Questions: Question-1: Identify key international trade and finance principles in the case. Question-2: What are the financial instruments used to facilitate foreign trade? Question-3: What are the typical foreign trade transactions involved in the case?
Financing the foreign trade: the case of an India textile exporter Namita Rajput, Rohit Bhagat and Saachi Bhutani Bhagat Namita Rajput is Associate Professor at University of Delhi, New Delhi, India. Rohit Bhagat is Manager at Yes Bank Ltd, New Delhi, India. Saachi Bhutani Bhagat is Assistant Professor at University of Delhi, New Delhi, India. Introduction Mr Nitin Gupta, MD and CEO of Latest Fashions Pvt. Ltd., was sitting in his office on a mid-June morning thinking about the achievements his company had made since its inception. Nitin had just come back from the Annual General Meeting of Latest Fashions Pvt. Ltd. where he learned that the company had achieved a 30 per cent increase in sales compared to the previous financial year. Both the shareholders and employees were happy with the company’s performance, how the organisation had grown over the years and the company’s current goal of a 40 per cent increase in sales for the present year. But Nitin was worried about the working capital funds required to support the projected sales and was expecting large export orders from Europe and America that had to be supplied before Christmas. To deliver the orders on time, Nitin needed to procure raw material, hire labour and arrange for warehousing and shipping. “Where will these funds come from?” Nitin asked Mr Narayan Verma, his trusted financial advisor and the company’s Chartered Accountant. Textile industry in India The textile industry in India dates back to the Harappan Civilization. India is the second largest producer of textiles and garments in the world; in addition, the sector contributes about 11 per cent of the country’s export revenues [http://texmin.nic.in/annualrep/ar_12_ 13_english.pdf (accessed 3 August 2014)] and is the second largest provider of employment after agriculture in the country [www.ibef.org/industry/textiles.aspx (accessed 3 August 2014)]. The Working Group Report constituted by the Planning Commission that aimed to boost India’s manufacturing exports during the 12th Five Year Plan (2012-2017), estimates India’s exports of Textiles and Clothing to be US$64.11 billion by the end of March 2017. Indian textile products are exported to more than a hundred countries, and the USA and European Union are responsible for approximately two-thirds of India’s exports. Other countries that account for India’s exports include: Canada, UAE, Japan, Saudi Arabia, The Republic of Korea, Bangladesh and Turkey (Figure 1). Background Latest Fashions Pvt. Ltd. was set up 10 years previously by Nitin, an MBA graduate, with a modest promoter funding of INR1 million. Engaged in the business of exporting ready-made apparel and kidswear, exports contributed to the major part of the sales of the company. Over the years, as the company expanded and the requirement for funds to support the working capital needs of the company increased, Nitin managed to infuse his own money and profits into the company and now the company has reached a turnover of INR500 million. Disclaimer. This case is written solely for educational purposes and is not intended to represent successful or unsuccessful managerial decision making. The author/s may have disguised names; financial and other recognizable information to protect confidentiality. DOI 10.1108/EEMCS-08-2014-0201 VOL. 5 NO. 4 2015, pp. 1-11, © Emerald Group Publishing Limited, ISSN 2045-0621 EMERALD EMERGING MARKETS CASE STUDIES PAGE 1 Downloaded by Swinburne University of Technology At 06:42 27 March 2017 (PT) Mr Narayan Verma has long been a close confidante of Nitin and had often guided Nitin on financial matters since the business began. Knowing Nitin’s concerns, Narayan appraised him about the different sources of financing in international trade. Nitin and Narayan decided to meet banks and various agencies in the business of financing of foreign trade to discuss the merits and demerits of each source of finance and eventually decided on how to finance their growing working capital need. Meeting with the bank Narayan arranged a meeting with the Chief Manager of Honest Bank, Ms Priyanka, who had been in the trade finance division of the bank for more than a decade and had successfully completed certificate courses in Trade Finance from one of the premium institutes of India. Nitin: Good morning ma’am. How are you doing? Priyanka: I Am good. How about you? How was the performance of your company last year? Nitin: We did a turnover of INR50 crore