The three methods of managing risk are: Loss control Loss financing Internal risk reduction Discuss these, making specific reference to how they apply to the role of a treasury risk manager

You are a new Irish based portfolio manager serving international clients. You have

€500 million of capital to invest and are currently formulating an investment and asset

allocation strategy.

Assuming your investment holding period is medium term (5 to 7 years), outline how

you would construct your portfolio and apportion capital to various assets.

Please outline your overall investment philosophy and general viewpoint on potential

returns during the holding period.

In terms of specific allocation please indicate the reasoning behind the asset selection.

considering you are a moderate investor

Full Limo Inc. offers high-end transportation services between the King of Prussia Mall (KPM) and Center City Philadelphia (22.5 miles). The invested capital is $800,000, corresponding to the investment in the 4 luxury vans it owns (you can ignore all other invested capital). Each van can carry 10 passengers. Each van makes 12 daily trips from Philadelphia to KPM and 12 from KPM to Philadelphia. The company charges $10 for each one-way ride. The current load factor is 40% (that is, each ride has 4 passengers on average). A significant source of operating costs is the fuel cost. The company vans have a fuel economy of each of 20 mpg (miles/gallon). Current fuel prices are 2.629 $/gallon. The staff costs and other costs of operating the service and running the business are $1M per year. The company operates 365 days a year.

a) Draw an ROIC (return on invested capital) tree for the company.

b) What is the ROIC?

c) Assume that the company can increase the fuel efficiency of the vans to 25mpg. What would be the new ROIC?

What are the key assumptions and principles used in forecasting? What are the primary drivers of gaps between the financial forecast and actual results? How can financial forecasting benefit an organization?

1. Is forecasting more important for small firms or large firms? Why?

Fred Franks is an aspiring entrepreneur. His dream is to open a restaurant that deep-fries everything. Deep-fried Twinkies, deep-fried hotdogs, and deep-fried salads were just some of the dishes he wanted to serve. Always a marketing genius, Fred wanted to call his restaurant TGI Fry-Days. He recognized another company was called TGI Fridays, so he made sure to have a very good (and expensive) lawyer.

Fred had $ 100,000 in his bank account, so in order to start TGI Fry-Days, he needed to borrow money. His bank asked for a full business plan with projected startup costs, pro forma income statement, and pro forma cash flow statement (no pro forma balance sheet needed).

Fred’s Available Sources of Financing

Personal Bank Account: Bank Loan:
Interest on the Loan

Things Fred Would Need.

Kitchen Equipment Furniture & Fixtures Signage
Working Capital

$ 100,000 $ 150,000

$1,500 per month

Cost

$ 150,000 $ 80,000 $ 10,000 $ 10,000

Useful Life

20 years 20 years 10 years

Revenue Forecast
M1: $30,000
M2 & M3: $40,000 per month
M4 – M6: $55,000 per month
M7: $20,000 (taking a summer vacation with his family) M8 – M12: $60,000 per month

Variable Expenses:
Wages: 25% of Revenues
Cost of Goods Sold (food): 33% of Revenues
Marketing: $2000 a month, except November & December (Holiday Season): $4,000 a month No Taxes. Consider TGI-Frydays to be an LLC

Other Expenses (alphabetical order)
G&A $ 5,000 a month
Insurance $ 500 a month
Legal Fees $ 2,000 a month, but paid as $6,000 every 3 months (starting M1) Rent $ 6,000 a month

ONLY***Need help with the Cash flow .

Cost of Foreign Debt Versus Equity. Time Inc. is a U.S. firm that has a large subsidiary in Indonesia. It wants to finance the subsidiary’s operations in Indonesia. However, the cost of debt is presently about 30 percent there for firms like Time or government agencies that have a very strong credit rating. A consultant suggests to Time that it should use equity financing there to avoid the high interest expense. He suggests that since Time’s cost of equity in the U.S. is about 14 percent, so the Indonesian investors should be satisfied with a return of about 14 percent as well. The consultant's advice is not logical. Why is it that Time’s cost of equity in Indonesia would not be less than Time’s cost of debt in Indonesia?

If U.S. firms issue bonds in _______, the dollar outflows to cover fixed coupon payments increase as the dollar _______.

Zoso is a rental car company that is trying to determine whether to add 25 cars to its fleet. The company fully depreciates all its rental cars over four years using the straight-line method. The new cars are expected to generate $145,000 per year in earnings before taxes and depreciation for four years. The company is entirely financed by equity and has a 35 percent tax rate. The required return on the company’s unlevered equity is 13 percent, and the new fleet will not change the risk of the company.

a. What is the maximum price that the company should be willing to pay for the new fleet of cars if it remains an all-equity company?

b. Suppose the company can purchase the fleet of cars for $310,000. Additionally, assume the company can issue $240,000 of four-year, 7 percent debt to finance the project. All principal will be repaid in one balloon payment at the end of the fourth year. What is the adjusted present value (APV) of the project?

Charlie, who is just 16 years old, won a lottery. However, the lottery does not pay out money until a person is at least 25 years old. Charlie hires a financial consultant and this consultant suggests that Charlie invest the money and then begin receiving monthly payments of 2500$ once he reaches age 25. The consultant also suggests that Charlie should protect himself from inflation by having his payments increase by 2.3% each year. Thus, the 12 monthly payments in year 1 will be 2500$ (age 25 until age 25+11months), the 12 monthly payments for year 2 will be 2500(1.023)$ (age 26 to age 26+11months), the 12 payments for year 3 will be 2500(1.023)2$ and so on.(NOTE: this is a situation where payments are monthly, but the percentage increase is annually.) It turns out that Charlie has won enough money for this payment scheme to last for a total of 25 years after he turns 25. If Charlie can earn j1 = 8% on his lottery winnings and the consultant charges 1.5% of the winnings as a fee (payable upfront when charlie is 16), how much did Charlie win in the lottery?

Given the flowing financial information about Amazon

1. (4 pts) Calculate Amazon’s operating cycle

2. (6 pts) Calculate Amazon’s cash cycle. How will you interpret their cash cycle?