You are working on your second project as an equity research intern at a bulge i

Question

You are working on your second project as an equity research intern at a bulge investment bank. Your focus is in retail space, especially in the health and fitness sector. Currently, you are gathering information on a fast-growing chain fitness company called LuluYoga. You are interested in calculating the free cash flow of the firm.

LuluYoga offers yoga classes in several major cities in the United States. Two major revenue resources are selling workout gear and membership passes for class access.

Assume at the beginning of year 2016, LuluYoga has zero inventory.

In year 2016, LuluYoga purchased 10,000 yoga mats at a price of $10 each. The company sells 6,000 mats at a price of $15 in year 2016 and sells the remaining at a price of $20 in year 2017.

In year 2016, LuluYoga sells 1,000 membership passes for $2,000 each. 80% of the classes purchased were used in 2016 and the rest are used in 2017.The yoga master’s compensation to teach classes are $300K in year 2016 and $200K in year 2017.

LuluYoga pays corporate tax of 35%.

Q1. What is LuluYoga’s net operating profit in 2016 ?

Explanation / Answer

>>> Calculation of net operating profit of LuluYoga in 2016

Particulars Amount $ Sale of Yoga mats           ( $15*6000) 90,000 Membership Classes      (1,000 classes*80%used * $2000) 1,600,000 Less:- Cost of yoga mats           ($10*6000) 60,000 Yoga master's compesation 300,000 Gross operating profit in 2016 1,330,000 -Taxes @ 35% 465,500 Net operating profit in 2016 864,500

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