Abstract
In the first exercise, Richard Sansing is considering establishing a premium cat food importing business. His main product line will be to sell high-quality, high-protein cat food at a price of €1.20 per can. His cost is €.70 per can. For purposes of this question, ignore taxes.
In the second case, Richard pays a fixed shipping cost of €(44*10= 440) to order the catfood from the U.S.A. As stated earlier, the cans cost €.70 each, and he sells 288,000 cans each year. His carrying cost of storing a single can for an entire year would be €0.09.
In the third exercise, Richard's firm has now been in operation for five years, and he has to finance an expansion with a rights offering. There are currently 14,000 shares outstanding, and they are trading for €33 each. The terms of the rights offering are that 7 rights will be required to buy a new share for €27.
In the fourth case, Richard's firm is also reassessing what discount rate to use to value the expansion's cash flows. The firm has decided that its capital structure of 44 % debt, 10% preferred stock, and 46 % equity is optimal, and so wishes to raise new financing in these proportions in the future.
In the last exercise, Richard's supplier has decided that payments for future orders will be denominated in $, not €. As a consequence, Richard has decided to hedge in the futures markets. Recall that one dollar futures contract calls for delivery of $20,000.
Richard will owe $100,000 in July. Meanwhile, one of Richard's competitors will also owe $100,000 in July but has decided not to hedge.The current July futures price is €0.70/$1.