last year which was a 30 per cent jump over the previous year. This year, we are expecting the sales to be up by a further 40 per cent. In fact, we have just received a few large orders from the USA and the EU. Figure 1 Trend of exports of textile and clothing from 2010-2011 to 2013-2014 0 50,000 100,000 150,000 200,000 250,000 2010-11 2011-12 2012-13 2013-14 Exports Year INR Crore USD Mn Source: Ministry of textiles, available at: http://texmin.nic.in/ sector/note_on_indian_textile_and_clothing_exports_intl_trade _section_Anx_I.pdf (accessed 24 January 2015) Figure 2 Process of letter of credit Importer LC Issuing Bank LC Advising Bank Exporter 1. Purchase Order 2. Approaches LC issuing Bank for Issuance 3. LC Issued and transm ed 4. LC advised 5. Shipment of Goods 6. LC, dra and shipping documents 7. LC, dra and shipping documents presented 8. Payment 9. Payment 10. Shipping documents forwarded 11. Payment PAGE 2 EMERALD EMERGING MARKETS CASE STUDIES VOL. 5 NO. 4 2015 Downloaded by Swinburne University of Technology At 06:42 27 March 2017 (PT) Priyanka: That is good to hear. Tell me, how can we assist you? Narayan: Over the years, the company has grown steadily and Nitin has been able to manage the growing fund requirement from his own funds and profits. Now that the company has reached a considerable size, we are looking to borrow funds from the bank to finance the international trade and enhance liquidity position of the company. Priyanka: We would be glad to get associated with your reputed organisation by financing your requirement. Nitin: What are the different ways in which you can extend loan to us? Priyanka: We can extend a line of credit to you to finance your export business. This could include availing pre-shipment finance against a confirmed order. You may utilise these funds for procurement of raw material, labour costs and packaging. Once the goods are shipped, we can extend post-shipment finance by purchasing the drafts and discounting the bill of exchange. Are there also exports that are backed by Letter of Credit (LCs)? Narayan: Our payment terms are for Letter of Credit (LCs), we receive LCs from buyers in the USA which are issued by top 10 banks of the world. Generally, the LC terms are for 180-day issuance from date of shipment. This leads to a temporary shortage of funds as we have already incurred the expenses for producing the goods and arranging to ship them; however, the payment from the importer becomes due on a later date. Priyanka: In such a case, on receipt and acceptance of an LC from a reputed bank, we can extend funds to you in anticipation of funds on the due date. Nitin: We are planning to import some machinery from Germany. Since the seller has a monopoly in the industry, they are insisting that we send them an advance before they ship the machinery to us. Priyanka: We can issue a Letter of Credit on your behalf in favour of the overseas supplier. Once the goods are shipped, the seller will present the documents including the Invoice, Insurance Policy, Packing List, Certificate of Origin, Bill of Exchange and Transport Documents for checking. Once we ascertain that the documents are as per the terms of the Letter of Credit, we will make payment to the overseas buyer. You can further avail buyer’s credit for making payment to the supplier. To understand the complete process of a Letter of Credit, please have a look at the below Figure 2. Narayan: What is the significance of these documents? Priyanka: The Commercial Invoice provides the details of goods shipped, along with the description of goods and their prices as agreed between the buyer and seller. An Insurance Policy is evidence of a contract of insurance and shows the full details of risks covered. A Packing List gives the details of the material packed. A Certificate of Origin is a proof that the goods originated in a particular country. A Bill of Exchange is a demand for payment issued by the exporter (drawer) to the importer (drawee). Narayan: Thanks, ma’am, for your guidance. Let me speak to the supplier and urge him to accept a Letter of Credit in place of an advance payment. Is there any other way in which you can support us? Priyanka: Yes, we can extend Bank Guarantees on your behalf as and when required. I would request you to share with me a copy of the latest audited balance sheet and a few details so that we can go ahead with the credit appraisal. This would involve assessing the balance sheet of your company. Nitin: Thanks, Priyanka for taking out time for meeting us. Let me discuss your proposal with our team and get back to you. Priyanka leaves Nitin: Narayan, would you recommend availing finance from the bank? VOL. 5 NO. 4 2015 