Chartered Finance

29 Jun

CASE STUDY: 1

Air Spares is a wholesaler that stocks engine components and test equipment for the commercial aircraft industry. A new customer has placed an order for eight high-bypass turbine engines, which increase fuel economy. The variable cost is $ 1.4 million per unit, and the credit price is $ 1.65 million each. Credit is extended for one period, and based on historical experience, payment for about 1 out of every 200 such orders is never collected. The required return is 2.5 per cent per period.

Q1) Assuming that this is a one time order, should it be filled? The customer will not buy if credit is not extended?

Q2) What is the break-even probability of default in port (a)?

Q3) Suppose that customer’s who do not default become repeat customers and place the same order every period forever. Further assume that repeat customers never default. Should the order be filled? What is the break even probability of default?

Q4) Describe in general terms why credit terms will be more liberal when repeat orders are a possibility.

 

CASE STUDY: 2

Taper Corporation shows the following information on its 2007 income statement.

Sales = Rs 1,62,000/-; Cost = Rs 93,000/-; Other Expenses = Rs 5,100/-; Depreciation Exp = Rs 8,400/-;

Interest Expenses = Rs 16,500/-; Taxes = Rs 14,820/-; Dividends = Rs 9,400/-.

In addition you are told that the firm issued Rs 7,350/- in new equity during 2007 and redeemed Rs 6,400/- in outstanding long term debt.

Q1) What is the 2007 operating cash flow?

Q2) What is the 2007 cash flow to creditors?

Q3) What is the 2007 cash flow to stockholders?

Q4) If net fixed assets increased by Rs 12,000/- during the year, what was the addition to NWC?

 

CASE STUDY: 3

Assume you are considering a new product launch. The project will cost $ 1,40,000/- have a four year life, and have no salvage value, depreciation is straight line to zero. Sales are projected at 170 units per year, price per unit will be $ 17000, Variable cost per unit will be $ 10,500 and fixed cost will be $ 3,80,000 per year. The required return on the project is 12 per cent, and the relevant tax rate is 35 per cent.

Q1) Based on your experience, you think the unit sales, variable cost and fixed cost projections given here are probably accurate to within  10 per cent. What are the upper and lower bounds for these projections?

Q2) What is the base case NPV? What are the best case and worst case scenarios?

Q3) Evaluate the sensitivity of your base case. NPV to change its in fixed costs?

Q4) What is the cash break even level of output for this project (ignoring taxes)?

 

CASE STUDY: 4

Suppose your company needs to raise $ 20 million and you want to issue 30 year bonds for this purpose. Assume that the required return on your bond issue will be 7 per cent, and you are evaluating two issue alternatives, a 7 per cent annual coupon bond and a zero coupon bond. Your company’s tax rate is 35 per cent.

Q1) How many of the coupon bonds would you need to issue to raise the $ 20 million? How many of the zeroes would you need to issue?

Q2) In 30 years, what will your company’s repayment be if you issue the coupon bonds?

Q3) What if the issue the zeroes?

Q4) Do you have any other alternative explain in detail?

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