Fin622 Assignment No 2 solution 2021-Corporate Finance-VU-semester fall 2021
Question: Part A
Cash management is the most critical factor in business success and sustainability, and robust cash-managed policies provide a competitive advantage to the corporation to capitalize on these opportunities even with limited resources. If cash is managed correctly, the business will remain
healthy in today's dynamic business environment. When a business's cash management is inadequate, it may experience severe liquidity problems, resulting in bankruptcy. The most critical factor affecting a business's profitability and long-term health is its liquidity. If the corporation manages the liquidity crisis appropriately, it will be more creditworthy and reputed
for lending institutes.
Suppose you are a finance person in Start Corporation. Your management gives you a responsibility to calculate optimal cash and analyze the liquidity, profitability, and risk of Star Corporation compared to its competitor Moon Corporation. The competitor, Moon Corporation,
has the same size and almost similar market share in the industry. The Start Corporation has a high level of investment in current assets and currently holds Rs. 50 million in the current asset while its competitor has Rs. 10 million in current assets. Star Corporation has the philosophy of
maximum purchasing of its current assets with equity and considers it less risky. But the competitor has thought of short-term debt financing for fixed assets.
Today, businesses operate in an open environment where other stakeholders have considerable influence on the operations and prospects of the business. The government is a critical player in this domain, and its policies impact the business directly and indirectly when the policy is tied with interest rates. In recent months, the government announced the contractionary monetary policy that caused the borrowing costly because of a surge in interest rates. Before the contractionary policy, the interest rate in the economy was only 7% per annum, but now it reached up to 12% per annum. The news in media and a few officials' statements show the existence of the contractionary policy for up to one year.
From the above information; you are advised to:
a) Calculate the “Spread and Return Point” of both corporations according to the Miller-Orr Model.
b) Which corporation should invest the money for the short-run as per Miller-Orr Model, and what is the logic?
c) Analyze the scenario and briefly elaborate on which working capital policies both corporations are adopting?
d) Which corporations’ profitability will be more affected with high-interest rates? Provide reasons
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