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IceBRG recording studios began several years based on the value proposition of signing young artists to develop them for larger studios. Essentially serving as a D-league for major labels, their primary revenue stream comes from signing over their artists to the bigger studios. They charge a nominal signing fee as a demonstration of commitment from their aspiring artists, pay those artists royalties as they begin to return value for IceBRG, and finally “cash out” when they sign the artists with bigger studios. In short, they treat the artists as investments that they hope to be able to sell for a higher price at a later date.After struggling for its first two years, IceBRG has recently been able to sign three of its artists with major labels. As the industry – and more young artists – are now recognizing this business model as successful, IceBRG expects rapid growth over the next two years. To match this growth, they will have to invest in more recording equipment, multiple national locations, personnel, and a variety of related assets. As their financial consultant, IceBRG is expecting you to be able to predict if, when,and how muchnew financing they will need to take on in order to support this growth.The 2017 Income Statement and Balance Sheet for IceBRG are included below. They expect sales to grow by 40% this year (2018), and another 60% next year (2019).

  1. Calculate the sustainable growth rate, “g”, for IceBRG. To start this calculation, you will need to estimate the equity in the beginning of 2017.
  2. Estimate AFN for 2018 using the formula (equation) method.
  3. Prepare a projected income statement for 2018, before the addition of any new financing.
  4. Prepare a projected balance sheet for 2018, before the addition of any new financing.
  5. Based on your 2018 projected balance sheet, what is your estimate of AFN for 2018? Why is the answer here different from the answer in part B?
  6. Repeat parts C, D, and E for the projections of the year 2019. What is the amount of AFN in 2019? Make sure to differentiate between “total AFN” and “new AFN in 2019”.
[Thousands of Dollars]
Income Statement
2017
Net Sales 5,000.00
Cost of revenue (2,000.00)
Gross Profit 3,000.00
Marketing Expenses 600.00
Administrative Expenses 200.00
Wages and Salaries 800.00
Interest (150.00)
EBT 1,250.00
Taxes (25%) (312.50)
Net Income (NI) 937.50
Cash Dividends (30% of NI) (281.25)
Added Retained Earnings 656.25
Balance Sheets Actual
2017
Cash & Mkt Sec 800.00
Accounts Rec 200.00
Inventories 1,200.00
Total Current Assets 2,200.00
Fixed Assets, Net 2,800.00
Total Assets 5,000.00
.
Accounts Pay 500.00
Bank Loan 500.00
Acc Liab 400.00
Total Current Liab 1,400.00
Long-Term Debt 1,000.00
AFN
Common Stock 1,900.00
Retained Earnings 700.00
Total Iiab & Equity 5,000.00

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