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Running Head: CORPORATE FINANCE
1
Corporate Finance
Assignment
SHORT-TERM FINANCING AND INTERNATIONAL CORPORATE FINANCE
Buddha Tamang is the manager in charge of short-term finance and planning for Exotic Cuisines Inc, a
restaurant chain that specializes in exotic main dishes, using ingredients such as alligator, buffalo, and
ostrich. The restaurant operates in the United States and plans to open another chain in an emerging
country, called Zana. The board of the company is considering ways to improve the working capital
management of the company. They are also discussing various sources of short-term financing and the
minimum amount of money to borrow in the short-term to finance inventory and accounts receivable
associated with revenue growth. Buddha met the board in a meeting yesterday and opened the meeting
with the statement that the company must investigate its cash cycle and find ways to improve it because
he has noticed a deterioration in the cash flow management of the firm.
Buddha was worried that the inventory period of the company increased from 50 days two years ago to
60 days in previous year and the accounts receivable period also increased from 27 days last two years
to 30 days the previous year whilst the accounts payable period remains the same at 40 days. He
explained that if the two components of cash cycle i.e., operating cycle and accounts payable period are
not improved, the company might need to borrow $2.5 million short-term next year to fill the gap between
short-term cash inflows and cash outflows.
Buddha has collected the following information for Exotic Cuisines Inc for the year 2020.
Item
Inventory
Accounts receivable
Accounts payable
Beginning
6,000
2,800
3,820
Ending
8,200
3,200
5,840
Credit sales for the year just ended were $75,000, and cost of goods sold was $40,000.
Buddha explained that the company can change some aspects of its short-term financial policy and find
alternative financing policies to fund current assets to improve its working capital management.
1. Calculate the following utilization ratios for Exotic Cuisines Inc.
i. inventory period
ii. receivables period
iii. payables period
2. Using the utilization ratios, the board chairman wants you to calculate the following and explain what
they mean:
i).
Operating cycle of the company for 2020
ii).
Cash cycle of the company for 2020
3. The company wants to increase its cash position. Explain to the board if the following activities
increase or decrease cash:
Running Head: CORPORATE FINANCE
i.
increasing long-term debt
ii.
increasing current liabilities
iii.
increasing current assets other than cash
iv.
increasing equity (i.e., selling some stock)
v.
increasing cash dividend payments
2
4. The board is concerned that the net working capital might be declining and not meet the $2 million
minimum requirement of the company. The company has a cash balance of $3 million and other current
assets of $2.8 million and current liabilities of $3.3 million. Should the board worry about the company’s
net working capital?
5. The cash budget shows that the Exotic Cuisines will need $2.5 million to finance its working capital
needs in next three years. List five sources of short-term financing the company can use to raise the
money.
6. Exotic Cuisines Inc. is considering the establishment of a manufacturing plant in Zana, a small West
African country with a population of about 30.5 million. The cost of the project is $5 million. The country’s
currency is the cedi, and it is traded against most foreign currencies including the U.S. dollar. The
exchange rate between the cedi and the U.S. dollar is quoted in the forex market as: U.S. $1 = ZC5.50.
Based on the exchange rate between the cedi and the U.S. dollar, what is the cost of the project in
Zanaian cedis?
7. According to the theory of relative purchasing power parity, if inflation in Zana is predicted to be 9%
over the next three years whereas the U.S. inflation rate will be 3%, what will be the exchange rate in
three years?
8. Based on the answer to question 7 above, the board wants to know whether the cedi will depreciate or
appreciate. (Choose one: depreciate or appreciate) and why?
9. The shareholders of Exotic Cuisines Inc. want to know the benefits of doing international business in
emerging economy like Zana. List four advantages that can convince the shareholders of Exotic Cuisines
to accept the project in Zana.
10. The shareholders also want to know some of the risks associated with doing business in emerging
economies like Zana. Explain three risks Exotic Cuisines Inc. is likely to face if it goes ahead with the
project in Zana?
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