EMERALD EMERGING MARKETS CASE STUDIES PAGE 3 Downloaded by Swinburne University of Technology At 06:42 27 March 2017 (PT) Narayan: I have scheduled a meeting with a factoring agency. Let us explore all the options and decide after that. Meeting with the factoring agency Nitin and Narayan decide to meet Mr Kapil, the head of Reliable Factors Ltd. Kapil has been working with Reliable Factors for more than 15 years. Kapil: Welcome Nitin and Narayan. I am obliged to meet you. I have heard many good things about your organisation at trade body meetings. Nitin: We are pleased to know this. We set up this company 10 years ago with a modest promoter funding of INR1 million, and last year we reached a turnover of INR500 million. Kapil: That is great to hear. Tell me, how I can be of assistance to you? Narayan: We are projecting a 40 per cent growth in turnover for which we are looking at a factoring agency which can fund our exports and streamline our cash flows. Kapil: We have been in the business of factoring for the past 15 years and have a sizeable portfolio in the textile sector. You can sell the export receivables to us in exchange of cash. Nitin: We would like to understand the process involved in the factoring of our exports. Kapil: We will sign a written agreement with you. Whenever you receive an order from the buyer, please let us know and we will do an examination of the creditworthiness of the buyer through our correspondent import factor based in the country of the buyer. Once this is done, you can ship the goods to the buyer. You can assign the invoices in our favour and we will provide a pre-agreed amount of cash in return. We will follow-up with the buyer for payment and the buyer will make the full payment to us. Narayan: What if the payment doesn’t come from the buyer on the due date? Kapil: There are two types of factoring: factoring with recourse, wherein, we will recover funds from you if the overseas buyer defaults and factoring without recourse, wherein, we will assume the payment risk of the overseas buyer and hence it is costlier than the first option. Nitin: What would be the charges for your services? Kapil: We usually charge interest in addition to the factoring commission which ranges between 1 and 3 per cent of the total transaction value depending on the credit standing of the buyer and buyer’s country. Narayan: Is there any additional service that you can offer to us? Kapil: In addition to providing financing, we can also perform credit investigations, guarantee commercial and political risks, assume collection responsibilities and offer marketing assistance. We can also look at doing forfaiting in case of medium- to long-term receivables. Ntitin: How is forfaiting different from factoring? Kapil: While factoring is used to finance short-term receivables ranging from 90 to 180 days, forfaiting is more relevant to capital goods and is used to finance medium- to long-term receivables, i.e. from 180 days up to 7 years. The financial instruments in forfaiting are usually time draft, bills of exchange and promissory notes. Forfaiting is always without recourse. Narayan: How does forfaiting work? Kapil: Forfaiting involves four parties – the exporter, the forfeiter, the importer and a bank from the importing country. Once the exporter manufactures the goods and sells them to the importer, the importer accepts Bills of Exchange drawn in its favour or issues promissory notes to the exporter. These financial instruments are guaranteed by a bank in PAGE 4 EMERALD EMERGING MARKETS CASE STUDIES VOL. 5 NO. 4 2015 Downloaded by Swinburne University of Technology At 06:42 27 March 2017 (PT) the importer’s country usually on an irrevocable basis. On receipt of these financial instruments, the forfeiter extends funds to the exporter. Nitin: Is there any difference in the pricing of factoring and forfaiting? Kapil: Since forfaiting is always without recourse, it is more expensive than factoring. In the case of forfaiting, a commitment fees is taken by us in addition to the discount fees for our commitment to execute a specific forfaiting transaction at a firm discount rate within a specified time. It varies between 0.5 to 1.5 per cent per annum of the unutilized amount to be forfeited and is charged for the period between the date the commitment is given and the date the discounting takes place or until the validity of the contract, whichever is earlier. Nitin: It was nice meeting you. We will share with you a list of the buyers, countrywise, that we deal with. Please let us know your tentative pricing for both factoring and forfaiting. Kapil leaves Nitin: What do you think about the proposal for factoring and forfaiting? Narayan: