Corporate Finance Case: a premium cat food importing business

Résumé du document

In the first exercise, Richard Sansing is considering establishing a premium cat food importing business. His main product line will be to sell high-quality, high-protein cat food at a price of €1.20 per can. His cost is €.70 per can. For purposes of this question, ignore taxes.

In the second case, Richard pays a fixed shipping cost of €(44*10= 440) to order the catfood from the U.S.A. As stated earlier, the cans cost €.70 each, and he sells 288,000 cans each year. His carrying cost of storing a single can for an entire year would be €0.09.

In the third exercise, Richard's firm has now been in operation for five years, and he has to finance an expansion with a rights offering. There are currently 14,000 shares outstanding, and they are trading for €33 each. The terms of the rights offering are that 7 rights will be required to buy a new share for €27.

In the fourth case, Richard's firm is also reassessing what discount rate to use to value the expansion's cash flows. The firm has decided that its capital structure of 44 % debt, 10% preferred stock, and 46 % equity is optimal, and so wishes to raise new financing in these proportions in the future.

In the last exercise, Richard's supplier has decided that payments for future orders will be denominated in $, not €. As a consequence, Richard has decided to hedge in the futures markets. Recall that one dollar futures contract calls for delivery of $20,000.
Richard will owe $100,000 in July. Meanwhile, one of Richard's competitors will also owe $100,000 in July but has decided not to hedge.The current July futures price is €0.70/$1.

Extraits

[...] How much in euro will Richard's competitor have to pay? [...]

[...] Turnover = ( * 1,2 = * 1,2 = Variable costs = * 0,7 = Margin on variable costs = Turnover Variable costs = 53328 = EBIT = Margin on variable costs Fixed costs advertising = 500 = According to the obtained result in calculation 16720), we can conclude that he should not advertise. Indeed, the EBIT with advertising calculation 16720) is inferior to the EBIT without advertising and increasing of sales 17 000) . d. Will his degree of operating leverage increase, stay the same, or decrease if his sales increase? If the sales increase, the degree of operating leverage stays the same. Indeed, the DOL is a tool whom variation results only from the level of sales variation. [...]

[...] My last name is Rayeur, the first three letters of which correspond to 18 and 25 so my individual number is 18+1+25 = 44. Thus, I would use number 44 for exercises completion which follows below. Exercise 1 Richard Sansing is considering establishing a premium cat food importing business. His main product line will be to sell high-quality, high-protein cat food at a price of 1.20 per can. His cost is per can. For purposes of this question, ignore taxes. [...]

[...] E(Ri) is the expected return on asset Beta is 1.25 Expected return on market is 16% Riskless rate is The formula which corresponds is the following: E(Ri) = Rf + Bi E(Ri) = Rf + Bi E(Ri) = + 1.25 ( - ) E = + 1.25 ( E = 0.08 + 1.25 * 0.08 E = 0.08 + 0.1 E = 0.18 = The expected return on asset is Formula of the cost of capital ) = capital of structure debt * yield to maturity + preferred stock * return rate + equity * expected return on asset C = * + * + 46% * 18% C = 0.1496 = The cost of capital is about Exercise Richard's supplier has decided that payments for future orders will be denominated in not As a consequence, Richard has decided to hedge in the futures markets. Recall that one dollar futures contract calls for delivery of $20,000. Richard will owe $100,000 in July. Meanwhile, one of Richard's competitors will also owe $100,000 in July but has decided not to hedge. The current July futures price is 0.70 a. How many contracts should Richard trade? [...]

[...] He will agree to buy dollars for Indeed, it will be more profitable to buy for * = Rather than to sell for * = We pay less expensive when we buy as when we sell c. Suppose July comes and the actual spot exchange rate is 0.788 per $1. How much in euro will Richard's competitor have to pay? * 0.788 = Richard's competitor will have to pay Once Richard's profit or loss in the futures market is considered, what will has total cash flow in July be? Profit = = The total cash flow in July will be 56000/14000 = d. Suppose July comes and the actual spot exchange rate is 0.612 per $1. [...]