Corporate finance

Résumé du document

Luxury Automotive Supply is trying to enter the California market which represents a lucrative market for automobiles owing to its pleasant climate. As the company's luxury automobiles are driven throughout the year due to the climate, the company feel the annual demand for car parts will be similar to that of Florida market.


1) The company's first step is to determine if it can profit from this venture, so it must perform a break-even analysis. The warehouse and office space which the company will rent will cost $12,500 in terms of monthly rent and utilities. It will hire two full-time employees who will earn $1,500 per month and this will cost the company 25% more in health care benefits. In order to market and advertise the new business, the company estimates an annual budget of $4,500 per month for advertisements on television, radio, newspaper as well as a website where orders can be placed. Other miscellaneous operating expenses will be $1,000 per month. The company will finance the move into California by taking $100,000 of equity out of its stock market investment account which earns 18% per year and taking out a small business loan of $50,000 at 12% annual interest rate (1% per month). To build up its inventory, the required auto parts will cost an average of $125 each. In order to realize profits, the company will sell the parts for $215 each. We will calculate how many parts the company needs to sell each month in order to break even, i.e., to reach a net income of zero.

Extraits

[...] In our case, we would like to increase our inventory turnover. In order to do this, we have 2 main solutions : - Reduce the inventory level (by making forecasts more precisely on sales, or we pass an order just when we have an order) - Increase sales (lower prices, increasing communication and marketing . Increasing sales means that we have to sell more products, or maintain our volume of sales and increase prices to increase the global turnover. The ratio could be better managed if there is a total control of stocks. [...]

[...] Adding to that, an important operating leverage means more risks, so a high β. To finish, we have to speak about financial ratio: the gearing. More important is the gearing, more are risks, and higher is the β. A company with high gearing (or high leverage) is more vulnerable to downturns in the business cycle because the company must continue to service its debt regardless of how bad sales are. As a consequence, the company is considered as more risky, and the β is influenced by that. [...]

[...] Detail your calculations. To calculate the change in net working capital, we have to calculate the current assets and current liabilities of each period of the year NWC = Current Assets Current Liabilities NWC beginning = = NWC ending = = Change in NWC = = Inventory turnover has been going down every year. The owners would like to reduce the amount of parts in stock and thereby make the firm more efficient. Discuss how the inventory could be better managed. [...]

[...] The answer is 311. What is their after-tax weighted average cost of capital? (Assume a corporate tax rate of 40 What would be the effect on their after-tax weighted cost of capital if they took out another loan for $25,000 at 15% annual interest? We need to have various information for this calculation. The formula is: Interest rate on debt * (1-corporate tax) * Debt + equity rate * Equity (Debt+Equity) (Debt+Equity) Interest rate on debt: 12% Corporate tax: 40% Debt: Equity rate: 18% Equity: WACC = 0,12 * * + 0,18 * + + = 0,12 * 0,6 * 0,33 + 0,18 * 0,67 = 0,14436 = If they took another loan, the WACC is less than if they have just one loan. [...]

[...] Corporate finance Luxury Automotive Supply is seeking to expand into the California market, which represents another nice weather climate in the U.S. where luxury automobiles are driven year-round. Thus they feel the annual demand for parts will be similar to the Florida marketplace. Their first decision is to determine if they can profit from this venture, so they must perform a Breakeven Analysis. The warehouse and office space they are looking to rent will cost $12,500 in monthly rent and utilities. [...]