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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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