Let us also visit the Web site of Exim Bank, India, and Export Credit Guarantee Corporation of India Ltd. (ECGC). Export import Bank of India Exim Bank is the premier export finance institution of India. It was set up in 1982 under the Export Import Bank of India Act 1981, and the government’s objective behind it was to enhance exports from India and integrate the country’s foreign trade and investment with the overall economic growth. In 2014, the bank had a loan portfolio of INR745,983 million [www.eximbankindia.in/ (accessed 10 August 2014)]. The bank plays an important part in India’s trade by financing, promoting and facilitating India’s foreign trade and is the principal financial institution in the country for coordinating the working of institutions engaged in financing exports and imports. The Exim Bank has taken the following initiatives to promote India’s foreign trade: Project exports: Exim Bank takes funded (Pre-Shipment Credit, Post-Shipment Credit, etc.) and non-funded exposure (Guarantee) for supporting turnkey projects, civil construction contracts, technical and consultancy service contracts, as well as supplies. Overseas investment finance program: The bank encourages Indian companies to invest abroad by providing facilities for Indian investments and overseas acquisitions. These facilities include loans to Indian Companies for investing in overseas ventures, extending letters of credit and guarantees to facilitate local borrowings by the overseas ventures. Lines of credit: Exim Bank extends Lines of Credit (LOC) to foreign governments or their nominated agencies and overseas financial institutions enabling them to finance imports of goods and services from India on deferred credit terms and thus promoting exports from India to target countries. Buyer’s credit: Overseas buyers can avail this facility for import of goods and services from India on deferred payment terms. This facility enables overseas buyers to avail medium- to long-term financing at a low cost compared to high cost of funding in the country of the importer. Marketing advisory services: Exim Bank supports Indian companies in their marketing initiatives on a success fees basis. The bank assists in identification of overseas opportunities for finding new markets, setting up plants and acquisition of overseas companies. VOL. 5 NO. 4 2015 EMERALD EMERGING MARKETS CASE STUDIES PAGE 5 Downloaded by Swinburne University of Technology At 06:42 27 March 2017 (PT) Corporate banking: The bank offers Term Loans in Indian Rupees/Foreign Currency to Indian Exporters, Export-Oriented Units (EOUs), Micro Small and Medium Enterprises (MSMEs) for financing projects, R&D, Expansion, working capital and modernisation. Grassroots initiatives and development (GRID) programme: Under this programme, EXIM Bank extends financial support to create export capability in grassroots enterprises and promote grassroots initiatives and technologies having export potential. Additionally, they also discussed getting the foreign credit insurance offered by the Export Credit Guarantee Corporation of India Ltd. backed by the government of the country to cover all kinds of risks associated with export trading, e.g. loss of money on account of foreign buyer becoming bankrupt or sudden import or exchange restrictions resulting in stopping of payments [www.ecgcindia.in/en/pages/ecgcaphome.aspx (accessed 10 August 2014)]. Currency risk While deciding on the strategy for the coming year, Nitin is also faced with the challenge on how to mitigate the currency risk. In the past, there have been instances where Nitin has quoted the price at the prevalent currency rate and by the time the export proceeds were realised, he received a lesser value for his goods. Nitin extracted the data of Foreign Exchange Rates for the past year and, on analysis, found that there had been an average 5-7 per cent fluctuation in the foreign currency rates against the Indian Rupee on a daily basis. Nitin was unable to decide whether to hedge the foreign currency or not (Figure 3). Narayan advised Nitin that there were two ways of hedging the currency risk: 1. A forward contract between a bank and a customer calls for a delivery, at a fixed future date, of a specified amount of one currency against another currency at an exchange rate fixed at a time the contract is entered into. 2. An option is a financial instrument that gives the holder the right but not the obligation to sell or buy another financial instrument at a set price and expiration date (Shapiro, 2006). Equipped with the knowledge of different ways of financing the foreign trade and hedging the currency risk, Nitin and Narayan decided to hold a meeting