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Case Study 35

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melanieberguelson.as2018
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136 views

Case Study 35

Uploaded by

melanieberguelson.as2018
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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BBT COMPANY

BBT is a well-established small private limited company specializing in online education,


based in the United States. The owner and founder, Mark Davis, currently owns 100% of the
shares and enjoys complete freedom in the running of the company. The business employs
three full- time staff who have been with the business for over six years. BBT has enjoyed
many years of expansion in the provision of online education. Mark owns the copyright for his
patented software, which provides him with a unique selling point (USP). However, the
copyright will expire in the near future. Moreover, several rival companies have recently
established a presence in the online education market. Mark has to raise finance to develop
new educational software to maintain or improve his market position. His bank manager has
refused to lend funds for the research and development (R&D) of the new software. He said
"software has a short product life cycle, and your balance sheet has deteriorated". Mark's
accountant has just presented the following financial information for BBT as of 31 October
2010, which raised some working capital and liquidity issues.

A)
i) Define the term copyright
- It grants the creator of an original work exclusive rights to its use and
distribution. In the context of BBT, it refers to the exclusive rights Mark Davis
holds over his patented software, preventing others from using it without his
permission.

ii) Two disadvantages for BBT of operating as a private limited company


- Private limited companies may find it challenging to raise capital compared to
public companies. BBT might face limitations in accessing funds from the
public through stock markets.

- In a private limited company, shares are not traded on public stock exchanges,
making it difficult for shareholders to sell their shares quickly.

B)
i)
BALANCE SHEET

FIXED ASSET 3000

ACCUMULATED 1500

NET FIXED ASSET 285000 X

CASH 2000

DEBTORS 0

STOCK 0

TOTAL CURRENT ASSETS 3000

OVERDRAFTS 0

CREDITORS 48000 Y

SHORT-TERM LOANS 0

TOTAL CURRENT LIABILITIES 48000

NET CURRENT ASSETS 58500

TOTAL ASSET LESS CURRENT (18000)


LIABILITIES

CAPITAL EMPLOYED 10500

NET ASSETS 2000

EQUITY 8500

ii) net profit before interest and tax = 10 / 100 x (27695)


= 2.769,50

Tax = 30 / 100 x (2.769.50)


= 8,308.50

The value of interest paid is USD $ 2,769.50 and the total corporation tax paid is USD
$ 8,308.50.
iii) Why the bank manager refused to finance the R&D of the new educational
software

- Software typically has a short life cycle, and the bank manager might be
concerned about the return on investment given the potential obsolescence of
the new software.
- The bank manager may have observed a deterioration in BBT's balance sheet,
indicating financial instability or increased risk, making them hesitant to provide
additional financing.

c) Examine two possible alternative sources of finance for R&D


- Mark could seek investment from venture capitalists who specialize in funding
innovative projects. This source of finance often comes with expertise and
guidance in addition to funding.

- Mark might explore government programs or subsidies that support research


and development activities. Governments often provide financial incentives to
encourage innovation and technological advancements.

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