Financial Management Case Studies: A Tutorial with Experiments303

Introduction

Financial management is a critical aspect of any business, and understanding the theoretical concepts behind it is essential for success. However, it's often the practical application of these concepts that poses the greatest challenge. This tutorial aims to bridge this gap by providing hands-on case studies and experiments that will help you apply financial management principles to real-world scenarios.

Case Study 1: Capital Budgeting

Scenario: A manufacturing company is considering investing in a new production line that is expected to generate additional revenue of $500,000 per year. The initial investment cost is $1 million, and the expected life of the project is 5 years. The company's required rate of return is 10%.
Questions:

Calculate the net present value (NPV) of the project.
Should the company invest in the project based on NPV analysis?
Conduct a sensitivity analysis to assess the impact of different revenue and cost assumptions on the NPV.

Experiment 1: Capital Structure Optimization

Scenario: A consulting firm is considering different capital structures to finance a $10 million expansion. The company has the following options:

Issue $10 million in debt at an interest rate of 6%.
Issue $5 million in debt at an interest rate of 6% and $5 million in equity.
Issue $2.5 million in debt at an interest rate of 6% and $7.5 million in equity.

Questions:

Calculate the weighted average cost of capital (WACC) for each capital structure.
Which capital structure minimizes the WACC?
How does the choice of capital structure affect the company's earnings per share (EPS)?

Case Study 2: Working Capital Management

Scenario: A retail store is experiencing cash flow problems due to excessive inventory. The store's inventory turnover ratio is 0.5, indicating that it takes an average of 2 years to sell its inventory. The store's cost of goods sold is $10 million per year.
Questions:

Calculate the average inventory level.
Identify the potential causes of excessive inventory.
Suggest strategies to reduce inventory levels and improve cash flow.

Experiment 2: Dividend Policy

Scenario: A technology company is debating its dividend policy. The company has $100 million in retained earnings and is considering the following options:

Pay out a dividend of $20 million.
Pay out a dividend of $40 million.
Retain all earnings.

Questions:

Calculate the dividend yield for each option.
Which dividend policy maximizes shareholder value?
Analyze the impact of the dividend policy on the company's stock price and financial flexibility.

Conclusion

By working through these case studies and experiments, you will gain practical experience in applying financial management concepts to real-world situations. The hands-on approach of this tutorial will help you develop a deeper understanding of financial decision-making and its implications for business success. Remember to approach these exercises with critical thinking and a willingness to explore different perspectives.

2024-11-04

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