Financial Management, March 2019 – Final Assessment
You have been asked by your 58 year old father-in-law Eito to help him assess a new venture. It is Friday night, and he needs the work finished by Sunday, in preparation for an early Monday morning meeting, so you know that he will not be able to give you any more information than he already has (and you will be unable to contact him over the weekend), and therefore you should rely on your own assumptions and estimates for some of the analysis if necessary.
Eito, who was educated in the USA, now lives in Tokyo, Japan, and recently took early retirement (from a pharmaceutical firm he joined 33 years ago), leaving the company with a lump sum (after tax) payment of Yen 110 million. Surprisingly, rather than being depressed by his new state of independence, he is excitedly contemplating a new career as a retailer of reproduction prints of European advertisements (see Appendix for examples). He is confident that he can set up a business to import the prints from the UK and sell them in Japan. His wife, who he met at business school, is pleased with his passion for this possible new venture but concerned that it might turn into a financial disaster. She has suggested that he develop a financial plan to evaluate the venture and its viability.
After a couple of hours discussion with Eito you have assembled the following information from him:
– Historic Prints (a fictitious name), a company with an established catalogue of prints (owned by one of Eito’s university colleagues), is prepared to give him exclusive rights to sell their products in Japan for a seven-year period in exchange for an upfront payment for those rights;
– The prints sell in the UK for an average of £17.50 each, and Historic Prints (HP) is prepared to set the selling price to Eito at a 45% discount to this price (recognising the savings in marketing costs);
– HP would ship to Eito on receipt of payment for each order;
– Eito has found out that air freight from London via courier would cost on average £8.00 per print and that the time from him placing an order, to receiving the goods in Tokyo, would be two weeks (including the preparation and packing time in the UK); he would also have to pay the courier cost to HP on ordering;
– Eito plans to order from the UK once every month (to optimise his logistics efforts) and intends to maintain a minimum stock of four weeks’ worth of sales to ensure that he will maintain a suitable range for customers;
– He will buy racking at a cost of Yen 450,000 to keep the prints in good condition as well as a jig for framing the prints (costing Yen 1.3 million) and has found a small industrial room he can rent nearby at a rental cost of Yen 125,000 per month (payable monthly in advance, plus an initial three month security deposit, refundable at the end of the tenancy if there is no damage);
– Eito will buy in glass and framing materials locally (costing Yen 900 per print) for mounting the prints, and will sell the framed prints throughout Japan by internet;
– He is planning to spend Yen 700,000 with a website designer to develop the site;
– He has already spent Yen 900,000 on a market study that told him that once established, demand would be about 650 prints a month, although in the first-year sales would start at only 70 prints in the first month before building up slowly throughout the year to the full level at the end of the first year, after which they would remain constant;
– The above study assumed an average selling price in Japan of Yen 8,500 per print (ignore any impact of sales taxes in your calculations);
– Shipping in Japan would average Yen 1,500 per print, and Eito is not planning to charge that to the customer;
– All internet sales would be by credit card, with the credit card company taking 1.0% per sale and remitting the monthly net total to Eito fifteen days after the end of each calendar month;
– Eito believes that two students could run the operation part-time, at a total cost to him (including employer’s social charges) of Yen 900,000 each per year;
– He believes that if necessary he could borrow up to an additional Yen 15 million at 8% p.a.;
– The effective overall marginal tax rate on income from a company set up to undertake this activity would be 40%, payable one year in arrears; Eito has also told you that he can invest any available cash at an after tax 4% per annum.
Eito also has a friend, Okimi, who owns a small chain of travel agents. Okimi is interested in the venture and has agreed that if Eito can incorporate the prints onto calendars, she would give him a one year contract to purchase fifteen calendars per month as promotional gifts for selected clients. She would pay Eito Yen 6,000 cash for each calendar (to be paid one month after delivery to Okimi), and these sales would be in addition to the internet sales outlined above (and would start immediately). To do this Eito would need to purchase a small press (costing Yen 45,000) to hold the print and calendar together while glueing, as well as blank calendars and glue at a cost of Yen 900 per calendar, and hire an assistant specifically to make and deliver the calendars at an additional cost of Yen 35,000 per month.
Eito remembers lectures on discounted cash flow analysis at business school (although he admits that he did not fully understand them, unlike his wife who was a distinction student). He has asked you to prepare a financial analysis while he is away to help him with the decision, making clear any assumptions that you make; the analysis should not exceed 25 pages (everything included), and should include:
– A summary of all assumptions and estimates that you have made for your analysis, including justifications where appropriate;
– A break even analysis;
– A Profit and Loss Statement for the first year of operations and Balance Sheet at the end of the first year;
– Monthly cash flow for the first year of operation;
– Annual cash flow for each further year;
– A clear explanation, in plain English, of how much cash the venture will need to get started;
– Any sensitivity analysis that you think would be helpful;
– The most that Eito could offer HP as an upfront fee for the exclusive rights for the seven year period (which does not include any print purchases) which would leave him no better or worse off than if he had not undertaken the venture, and the amount you suggest he should actually offer them;
– Conclusions and recommendations;
– A critical reflection of the method you have chosen to decide whether the venture is attractive or not, and what, if anything, would you do differently in any future financial analysis of this type, and why?
Eito has explained that he is going to be out of town for a wedding so will be unable to provide any assistance at all, but as he pointed out before leaving “you will find this easy with computers and the internet to help”.
Your report should demonstrate skills of critical reflection, effective communication and balanced judgment; note that this is not a market report. Scripts that are excessively long (i.e. exceeding the page limit) will not be read beyond the point of the limit; there is no minimum word limit. Do not put your name on the paper.
The overall structure (within the 25 page limit as above) should be as follows:
1. Cover Page (1 page)
2. Table of Contents/List of Exhibits (1 page)
3. Executive Summary
4. Main Report
5. Critical Reflection
5. List of References.
The data in your answer should be clearly laid out in tabular format so that your approach and answer are both plainly evident.
Submissions should be machine readable in MS-Word format only; submit only one file, and include any Excel analysis as images, not embedded files.
Grading will be based on the following breakdown:
– Assumptions, estimates and sensitivity analysis: 25%
– Cash flow and financial viability analysis: 25%
– Other financial details (P&L Statement, Balance Sheet, break even, etc): 35%
– Critical reflection: 10%
– Referencing and presentation: 5%
Financial Management, March 2019 – Final Assessment