge opportunity to access funding from issuing shares of stock
Tax rate are lower, as we all know that personal income tax are higher than corporate tax rates.
3) 3 conflicts:
Expense and Fee: in reality sometime fee and expense may go beyond budget of the investors or fund agreement. In some case, to keep the business running they may have to adjust the fund
Risk factor: usually the management team are more likely to take risk while the investors focus on dividend and capital gains
Value and
4) Senior management positions would consider:
Financial Manager
Re-search and Marketing Manager
Product Manager
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