Case 1 (8 marks)
Bona Bonjela works as a bricklayer and earns $45,500 per annum. His wife, Leslie, has a part-time job in which she earns $18,500 per annum. Leslie has been left an inheritance of $300,000 by her aunty. If this money is invested in a bank deposit, it will generate a 6.5% interest per annum. Bona and Leslie, however, are interested in buying a news agency costing $450,000 (including all inventories, equipments, a vehicle, and all transaction costs (i.e. stamp duty, settlement fees, etc)). Their plan is for both to quit their current jobs and run the news agency.
Bona and Leslie have approached a bank, and the bank has granted them a
pre-approval for a business loan of $150,000 at 8.25% per annum, with
interest only payment, repayable over 25 years. The current owner of the
news agency provides sales and expenses information for the previous year,
as follows:
Sales Gross profit
• Newspapers and magazines $1,200,000 15%
• Stationary 154,000 25%
• Books 172,000 15%
• Confectionary 12,500 45%
• Other sales 24,320 25%
The previous year’s expenses were as follows:
• Shop attendant wages $28,500
• Insurance 20,000
• Rent of premises 22,000
• Security 9,880
• Telephone and utility 12,500
• Rates 10,500
• Advertising 3,980
• Vehicle expenses 15,890
• Trade subscriptions 3,200
• Depreciation expenses 11,000
Bona and Leslie ask for your advice regarding this business decision.
Required:
a. What would be your financial advice to Bona and Leslie? Will they be
better-off financially by buying the news agency? Provide your
calculations to support your advice, and provide also all relevant
financial factors that are related to the situation.
b. What would be your advice to Bona and Leslie regarding other non-
financial factors that they should consider before making a decision?
c. Finally, should Bona and Leslie go ahead with the purchase of the
news agency? What would be your professional advice to them?
Case 1.
Bona Bonjela's Salary per year = $45,500
Leslie Bonjela's Salary per year = $18,500
Interest of deposit per year = $23,660
Income = $87,660
a)
Bona and his wife earn $64,000 amount per annum when Bona Bonjela works as a bricklayer and his wife, Leslie works in a part- time job. As well as Leslie’s inheritance of $300,000 and their salaries also $45,500 and $18,500 invested in a bank deposit, it will generate a 6.5% interest per annum. So simply they earn an interest $23,660 per annum. Then they earn revenue about $87,660 for a year.
If they buy a news agency costing $450,000 there is a gross profit calculation in below.
Sales Gross Profit Amount
Newspaper and Magazines $1,200,000 15% $180,000
Stationary $154,000 25% $38,500
Books $172,000 15% $25,800
Confectionary $12,500 45% $5,625
Other Sales $24,320 25% $6,080
Total $1,562,820 $256,005
There will be sales revenue about $1,562,820 and gross profit of $256,005. Before that Bona and Leslie have approached to bank and they took a business loan of $150,000 at 8.25% per annum. Then there will be an annual interest about $12,375.
Interest for Loan = $150,000 • 8.25% = $12,375
Bona and Leslie's Business
Income Statement
For the year ended
Sales $ 1,562,820
Cost of sales (1,306,815)
Gross Profit 256,005
Expenses
Shop attendant wages 28,500
Insurance 20,000
Rent 22,000
Security 9,880
Telephone and utility 12,500
Rates 10,500
Advertising 3,980
Vehicle expenses 15,890
Trade subscriptions 3,200
Depreciation expenses 11,000
Loan interest 12,375 (149,825)
Net Profit 106,180
Bona and Leslie both will be getting a net profit about $106,180 from the business. But they can only earn revenue about $87,660 from their current jobs and interest from the bank deposits. So we can assume that they will be better off financially by buying the news agency, because they earn a profit more than their salary and excess interest. It is better off from financially, but when it is come to long term it will be earn losses. Therefore, there will be decrease in demand of newspapers, because most people will be using e-newspapers, e-mails, etc. Then Bona and Leslie will have to add more things to business for earn profits.
a. To determine whether Bona and Leslie would be better off financially by buying the news agency, we need to consider their current financial situation and compare it with the potential financial outcomes of owning the news agency.
1. Current Income:
Bona's annual income: $45,500
Leslie's annual income: $18,500
2. Inheritance:
Leslie's inheritance: $300,000
3. Bank Deposit:
Interest rate: 6.5%
Investment amount: $300,000
Calculation:
Interest earned from bank deposit: $300,000 * 6.5% = $19,500
4. Business Loan:
Loan amount: $150,000
Interest rate: 8.25%
Repayment period: 25 years
Calculation:
Annual interest payment for the loan: $150,000 * 8.25% = $12,375
5. News Agency Financials:
Sales and Gross Profit:
Newspapers and magazines: $1,200,000 * 15% = $180,000
Stationary: $154,000 * 25% = $38,500
Books: $172,000 * 15% = $25,800
Confectionary: $12,500 * 45% = $5,625
Other sales: $24,320 * 25% = $6,080
Total Gross Profit: $180,000 + $38,500 + $25,800 + $5,625 + $6,080 = $256,005
Expenses:
Total expenses from the previous year: $28,500 + $20,000 + $22,000 + $9,880 + $12,500 + $10,500 + $3,980 + $15,890 + $3,200 + $11,000 = $157,450
Net profit from the news agency: $256,005 - $157,450 = $98,555
b. Apart from the financial factors, Bona and Leslie should also consider non-financial factors before making a decision. These factors may include personal interests, skills, experience, market conditions, competition, and the potential growth of the news agency. They should also consider the risks involved in running a business and the time commitment required.
c. Based on the calculations and the consideration of non-financial factors, the professional advice to Bona and Leslie would depend on further analysis. They should conduct a comprehensive feasibility study considering all aspects of the news agency, including potential growth, market conditions, competition, and their own skills and experience. It is also recommended to consult with a financial advisor and a business consultant to assess the viability and potential challenges of owning a news agency.