Current analysis
You will need about $150,000 in start-up costs but you can only borrow half of that amount from your family's home equity (at 13% interest). You will have to borrow the rest of the needed capital from a local community bank at 10%. Suppose you decide to take out a 5 year loan. Here is the amortization schedule:
Date
|
Interest
|
Principal
|
Balance
|
Year 1
|
$13,904.46
|
$24,340.22
|
$125,659.78
|
Year 2
|
$11,355.72
|
$26,888.96
|
$98,770.83
|
Year 3
|
$8,540.10
|
$29,704.58
|
$69,066.24
|
Year 4
|
$5,429.64
|
$32,815.04
|
$36,251.20
|
Year 5
|
$1,993.48
|
$36,251.20
|
$0.00
|
Your estimated revenue per page of a medical record is 75 cents. The estimated processing cost per page is 20 cents
Marketing is expected to cost you $2,000 per year. So far, you only have two clients (two local hospitals) with combined annual discharges of 30,000. From your marketing efforts and word- of-mouth, you expect to gain 5,000 new discharges each year over the next 5 years.
On average, you expect to release10 pages per discharge. You plan to pay yourself $85, 000 per year. You plan to hire a part-time clerk for every 15,000 discharges at $20,000 per year. You expect to pay $10,000 per year in equipment lease. For the next 5 years, your revenue and expenses are expected to increase by 3%, except the marketing costs (in other words, marketing will remain at $2,000 per year) Your tax rate is expected to stay at 35%
Questions
1. What is your corporate cost of capital (CCC) on the day you start your business?
2. Construct a projected P&L statement in each year for next 5 years.
3. Construct a simple balance sheet statement in each year for next 5 years. Remember that Assets = Equity + Liabilities
4. Discuss about the Dupont equation of your company.
5. What other financial measures can investors use to evaluate the profitability of your company?