Corporate finance: Opening a retail music store

Résumé du document

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. Their first decision is to determine if they can profit from this venture, therefore 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)

Extraits

[...] This could happen in case of big news coming in the industry of CDs distribution. In case of good or bad news, the value of the stock will move faster than the average market and for this reason the Beta will increase. A Beta can't move from 1.0 to 3.0 in two or three days because it is generally calculated on a long time period (At least one year). I think that some elements could influence(. Until now, the disc, and more in general, the music industry was relatively steady. [...]

[...] To finish we can add that there are different types of bond. Indeed several kinds of bonds are possible, secured or unsecured, more profitable to the company or to investors: - Debenture: this is a standard bond issued most of the time by corporations. This is an unsecured debt obligations - Secured Bond / Mortgage ( + this bond is secured and most of the time issued by public utilities. Yield is less important than for unsecured bonds. - Convertible bond ( + that bond can be converted into a predetermined amount at certain times during its life. [...]

[...] And if the profits of the company are increasing, the subscriber of the bond won't receive more money. When a company issue shares, it expose itself to shareholders voting risks. In fact the shareholders will have the right to give their opinion and to vote; and if the company isn't owned for more than by Jane and Elizabeth, there will be a risk for them of losing the control. Investment banking fees are higher when a company issues shares than when a company issues bonds. [...]

[...] Five years later the store is doing extremely well. The business is going so well that Elizabeth and Jane have been able to borrow large amounts of money from their bank and open three new stores. Now they want to open ten new stores, but the bank is not willing to lend them the million they need. In order to expand further, Elizabeth and Jane would need to raise money from the public, either through issuing bonds or issuing shares. [...]

[...] x ( 11 * x ) / 100 = 40,000 1 * x 0,11 * x = 40,000 ( 1 - 0,11 ) * x = 40,000 x = 40,000 / ( 1 0,11 ) x = 40,000 / 0,89 x = $ 44,943 As a consequence in order to get from this loan a total amount of $ 40,000, they will have to borrow $ 44,943 at Indeed of interests on this amount will make: $ 44,943 * 11% = $ 4,943 $ 4,943 (discount loan > $ 4,800 (simple loan To conclude we can say that a discount loan of 40,000 dollars at 11% actually has an effective rate at The rate is lower in the simple loan So the simple loan is more interesting than the discount loan for both women. Therefore I would recommend to Jane and Elizabeth to take the first solution: a simple loan for $ 40,000 at 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. Who is right? [...]