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Case from journal
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Reference no. JIACS11-03-09
Published by: Allied Business Academies
Published in: "Journal of the International Academy for Case Studies", 2005
Length: 7 pages
Data source: Field research

Abstract

Bob Fortune has spent a number of years in the candle-making industry and has decided to start his own business. Using a made-to-order approach, he is hoping to carve out a niche in the market. He has obtained $260,000 in equity investment for his business but still needs additional funds and plans to use a line of credit. To determine the amount he needs to borrow, Bob needs to develop his first year financials. Not only does he need to completely forecast his income statement and balance sheet, he also needs to determine the amount of debt financing needed to reach his target cash balance. Deriving the amount of financing needed is complicated by the financing feedback effect, wherein the more he borrows, the more interest he pays. The primary focus of this case concerns the borrowing needs of a start-up business, taking into account the financing feedback associated with interest expense. Instead of using the traditional iterative method for debt determination, enough information is provided so the better students could express the relationship in an algebraic construct and solve directly for the requisite loan amount. Secondary issues include developing a forecasted statement for the first year of a start-up business. The case has a difficulty level of three, and is positioned for use in junior level principles of finance courses as well as in integrated business curriculum classes for juniors. The case is designed to be taught in two class hours and is expected to require three to six hours of outside preparation by students.
Industry:
Size:
Startup

About

Abstract

Bob Fortune has spent a number of years in the candle-making industry and has decided to start his own business. Using a made-to-order approach, he is hoping to carve out a niche in the market. He has obtained $260,000 in equity investment for his business but still needs additional funds and plans to use a line of credit. To determine the amount he needs to borrow, Bob needs to develop his first year financials. Not only does he need to completely forecast his income statement and balance sheet, he also needs to determine the amount of debt financing needed to reach his target cash balance. Deriving the amount of financing needed is complicated by the financing feedback effect, wherein the more he borrows, the more interest he pays. The primary focus of this case concerns the borrowing needs of a start-up business, taking into account the financing feedback associated with interest expense. Instead of using the traditional iterative method for debt determination, enough information is provided so the better students could express the relationship in an algebraic construct and solve directly for the requisite loan amount. Secondary issues include developing a forecasted statement for the first year of a start-up business. The case has a difficulty level of three, and is positioned for use in junior level principles of finance courses as well as in integrated business curriculum classes for juniors. The case is designed to be taught in two class hours and is expected to require three to six hours of outside preparation by students.

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Industry:
Size:
Startup

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