Financial Management
Paper instructions:
Financial Management –
The final assessment is as follows.
You have been asked by your 60 year old aunt Laura to help her assess a new venture.
It is Friday night, and she needs the work finished by Sunday in preparation for an
early Monday morning conference call with Hong Kong, so you know that she will
not be able to give you any more information than she already has (and you will be
unable to contact her over the weekend), and therefore you may need to rely on your
own estimates for some of the analysis.
Laura lives in San Francisco and recently took early retirement (from a company she
joined 30 years ago), and left the company with a tax-paid lump sum payment of
$400,000. Surprisingly, rather than being depressed by her new state of independence,
she is excitedly contemplating a new career as a retailer of oriental jewellery. She is
confident that she can set up a business to import the jewellery from China for sale in
the USA. Her husband, whom she met at business school, is pleased with her passion
for this possible new venture, but concerned that it might turn into a financial disaster.
He has suggested that she develop a financial plan to evaluate the venture and its
viability.
After a couple of hours with Aunt Laura you have assembled the following
information from her:
– A college friend, An-Ming, in Hong Kong owns a company selling Chinese
birthstones and is prepared to give her exclusive rights to sell their products in the
USA;
– The birthstones that would be sold in the USA retail in Hong Kong for HKD600;
– An-Ming’s firm would sell the birthstones to Laura at a 60% discount to their Hong
Kong price;
– The firm would ship to Laura on receipt of payment for each order;
– Laura has found out that shipping to San Francisco from Hong Kong would cost an
average of HKD150 per birthstones (paid in advance) and that shipment from the
factory to her would take two weeks;
– Laura plans to order from Hong Kong fortnightly and intends to maintain a
minimum stock of two weeks worth of birthstones to ensure that she will be able to
maintain supply to customers;
– She will buy a computer, printer and racking equipment at a cost of $4,000, and has
found a small industrial unit nearby that she can rent at a cost of $24,000 per year;
– Laura intends to sell by internet only, and is planning to spend $5,000 with a website
designer;
– She has already spent $5,000 on a market study that told her that once established,
demand will be about 400 birthstones a month, although in the first year sales would
start at 40 birthstones in the first month before building up slowly to the full level at
the end of the first year;
– The above study assumed a selling price of $110 per birthstone;
– The study also examined the potential for a higher price of $135 for birthstones
incorporated into jewellery (such as rings, brooches, tie pins, etc), and concluded that
unit sales at that price would be about 200 pieces a month;
– Based on the study Laura is confident that she could achieve the higher price by
incorporating the birthstones into basic rings or brooches which she could do herself
and which would cost an additional $30 per unit plus $10 for supplies such as glue.
This would also require her to purchase some assembly equipment at a cost of $7,500;
– All products would be packed for shipment to the customer in the US at a cost of
$15;
– All sales would be by credit card, with the credit card company taking 1% per sale
and remitting the monthly total to Laura on the15th of every subsequent month;
– She believes that one person could run the operation and hopes to do so herself,
paying a salary of $5,000 per month. However if she also decides to sell birthstones
incorporated into jewellery she would need an associate who would be paid $2,000
per month plus $20 per piece to cover the time needed to assemble the jewellery;
– Laura’s marginal tax rate on investment or earned income is 30%, payable one year
in arrears;
– If necessary Laura believes that she could borrow up to $100,000 at 8% p.a.;
– If she goes ahead, An-Ming has asked Laura to contribute towards the cost of special
tooling needed to cut the stones to the sizes and shapes needed for the American
market.
Laura believes that she could invest her redundancy lump sum at 5% per annum and
therefore suggests that you use 5% as the after tax discount rate for a discounted cash
flow analysis.
Laura has asked you to prepare an analysis to help her with her decision, making clear
any assumptions that you make; the analysis should not exceed 4,000 words
(excluding the content of exhibits, headings, etc), or a total of 25 pages, and should
include:
– A summary of all assumptions and estimates that you have made for your analysis,
including justifications where appropriate;
– Monthly cash flow in the first year of operation;
– Annual cash flow thereafter;
– Any sensitivity analysis that you think would be helpful;
– The amount which Laura could offer An-Ming to cover the tooling costs which
would leave her no better or worse off after five years than if she did not undertake
the venture;
– Conclusions and recommendations.
Laura has explained that she is going to be out of town for a wedding so will be
unable to provide any assistance at all, but as she pointed out before leaving “you
business school students have it a lot easier than we did in our day, with computers
and the internet for help”.
Your report should demonstrate skills of critical reflection, effective communication
and balanced judgement; note that this is not a market report. The final assessment
will account for 70% of your overall grade for this module. Submission is by the end
of Sunday October 6th, (Swiss time), despite any other dates that may be shown on
the Syllabus.
Scripts that are excessively long (i.e. exceeding the limit by more than 10%) will not
be read beyond the point of the word limit; there is no minimum word limit. Do not
put your name on the paper.
The overall structure should be as follows:
1. Cover Page (1 page)
2. Table of Contents/List of Exhibits (1 page)
3. Main Report (within range of words, see above)
4. Exhibits (if any)
5. References/Bibliography
The data in your answer should be clearly laid out in tabular format so that your
approach and answer are both plainly evident.
Submissions should be in MS-Word format only. Submit only one file covering both
parts of the assignment, and include any Excel analysis as images, not embedded files.