1. Teaching plan
This module is an introduction to the financial management of a corporation. The aim is to give you an overview of the major theories, tools and results in corporate finance. The primary goal of this module is to impart the knowledge to allow you to intelligently solve practical business problems. To achieve this goal, it is crucial that you have a sound understanding of finance theory. As such, the module will be theoretical in nature, often requiring rigorous quantitative analysis.
Tongda is a private enterprise in Shenyang. In its early days, it outsourced its accounting to Jinhua. Now, Tongda has gradually expanded its scale and hired a college graduate Wang Ping as its accountant. Wang Ping has not been formally trained as an accountant and lacks of experience. He asks us for help regarding the following: (1) On January 1, 2002, Tongda intends to lease a universal machine from Shenyang Trust and Investment Corporation. The lease agreement states an annual payment of RMB 5,600 made at the end of each year till December 31, 2007. Usually, Shenyang Trust and Investment Corporation charges an all-in-one rate of 5% for such arrangements. But when Red Star Machine Tool Works learns this, it proposes to sell the same machine at RMB 28,000.
Wang Ping doesn’t know which option is better. (2) Tongda intends to set up a Scholarship Fund at Northeastern University on August 2002 . Starting from August 2003, every year the fund will award RMB10,000 to 1 special prize winner, RMB 5,000 each to 2 first prize winners , RMVB3,000 each to 3 second prize winners, and RMB 1,000 each to 4 third prize winners. The current annual interest rate of bank deposits is 4% , and Tongda predicts no change in the interest rates in short term. Wang Ping does not know how much to deposit with the bank. In addition, Wang Ping has a monthly income of about 3,000 yuan, and his living expenses are about 1,500 yuan a month. Wang Ping plans to buy a flat. His parents offer to pay the down payment for him, so he will only need to repay bank loan in monthly installments. He wants to know he can afford a flat of about how much money.
Case 2 Harry Patterson
With a £9000 lottery win, Harry Patterson and his wife decide to open a health food shop on 1st January 2xxl. He proposes to set up a company and will invest the £9000 in exchange for 1000 £1 ordinary shares each to him and his wife. He has arranged to rent the premises for £1800 pa which is payable quarterly in advance. During January he intends to buy for cash £9000 worth of fittings and equipment and a van for £3600 which he will not pay for until February.
His sales and purchases estimates for the first three months of 2xxl are:
Jan Feb Mar
Sales (£) 2700 36004500
He anticipates that 10% of his sales will be on credit and that they will be paid for in the month following the sale. All purchases will be paid for one month after purchase.
Expenses of the business are estimated to be :
Wages£600 per month (payable immediately)
General£300 per month (half payable immediately and half payable the next
month) Depreciation £360 pa on fittings and equipment
£720 pa on the van
Goods are sold at a price representing a 50% mark-up on cost price.
1.A cash budget for each of the three months Jan-Mar.
2.A Profit and loss account for the period
3.A Balance Sheet at the end of the period
Comment briefly upon the profitability and liquidity of the business as it is forecast.
Chapter 7 Example
Assume that you recently went to work for Allied Components Company, a supplier of auto repair parts used in the after-market with products from Daimler Chrysler, Ford, and other auto makers. Your boss, the chief financial officer (CFO), has just handed you the estimated cash flows for two proposed projects. Project L involves adding a new item to the firm’s ignition system line; it would take some time to build up the market for this product, so the cash inflows would increase over time. Project S involves an add-on to an existing line, and its cash flows would decrease over time. Both projects have 3-year lives, because Allied is planning to introduce entirely new models after 3 years.