PART II - DPC Company
DPC is an apparel retailer located at Thessaloniki, Greece and is currently examining a new project to expand its store network through a new store. After relevant market research, it is estimated that sales of the new store will be as follows for the next 5 years
                  2015       2016          2017       2018       2019
Units       54,000       54,000    60,000    54,000    54,000
€ /unit          10€          12€          10€          10€          10€
Sales in € 540,000€ 648,000€ 600,000€ 540,000€ 540,000€
After relevant research, DPC concluded that there exists only one store of 500m2 available (and suitable according to its marketing plan) that can be either rented or acquired. The price for the "new" store is €1,500,000 payable at the time of purchase (including all relevant expenses that must be capitalized and depreciated). If DPC rents the store, an immediate deposit of 2-month rent will be necessary. This deposit will never be recovered. Monthly rent will be €10,000 and will be payable at the end of each month. Fixed assets are depreciated under the straight-line method at 5% annually. Additional information is as follows:
Purchases
DPC has recently made an agreement with its suppliers according to which the price paid for merchandise purchased will be set to €5/unit the next 5 years. For the 5 subsequent years DPC has agreed to pay 50%, 60%, 70%, 80%, and 90% in cash at the time of purchase from its suppliers.
The rest of the amount will be on a 3-month credit. Purchases are assumed to take place at the beginning of the month. Each month, DPC purchases the units necessary to satisfy the respective month's demand plus a 10% of the following month's demand (in units). Annual sales of 2020 are assumed 50,000 units.
Sales
DPC provides all of its customers a 2-month credit. Sales are assumed to take place at the end of each month. Additionally, it is assumed that sales are equivalently distributed to months, i.e. each month's sales equal 1/12 of annual sales.
Operating expenses
It is estimated that monthly fixed operating expenses of the "new" store, excluding depreciation and/ or rents, will be 3,000€ payable at the end of each month.
Income tax
The corporate income tax rate is 20% Income taxes are payable 6 months after the end of the respective fiscal year, e.g. the 2015 income tax must be paid on June 30th, 2016. DPC must also pay 50% of its annual income tax as advance of the next year's income tax, e.g. if the income tax of 2015 is €100, DPC must pay €150 on June 30th, 2016. Tax advances are treated as current assets and are deducted from the tax due at the end of the respective fiscal year, e.g. if the income tax of 2015 is €100 and DPC has already paid €30 as tax advance (on June 30th, 2014), the amount due on June 30th, 2016 equals €100+€50-€30= €120. In case of losses incurred, DPC pays no income tax.
Financing choices
The acquisition of the new store can be financed either with debt, equity, or both. According to market analysts, the projects' beta coefficient equals 1.5. If debt financing is chosen, DPC will issue a 5-year common bond (i.e. neither callable, nor convertible) with a semi-annual 5% interest payment. Similar bonds are currently discounted at 8%. If common equity is used instead, the company will issue 1,000,000 shares. DPC's executives estimate that the expected market return is 10% and the risk-free rate is 6%. Costs of issuing new financing and personal income taxes are negligible. It is also assumed that any combination of debt-equity is possible. There exists a credit line available to finance any short term cash deficit. In particular, DPC can receive an immediate 1- month credit from commercial banks at a 0.5% monthly interest payable at the end of the following month, e.g. if DPC faces a cash deficit of €1,000 at the begging of June, it may immediately borrow €1,000 and pay back €1,005 at the end of July. Financing fixed assets with short-term bank borrowing is strietly forbidden. DPC has no intention of making short-term investments in case of cash surplus.
Dividend policy
In case new shares are issued, earnings are paid in total as dividends 3 months after the end of each fiscal year (fiscal years end on December 31s). For earnings distribution to be made, DPC must have no accumulated losses.
Terminal value
If DPC acquires the store, it will be able to liquidate it for €2,000,000 at the end of 2019. If DPC rents the store, the company will receive €500,000 at the end of 2019 to abandon the project.
Required
(a) Prepare the annual cash budget for the period 2015-2019 assuming that
I. DPC acquires the store and the acquisition is financed 100% with new debt
II. DPC acquires the store and the acquisition is financed 100% with new equity
III. DPC rents the store
(b) Assume that DPC chooses to acquire the store. What is the optimal financing mix in this case? (hint: different financing mix means different level of risk)
(c) Provide with a critical discussion as to what is the optimal course of action for DPC. (hint: make sure you account for every possible action)

PART II - DPC Company DPC is an apparel retailer located at Thessa...