next day with the management team to discuss their views on how to meet their growing requirement of capital and boost the liquidity position of the company. They needed to make a decision Figure 3 Foreign currency rates with respect to Indian rupee from 1 April 2014 to 31 March 2014 0 20 40 60 80 100 120 02-04-13 02-05-13 02-06-13 02-07-13 02-08-13 02-09-13 02-10-13 02-11-13 02-12-13 02-01-14 02-02-14 02-03-14 FX rate Date Foreign Exchange Rates for FY 14 USD GBP EURO Source: www.rbi.org.in PAGE 6 EMERALD EMERGING MARKETS CASE STUDIES VOL. 5 NO. 4 2015 Downloaded by Swinburne University of Technology At 06:42 27 March 2017 (PT) immediately as the peak season was approaching and they needed funds immediately to start working on the orders they had received. Narayan summarised the following list of products discussed during the different meetings for the ease of decision-making: 1. Bank: Pre-shipment finance; Post-Shipment Finance; Discounting against Letter of Credit; Letter of Credit; Buyer’s Credit; and Bank Guarantee. 2. Factoring Agency: Factoring with recourse; Factoring without recourse; Credit investigations; Guarantee commercial and political risks; Collection responsibilities; Marketing assistance; and Forfaiting. 3. Export Import Bank of India: Project Exports; Overseas Investment Finance Program; Lines of Credit (LOC); Buyer’s Credit; Marketing Advisory Services; Corporate Banking; and Grassroots Initiatives & Development (GRID) programme. 4. Export Credit Guarantee Corporation of India: Foreign credit insurance. Reference Shapiro.
In: Finance
Who gains and who loses from import restrictions?
In: Economics
A recent study shows that 18% of adults in the US do not use the Internet. Suppose that 12 adults are randomly selected in the US.
a)Construct the PMF of X, the number of adults who don't use internet in this group.
b)What is the expected value and standard deviation of X?
c)What is the probability that at least 1 of the adults uses the Internet?
In: Statistics and Probability
In: Economics
Hello, I need some advice on the case below. I need to know some arguments for how Kant's ethics applies to this case, and why other people who believe in the Kantean theory of ethics would also support the arguments. I need to use Kants theory to determine if this is morally correct or incorrect.
Casino Gambling on Wall Street Case 4.5 Casino Gambling on Wall Street
CDO stands for “ collateralized debt obligation,” and before the financial meltdown of 2008, hardly any nonspecialists were familiar with this arcane acronym. A CDO is a collection of individual debts ( for example, home mortgages) that are bundled together in one investment pool. That pool can then be divided into different sections ( or “ tranches”), representing different degrees of risk, and sold to investors. An individual lender, such as a credit card company, may put together a CDO, or an investment firm may create a CDO from a package of loans from different lenders. Although abused during the housing bubble, CDOs perform a useful economic function. They allow lenders to focus on loan origi-nation and investors to buy interest- earning securities. 86 What serves no obvious economic function, however, are so- called synthetic CDOs, which represent a bet on the of a package of loans owned by others. For exam-ple, Goldman Sachs brokered a synthetic CDO, known as Abacus- 2007 AC1, based on the performance of a group of subprime loans. But unlike a normal CDO, a synthetic like Abacus contains no actual bonds or mortgage loans; it merely references assets owned by other people. As with other synthetic CDOs, one side of the option was betting the value of a bundle of assets ( owned by other people) would rise; the other side of the option that it would fall. In principle, it’s no different from wager-ing on the Yankees vs. the Dodgers or on a cricket fight. “ With a synthetic CDO, it’s a pure bet,” says Erik F. Gering, a former secu-rities lawyer and now a law professor at the University of New Mexico. “ It is hard to see what the social value is.” In the two years before the financial meltdown of 2008, over $ 100 billion in synthetic CDOs were issued, and everyone agrees that, by increasing the instability of the system, they were an important factor in that crisis. Moreover, their use represents a shift in the culture of investment banks from a focus on finding the most produc-tive allocation of savings to an emphasis on maximizing profit through proprietary trading and arranging casino- like wagers for market participants. For these reasons, many business writers and financial experts are critical of syn-thetic CDOs and other purely speculative derivatives, believing that