FINA 333 - Introduction to Financial Management
Problem C1
You are a merchant in East Persia. You can send caravans to the
cities listed below, each of which will take about a year to reach the city and return.
Unfortunately, due to recent reversals of fortune, you only have enough capital to live on
for a year. However, your reputation as a merchant is such that you can form a company and
raise 200,000 shekels from stockholders by selling 10,000 shares of stock. Your company
can also borrow according to the schedule below. You will liquidate the company on the
return of the caravans and pay the net proceeds out to the shareholders.
(year 1)
Here are the caravans you can send:
| destination | net cost to outfit | proceeds on return | expenses on return | net proceeds on return |
| Arion | 100,000 | 142,000 | 32,000 | 110,000 |
| Bactra | 100,000 | 160,000 | 35,000 | 125,000 |
| Carmana | 200,000 | 286,000 | 56,000 | 230,000 |
| Dahae | 100,000 | 154,000 | 34,000 | 120,000 |
| Ecbatana | 150,000 | 214,000 | 44,000 | 170,000 |
The net proceeds are after all expenses (except interest), including your share of the
profits.
You can borrow on one year notes with the rate you pay depending on the
amount you borrow, as follows:
| amount borrowed |
rate |
| S/ 50,000 | 8.2% |
| 100,000 | 8.8 |
| 150,000 | 9.9 |
| 200,000 | 11.3 |
| 250,000 | 13.2 |
| 300,000 | 15.5 |
| 350,000 | 18.2 |
| 400,000 | 21.3 |
| 450,000 | 24.9 |
Question to think about:
Why does it cost a higher rate for you to borrow more?
Complete the questions below to turn in.
Note that on this first problem, your choice of caravans does not affect your score.
List the caravans you are sending out: Arion Bactra Carmana Dahae Ecbatana
How much total capital will you need? S/
How much must you borrow? S/
Prepare a balance sheet as it will look right after sending out the caravans.
Prepare an income statement for the year as it will look when the caravans return.
Describe how you decided which caravans to send.