QFINA3 Aussie Tshirts (10 marks in total)
Aussie Tshirts was founded by two friends, William and Michael, who went through design school and wanted to create interesting Tshirt designs and start a business but with a distinctively Australian concept such as using images of Australian animals. They investigated the available printing companies in Australia for Print on Demand and found none that were competitive with overseas printing. The best overseas printing company they found can print the most basic tshirt for A$22 at today’s exchange rate. They did find one clothes printing business (Auburn Printing Company – APC) that has a digital clothing printing press that could be used to print large runs of shirts but it requires a $500 set up every time you change a tshirt design but then the marginal cost for each shirt is only $12.50 (including the cost of the shirt and the ink to print the shirt).
- If they think they will sell at least 50 of every shirt design should they pay for a print run at APC or use overseas Print on Demand? What risks are associated with this decision? (3 marks)
- William and Michael find a digital printing press for sale for $50,000. If this reduces their set up cost to $350 and the marginal cost for each shirt becomes $7.50 then home many tshirts do they need to sell to make this purchase worthwhile? (2 marks)
William and Michael decide to buy the printing press and they finance it by borrowing money from William’s parents (paying 10% interest per year). They think the printing press will last about 5 years. After working for a year they have had 40 different designs and sold an average of 100 shirts at $30 of each design. They figure that their profit before interest and taxes is $66,000. The friends each own 50% of the company and William is thinking of leaving the company. They never agreed to an exit plan so when he brought it up Michael got quite upset because William asked Michael to buy him out. He asked for $100,000.
- Do you agree with the buyout value of $100,000 – why/why not? Ensure you calculate your valuation of the company using at least two different methods given the information you have available. Assume a tax rate of 27.5%. (4 marks)
Please prepare a brief report clearly addressing the questions outlined in the case above. (1 mark for quality of the report) The maximum page limit for the report is 2 pages (max 1000 words), plus 1 page appendix. Any workings or calculations prepared in Excel should be copied into tables in the main body of your report or the appendix. You should submit one word document file only for this question. Do not submit your spreadsheet file.