Corporate finance - exercices

Résumé du document

Presentation of different questions of corporate finance with cases and exercises.

Extract of the document:
"Old friends Jane and Elizabeth have decided to open up a retail music store. They will open up a store in a large shopping mall, purchase CDs from the large music distributors, and resell them to the public.

1) Their first decision is to determine if they can profit from this venture, so they must perform a Breakeven Analysis. Their monthly rent and utilities are $5,000. They will hire one part-time employee who will earn $1,000 per month. They also will have a small advertising budget of $300 per month for a website, posters, and ads in music magazines. Other miscellaneous operating expenses will be $100 per month. In addition to their own contributions, they also took out a simple loan for $40,000 at a 12% annual interest rate (1% per month). The CDs cost them an average of $12 each, and they will sell them for $20 each. Calculate how many CDs they will need to sell each month in order to Breakeven (have a Net Income of zero)."

The purpose of a breakeven analysis is to study the profitability and particularly to show the breakeven point: from what point the profit will begin? In our case we have to show, with all the costs that our two friends have to support, how many CDs are necessary to sell to begin to make profit. To be successful in this action we will apply this principle: In order to calculate the breakeven, Net Income has to be equal to 0. It is the reason why we understand that Interests have to be equal to the EBIT."

Extraits

[...] Who is right?” To answer to this question we have first to understand what we are looking for. In fact we are trying to identify if it is more profitable for the two friends to choose to pay at the day 10 with a discount of and with the company credit card at 22% interest or to pay at the day 40 without any discount. To help us in this question we will apply the formula below to calculate the “discount annual + discount / 100-discount)^ (360 / total days discount days) - 1 We obtain then: 1 = We will now compare it with the credit card interest rate. [...]

[...] Everyone is moving to the legal and trading mp3. The goods are not anymore sold in a real marketplace but in the Internet. That's implies a non-physical good but a virtual one. This modification of the market also implies a massive opportunity: the end of a physical stock. The β coefficient, which was superior to 0 before, has moved to 0 now thanks to this development. [...]

[...] It is the reason why we obtain these results: Interests = $ 40,000 * 11% = $ 4,400 We are now calculating the usable funds with this formula: $ 40,000 = interests + (usable funds) $ 40,000 - $ 4,400 = $ 35,600 = usable funds Effective interest rate = Interest / (Usable funds) Effective interest rate = $ 4,400 / $ 35,600 = 12,36% In comparison with the first loan, the simple loan with an effective interest rate of 12% we can note that the discount loan is more expensive for our two friends that the first one. It is better to conserve the first loan and to not change for the discount loan The Terms of Credit The music distributors that sell them their CDs offer terms of 3/10 net 40. Jane thinks that they should not take the discounts since they don't have much extra cash. Elizabeth thinks that they should take the discounts and pay with the company credit card, even though it charges them 22% interest. [...]

[...] What are the elements of this model and how does it work? What does Beta represent? Are there any developments in this industry, which you would expect to influence We will start our explanations with the analysis and the remind of the formula: K = Krf + β (Km - Krf) K = required return It is what you will eventually have in return when you purchase shares Krf = Risk free rate It is an interest rate, which exclude all the risks (the market risk and also the risk of individual stock). [...]

[...] To choose the bonds solution is considered on the market as the solution with the minimum of risks for a company Disadvantages: The first disadvantages is related to the nature of the bonds: in opposition to the shares, a bonds is like a contract of investment where the company has a defined time to reimburse the investors with the interests and the company can not give the money back later, while the shares have no conditions with the time. The second disadvantage is related to the debt ratio. [...]