MEMORANDUM TO: Board of DirectorsFROM: THOMSON GREGORY SUNNY THE FINANCIAL ANALYST, TREASURY TEAMDIVISION OF CONSUMER PROTECTION AND SUPERVISIONSUBJECT: ENTERING INTO A CONTRACT WITH A JAPANESE RETAILER TO SELL SPECIALIST RANGE OF GLASSWAREDuring the discussion of the prospect of getting into a contract with a Japanese Retailer to a range of our glassware products at the March Board meeting, Board members pointed out a number of issues. This memo is to officially to give additional information in addressing the concerns that were raised in the Board meeting. Following our meting and the subsequent release of the draft report on project, we managed to meet our prospective partner (KAYWA) in order to get the opinions, suggestions and their input.
We are objective that the outcome of the meeting would be very relevant for the discussion on the special Board meeting to be held next month in May 2011.therefore we can report on it. Issues that were raised at the March 20th Board of Directors meeting. The Directors were concerned on how to get the best discount rate to assess the project as this raised eyebrows on the decision on whether to proceed into signing the contract or whether to forfeit the idea.
So on evaluating the viability of the project, these were the major factors that should dictate whether we get into the venture or not. If the reasons are sound then the project is initiated. The records has it that we have been relying on the weighted average cost of the capital in order to obtain the cost of acquiring funds. This is a strategic plan to minimize the risks. From the financial perspective borrowing to fund the business project would not be a good idea because we must pay interest and therefore we must factor in the concerns of foreign exchange rates risks.
If the sales forecast of the 25% profit can be realized then we can go ahead with the project since they will be enough cash flow to neutralize the perceived interest. We should therefore use the interest charged by the bank as a platform to getting a discount rate and it’s that simple and clear. One way of funding the project is to reduce our annual dividends and the cash saved is used in reducing the company debts. The project is seen to be having a high risk and therefore we are negotiating a high premium rate discount for our company.
CONCLUSIONFrom the above discussed reasons, the staff members recommend the Board of Directors to approve the project. STAFF CONTACTS Division of Consumer Protection and Supervision: THOMSON GREGORY SUNNY THE FINANCIAL ANALYST, TREASURY TEAMPart 2 -ProblemRequiredYou are a member of the management team. To assist the CEO, set out answers to the following: Calculate the required return on equity for both LS and competitor A based on CAPM and comment on the results.
Compare the actual return with the required return in each case and advise whether LS or competitor A is providing the best performance