The target customer audience is driven to purchase well above average quality furniture and is willing to pay a slight premium price to acquire the limited edition pieces.


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Landon Enterprises, Inc. manufactures and sells solid and veneered wood furniture. The target customer audience is driven to purchase well above average quality furniture and is willing to pay a slight premium price
to acquire the limited edition pieces. The firm is concerned that weakening economic conditions may cause a temporary decline in sales growth, profits, and cash flow even though the target
audience may be slightly less
affected than the population as a whole. Landon is considering expansion to an International Market to develop a more effective sales appeal to the International Buyer.
You are being asked to wear the hat of a member of an employee team that has been tasked with evaluating the expected outcomes from various cost structure and pricing changes associated with the anticipated international expansion. The BOD is interested in the financial forecast for the next three years to include an
annual forecast of Sales, Total Variable and Fixed Costs, Net Operating Income, and the breakeven point in sales revenue. Forecasting the future is certainly no exact science but it must take place to begin any evaluation process.
An income statement and a balance sheet for the year ended and as of December 31, 2022 are presented on page 3 of this document. The key ratio values (e.g. contribution margin ratio) have held steady for the past
three years or so but are expected to change in the coming years. Specifically, the following “moving forward” values are expected (forecasted) by senior management of Landon.
You will use the initial forecasts for the first pass of your forecasting model.
1. The variable cost ratio is expected to increase to 65% for each of the next three years (2023, 2024, 2025) whether the expansion occurs or not. This increase is driven primarily by the growing cost of skilled craftsman labor and the rising cost of the specialized woods necessary to build the premium products. Landon will attempt to offset these rising costs by developing an International sales presence that they hope will allow for modest price increases and greater volume over which to spread
the higher fixed costs. As a first pass, use the 65% expected variable cost ratio for the three year planning period (2023,2024,2025)

2. Fixed operating costs (excluding depreciation) are expected to increase by $200,000 in 2023 and then 6% annually for each of the next two years (2024 and 2025) if the international expansion occurs and 4% annually from the 2022 amount if it does not occur.
3. New capital asset additions are expected to be depreciated over a blended life of 10 years. The firm
uses the straight line method of depreciation. Use 2022 depreciation expense as the base amount that will continue over the next three years increased by additional depreciation on any new capital asset additions (depreciate over the 10 year blended life) if International expansion takes place. Assume that any new capital additions occur at the beginning of 2023. Use a full year of depreciation each year (no partial year in 2023).
4. The blended interest rate on borrowed funds (above the existing 12/31/2022 amount) is expected to be 8%. The 8% applies only to additional debt financing. The existing debt financing remains at 6% annually on interest bearing debt.
5. Management expects the income tax rate to remain steady at 30%. The BOD is considering an expansion to the asset base of $3,000,000. Approximately $2,000,000 will be in additional fixed assets (subject to depreciation) and approximately $1,000,000 in current assets (primarily inventory and AR).
If expansion takes place, the expanded asset base is expected to increase sales by 20%
annually. If the expansion is not undertaken, sales are expected to increase by 8% annually. Management is considering three different financing options to fund the expansion.
(1) Issue $3,000,000 of new interest bearing debt (8%)
(2) Issue $3,000,000 of new common stock at a market price of $30 per share.
(3) Issue a 50/50 mix of new debt (8%) and new common stock ($30 per share). The BOD needs your expertise to help it determine the likely financial outcomes if expansion does not take place and if it does take place under the various financing options. Specifically the BOD wants you to deliver the following within your report:
(1) Using MS Excel to present your model, prepare forecasted income statements for the next three years (2023, 2024, 2025) assuming that the expansion does not take place. For each year present the forecasted income statement, the breakeven point (treat interest expense as a fixed cost for the purpose of the breakeven calculation), the earnings per share, the expected dividends per share, and
the forecasted stock price given the P/E guidelines presented above. Create an effective MS Excel model (landscape) that shows 2022 (the actual values), 2023, 2024, and 2025 (forecasted values).

(2) Using an MS Excel to present your model, prepare forecasted income statements (not the balance sheets) for the next three years, under each financing option, assuming that the expansion does take place. Use the 2022 (actual), 2023, 2024, 2025 (forecasted) landscape format that you have in place.
As you did above, present the forecasted income statement and the breakeven point (treating interest expense as a fixed cost) for each year.

(3) Prepare approximately 3 pages of commentary in which you provide analysis and reflection upon the BOD’s potential actions (to do or not do the expansion). I want an efficient comprehensive reflection on the key outcomes that your forecasts present. Your analysis / reflection should address quantitative and qualitative factors. Be sure to include reflection upon the “risk” of the various decisions and
related outcomes.
(4) Begin your report with an intro to the BOD of the proposed expansion and key assumptions. Reference key results presented in your forecast models. The MS Excel Model needs to be a separate attachment to the report. One MS Word file with intro / commentary / conclusion and one MS Excel file (either multiple pages or I’m fine with one large page if sent electronically). Only one MS Excel file is permitted.
I’m looking for a very effectively designed format. Your name must appear on the MS Word document and the MS Excel document. Presentation does impact the grade for the project. A condensed income statement for 2022 Actual results are as follows:
Sales: $7,000,000
Variable Cost: 4,200,000 (Production labor and materials)
Contribution Margin: 2,800,000
Fixed Operating Costs: 1,300,000 Excludes Depreciation
Depreciation Expense: 300,000
EBIT: 1,200,000
Interest: 180,000 (6% on interest bearing debt)
EBT: 1,020,000
Tax: 306,000 (Federal and State income tax)
EAT: 714,000
The firm’s balance sheet as of December 31, 2022 is as follows:
Assets
Cash: $400,000
AR: 800,000
Inventory: 2,600,000 (raw mat., work in process, finished goods)
Plant/Equipment/Vehicles (gross): 3,000,000
Plant and Equipment (accum depr): (1,200,000)
Land: 1,400,000
Total Assets: $7,000,000
Liabilities and Equity
Accounts Payable: $1,800,000
Short Term Notes Pay: 500,000 Interest Bearing
Long Term Notes Pay: 2,500,000 Interest Bearing
Total Liabilities: 4,800,000
Paid in Capital (Common Stock): 1,000,000
Retained Earnings: 1,200,000
Total Equity: 2,200,000
Total Liabilities and Equity: $7,000,000

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