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Corporate finance: Opening a retail music store

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

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)

[...] 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. [...]


[...] Shares have the advantage that by issuing them, a company will increase its capital without having debts. To conclude we could say that issuing bonds is less risked than issuing shares. The company will be sure to get money and will know when it will get money. It can easily plan and forecast its project. Bonds procure a better stability to the company. Nevertheless, one of the disadvantages is that the company is obliged to pay owners at the due date; on the contrary dividends for shares are only paid if the company is healthy. [...]

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