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CHARTERED FINANCE

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?