they should be severely limited or even pro-hibited. However, companies like Goldman Sachs and oth-ers make $ 20 billion a year putting them together, and these firms lobbied strongly and successfully to see that the financial reform bill of 2010 didn’t significantly restrict them. In their defense, one industry insider says, “ I believe that synthetic CDOs have a very useful purpose in facilitat-ing the management of risk. . . . Such instruments facilitate the flow of capital.” But it is difficult for even the heartiest champion of syn-thetic CDOs to defend the Abacus- 2007 AC1 deal with a straight face. Goldman Sachs put it together for hedge fund tycoon John Paulson based on a group of lousy mortgage loans that he had selected for the sole purpose of betting that their value would go down. As with any synthetic CDO, of course, Goldman Sachs needed to find investors who would take the opposite position, which it did— the two largest being ABN Amro and IKB Deutsche Industriebank— and it was paid $ 15 million for closing the deal. Those companies, however, were not told that Paulson was betting against them nor that he had selected the underlying subprime mortgages only because he believed they were sure to lose value. And, sure enough, Abacus- 2007 AC1 soon produced a $ 1.5 bil-lion loss for ABN and an $ 840 million loss for IKB— but a $ 1 billion gain for Paulson. Goldman Sachs’s defenders say that ABN and IKB were sophisticated investors who should have known what they were doing and that who is on the other side of a CDO is not something that is routinely disclosed. So perhaps ABN and IKB deserved what they got— after all, one might argue, they had no real business undertaking a synthetic CDO as opposed to underwriting or insuring actual subprime loans. But, still, it’s hard to square Goldman Sachs’s treatment of them with the principle displayed on the company’s website: “ Our client’s interests always come first.” Goldman Sachs, of course, is not the only financial institution to manipulate its customers. The Securities and Exchange Commission has accused Citigroup, for exam-ple, of putting together a package of mortgage backed securities without telling investors that it was betting against them— that the fund was designed to fail. When it did, Citi earned $ 160 million while its investors lost $ 700 million. On the other hand, spread across the country are thousands of small community banks and not- for- profit credit unions. Believing that their job is to serve the com-munity, they often take a personal interest in their cus-tomers, making loans to local businesses, lending small sums to individuals who have fallen into financial trouble, or bending over backwards to help those who can’t keep up their mortgage payments. “ They support you person-ally,” says one customer. “ Customers . . . can walk in and talk to the president,” adds another, “ and know he isn’t sucking in their money and betting against them on pro-prietary securities.”
In: Economics
Zeile Company began operations on January 2, 2016. It employs 9 individuals who work 8‐hour days and are paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate.
Zeile Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time at expected future rates of pay without discounting. Additional information is as follows: 2016 2017 Actual Hourly Wage Rate (2016) $15.00 (2017) $18.00
Projected Future Pay Rates Used to Accrue Vacation Pay (2016) $16.00 (2017) $18.50
Vacation Days Used by Each Employee (2016) 0 (2017) 9 Sick Days Used by Each Employee (2016) 4 (2017) 5 Instructions
(a) Prepare journal entries to record transactions related to compensated absences during 2016 and 2017.
(b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2016, and 2017.
In: Accounting
Zeile Company began operations on January 2, 2016. It employs 9 individuals who work 8‐hour days and are paid hourly. Each employee earns 10 paid vacation days and 6 paid sick days annually. Vacation days may be taken after January 15 of the year following the year in which they are earned. Sick days may be taken as soon as they are earned; unused sick days accumulate.
Zeile Company has chosen not to accrue paid sick leave until used, and has chosen to accrue vacation time at expected future rates of pay without discounting. Additional information is as follows: 2016 2017 Actual Hourly Wage Rate (2016) $15.00 (2017) $18.00
Projected Future Pay Rates Used to Accrue Vacation Pay (2016) $16.00 (2017) $18.50
Vacation Days Used by Each Employee (2016) 0 (2017) 9 Sick Days Used by Each Employee (2016) 4 (2017) 5 Instructions
(a) Prepare journal entries to record transactions related to compensated absences during 2016 and 2017.
