Corporate finance: Opening a retail music store

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Corporate finance: Opening a retail music store

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Friends Jane and Elizabeth have decided to open up a retail music store. They will open up a store in a large shopping mall, purchase CDs from the large music distributors, and resell them to the public. Their first decision is to determine if they can profit from this venture, therefore they must perform a Breakeven Analysis. Their monthly rent and utilities are $5,000. They will hire one part-time employee who will earn $1,000 per month. They also will have a small advertising budget of $300 per month for a website, posters, and ads in music magazines. Other miscellaneous operating expenses will be $100 per month. In addition to their own contributions, they also took out a simple loan for $40,000 at a 12% annual interest rate (1% per month). The CDs cost them an average of $12 each, and they will sell them for $20 each. Calculate how many CDs they will need to sell each month in order to Breakeven (have a Net Income of zero)

Introduction
Can one profit from this venture and performing the breakeven analysis
Taking a loan from a bank
The music distributors that sell the CD's
The cash conversion cycle for this business and how one might be able to improve it
Expanding the business
The advantages and disadvantages of issuing bonds instead of shares
1. Advantages of issuing bonds instead of shares
2. Disadvantages of issuing bonds
The capital asset pricing model
Conclusion

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[...] This can be a good indicator of default risk premium. LP = Liquidity Premium = This represents the extra return demanded by investors as compensation for investments that could be difficult to turn into cash. For example an actively traded bond will have a lower liquidity premium than a bond that is rarely traded because it will be easier to convert it into cash. To sum up we can say that the more marketable a bond is, the lower the liquidity premium will be. [...]

[...] The bond is bought at a discount price discount of the face value); the profit will be issued at the maturity date for its full face value. Discuss the advantages and disadvantages of issuing bonds instead of shares Advantages of issuing bonds instead of shares: First we can say that by issuing stock, a company will have to share its profits by shareholders and for this reason it can be a better solution to issue bonds. In fact with bonds, a company won't share profits but will only pay interests. [...]

[...] To sum up we can say that the CAPM says that the expected rate of return of an investment must be at least the real free-risk rate plus a risk premium. As we have seen, the Beta interferes in the calculation of this risk premium. What's the Beta? What does Beta represent? The Beta relates to the risk of the individual security to that of the whole market. It measures the responsiveness of a security to movements in the market portfolio, the risk of a given security. [...]

[...] x ( 11 * x ) / 100 = 40,000 1 * x 0,11 * x = 40,000 ( 1 - 0,11 ) * x = 40,000 x = 40,000 / ( 1 0,11 ) x = 40,000 / 0,89 x = $ 44,943 As a consequence in order to get from this loan a total amount of $ 40,000, they will have to borrow $ 44,943 at Indeed of interests on this amount will make: $ 44,943 * 11% = $ 4,943 $ 4,943 (discount loan > $ 4,800 (simple loan To conclude we can say that a discount loan of 40,000 dollars at 11% actually has an effective rate at The rate is lower in the simple loan So the simple loan is more interesting than the discount loan for both women. Therefore I would recommend to Jane and Elizabeth to take the first solution: a simple loan for $ 40,000 at The music distributors that sell them their CDs offer terms of 3/10 net 40. Jane thinks that they should not take the discounts since they don't have much extra cash. Elizabeth thinks that they should take the discounts and pay with the company credit card, even though it charges them 22% interest. [...]

[...] The music distributors offers payment terms of 3 / 10 net 40 what means that if Jane and Elizabeth pay within 10 days they will get a discount on the CDs prices. Otherwise it is possible to pay within 40 days but without any discount. There are two main possibilities: Jane idea: Jane thinks that they should not take the discounts since they don't have much extra cash / 97 = 0.030928 = for 30 days Effective annual interest rate: + 0.030928 ) 360/30 = 0.44125 = So if they follow Jane Idea, they will have to pay an effective annual rate of Elizabeth idea: Elizabeth thinks that they should take the discounts and pay with the company credit card, even though it charges them 22% interest. [...]

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