Corporate Finance Case Study

Docs en anglais | 12 pages | 30-09-2008 | Format : | Note : Non noté |

PRIX : 9.00€ |

Résumé

In this case study, we discuss the case of two entrepreneurs who have decided to open up, and later expand, 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. Our aim is to analyze this project so that they can make the appropriate choices for their company.

Table of contents:

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).

2) Another bank has offered them the $40,000 loan at a lower interest rate of 11% per year, but this loan is a discount loan. Is this a better loan for them? Explain why or why not.

3) 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?

4) The store opens and business goes well. The owners, however, find that they never have enough cash. Discuss the cash conversion cycle for this business and how they might be able to improve it. Does your answer conflict with your answer to question 3?

5) 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 $1 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. If they decide to issue bonds, how will the interest rate that Jane and Elizabeth have to pay on the bonds be determined?

6) Discuss the advantages and disadvantages of issuing bonds instead of shares.

7) When potential new investors decide whether or not to purchase shares in the company they will likely use the Capital Asset Pricing Model. 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 Beta?

Recommandations

Du même auteur

Nouveautés dans la rubrique Docs en anglais

Les plus visités dans la matière Docs en anglais