(b) Compute the amounts of any liability for compensated absences that should be reported on the balance sheet at December 31, 2016, and 2017.
In: Accounting
Leverage Benefits: You have finished your MBA and taken job at a small manufacturing company that specializes in restoring old fj-40 Land Cruisers and the Series II and III Land rovers (the classic safari vehicles you see in movies). With baby boomers retiring and fulfilling pent up dreams the business cannot keep up with demand for these classic rugged 4-wheel drive vehicles. The owners would like to expand but tell you they only have about half cash to pay for the expansion, which would cost about $600,000. You ask them why they don’t just borrow the other half. They say it is too expensive, especially compared to the cost of retained earnings. Current loans from the bank would cost 7% to 8%. The company is every profitable and the expansion would have a positive NPV at discounts up to 18% or 20%. The company’s tax rate is 30%.
A. Do you agree with the owners that debt is expensive compared to retained earnings?
B. Make a brief argument for why the owners should borrow and pursue this opportunity.
In: Finance
Lynn Price recently completed her MBA and accepted a job with an electronics manufacturing company. Although she likes her job, she is also looking forward to retiring one day. To ensure that her retirement is comfortable, Lynn intends to invest $3,000 of her salary into a tax-sheltered retirement fund at the end of each year. Lynn is not certain what rate of return this investment will earn each year, but she expects each year’s rate of return could be modeled appropriately as a normally distributed random variable with a mean of 12.5% and standard deviation of 2%. (this problem requires the use of Analytic Solver Platform)
If Lynn is 30 years old, how much money should she expect to have in her retirement fund (expected value) at age 60? Answer this question by using the appropriate Psi Statistical function
What is the probability that Lynn will have more than $1 million in her retirement fund when she reaches age 60? Answer this question by using the appropriate Psi Statistical function
Attach the screenshots of your spreadsheet model and the distribution graph for the fund she will have at age 60
In: Statistics and Probability
XYZ Company is a reputable manufacturer of various especially electronic items. Jay Carter, a recent MBA graduate, has been hired by the company in its finance department. On of the major revenue-producing items manufactured by the XYZ is smartphone. The company currently has one smartphone in the market and sells has been excellent. The smartphone is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current smartphone has limited features in comparison with newer models. The company can manufacture the new smartphone for $300 each in variable costs. Fixed costs for the operation are estimated to run $5.1 million per year. The estimated sales volume is 64,000, 106,000, 87,000, 78,000, and 54,000 unit per year for the next five years, respectively. The unit price of the new smartphone will be $485. The necessary equipment can be purchased for $31 million and will be depreciated on a seven-year MACRS schedule (Use Table A-1 below). It is believed the value of the equipment in five years will be $5.5 million. Net working capital for the smartphones will be one time at $5,000,000 at the beginning of the project (time zero). XYZ has a 35% corporate tax rate and required return of 12%. Jay was asked to prepare a report that answer the following questions: Part 1- (40 Points) 1. What is the project NPV? 2. What is the Project IRR? 3. What is the payback period of the project? 4. What is profitability index of the project? 5. How sensitive is the NPV to change in the price of the new smartphone (assume that the price goes done to $370)? 6. How sensitive is the NPV to change in the quantity sold (assume that quantity reduce by 10%)? Part 2- (25 Points) 1. What is a break-even (quantity)? 2. If the total interest payment be $150,000, what are the degrees of operating and financial leverage? Part 3- (25 Points) Assume that the company has the following capital structure: Debt $15,000,000 Preferred stock $7,5,000,000 Common stock $27,5,000,000 What will be the cost of capital if the company decide to raise the needed capital proportionally and with following costs? Please use the following information to calculate the weighted cost of capital: a. Bond: A 30-year bond with a face value of $1000 and coupon interest rate of 13% and floatation cost of $20 (Tax is 35%) b. Preferred stock: Face value of $35 that pays dividend $5 and floatation cost of $2 c. Common stock: Market value of $54 with floatation cost of $3.5. Last dividend was $6. The dividend will expect to grow at 7%. Part 4 (10 Points) Uses the new cost of capital, calculate the NPV and IRR?
In: Finance