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?

A company is considering an investment proposal to install new milling controls. The project will cost Kes50,000. The facility has a life expectancy of five years and no salvage value. The company’s tax rate is 40%. The estimated cash flows from the proposed investment proposal are as follows:

Year CF
1 10,000
2 11,000
3 14,000
4 15,000
5 25,000

Compute:
a. Accounting Rate of Return and advise management if the required rate of return is 6 %

b. Traditional Payback period and advise management on the feasibility of the project

c. Discounted payback period at 6% discounting factor

d. Net present value at 6% discounting factor and advise management on the project’s feasibility

e. Net present value at 15% discounting factor and advise management on the project’s feasibility

f. Internal rate of return and explain its significance to the firm

g. Profitability Index at 10% discounting factor

For the retail investor who would like to participate in a stock market, does it matter whether they choose to hold a ETF or an index fund? Which key variable drives the decision between either instrument

Bill ClintonBill Clinton

reportedly was paid an advance of

$ 10.0$10.0

million to write his book

My LifeMy Life.

Suppose the book took three years to write. In the time he spent​ writing, Clinton could have been paid to make speeches. Given his​ popularity, assume that he could earn

$ 8.1$8.1

million a year​ (paid at the end of the​ year) speaking instead of writing. Assume his cost of capital is

10.2 %10.2%

per year.                                       

a. What is the NPV of agreeing to write the book​ (ignoring any royalty​ payments)?

b. Assume​ that, once the book is​ finished, it is expected to generate royalties of

$ 4.9$4.9

million in the first year​ (paid at the end of the​ year) and these royalties are expected to decrease at a rate of

30 %30%

per year in perpetuity. What is the NPV of the book with the royalty​ payments?

Pisa​ Pizza, a seller of frozen​ pizza, is considering introducing a healthier version of its pizza that will be low in cholesterol and contain no trans fats. The firm expects that sales of the new pizza will be

$ 15$15

million per year. While many of these sales will be to new​ customers, Pisa Pizza estimates that

45 %45%

will come from customers who switch to the​ new, healthier pizza instead of buying the original version.  

a. Assume customers will spend the same amount on either version. What level of incremental sales is associated with introducing the new​ pizza?

b. Suppose that

58 %58%

of the customers who will switch from Pisa​ Pizza's original pizza to its healthier pizza will switch to another brand if Pisa Pizza does not introduce a healthier pizza. What level of incremental sales is associated with introducing the new pizza in this​ case?

Beryl's Iced Tea currently rents a bottling machine for

$ 53 comma 000$53,000

per​ year, including all maintenance expenses. It is considering purchasing a machine​ instead, and is comparing two​ options:

a. Purchase the machine it is currently renting for

$ 150 comma 000$150,000.

This machine will require

$ 24 comma 000$24,000

per year in ongoing maintenance expenses.

b. Purchase a​ new, more advanced machine for

$ 265 comma 000$265,000.

This machine will require

$ 15 comma 000$15,000

per year in ongoing maintenance expenses and will lower bottling costs by

$ 13 comma 000$13,000

per year.​ Also,

$ 36 comma 000$36,000

will be spent upfront training the new operators of the machine.

Suppose the appropriate discount rate is

7 %7%

per year and the machine is purchased today. Maintenance and bottling costs are paid at the end of each​ year, as is the rental of the machine. Assume also that the machines will be depreciated via the​ straight-line method over seven years and that they have a​ ten-year life with a negligible salvage value. The corporate tax rate is

20 %20%.

Should​ Beryl's Iced Tea continue to​ rent, purchase its current​ machine, or purchase the advanced​ machine? To make this​ decision, calculate the NPV of the FCF associated with each alternative.

Note​:

the NPV will be​ negative, and represents the PV of the costs of the machine in each case.