Business Finance

FINAL ASSESSMENT Activity brief BCO222 BUSINESS FINANCE II Online campus Professor: Julia Sokolova ([email protected])

Description Assignment consisting of a set of case studies on the material of Weeks 5-8. This is an individual task. Remember that as a student you are bound by the school ethics and all the work you submit should be of your own.

Format This activity must meet the following formatting requirements:

• Font size 12 • Double-spaced • Harvard Referencing System

Goal(s) To assess the students’ learning on the second half of the course.

Due date Date: Monday, 19 July 2021 Time: 14:00 CET via Moodle (Turnitin)

Weight towards final grade

This activity has a weight of 50% towards the final grade.

Learning outcomes

1. Demonstrate understanding of financial forecasting and planning.

2. Critically analyze working capital management and managing firm liquidity.

3. Analyze the sources of short-term credit and its estimated cost.

Assessment criteria

For computational questions, you should show all your workings and the results. For conceptual questions, you should demonstrate thorough understanding of finance concepts and principles. The student’s work will be assessed by deepness of analysis, solid judgments, logic of statements, and understanding of implications of finance and business.

CASE 1 (40 points)

The 2020 financial statements for Azimuth Corporation follow. Assets, costs, and current liabilities are proportional to sales. Long-term debt and equity are not. The company maintains a constant 40 percent dividend payout ratio. As with every other firm in its industry, next year’s sales are projected to increase by 15 percent. The firm is operating at full capacity and no new debt or equity is issued.

Instructions:

a) Calculate internal and sustainable growth rates. (5 points)

b) Prepare Proforma Income Statement for 2021, and calculate dividends and addition to retained earnings in 2021. (10 points)

c) Prepare Proforma Balance Sheet for 2021. (10 points)

d) Calculate the amount of external financing needed in 2021, and explain what financing options are available for the company. (5 points)

e) Assuming that the company operated at 90% capacity in 2020, re-calculate Proforma Total Assets in 2021. (5 points)

f) How would you approach predicting next year's sales growth? Explain. (5 points)

CASE 2 (20 points)

The following data are available for the budget preparation of Russel Corporation:

July August September

Total sales €200 €220 €180

Cash purchases 70 80 60

Credit purchases 40 30 40

Labor and administrative expenses 30 30 30

Taxes, interest, and dividends 10 10 10

Capital expenditures 100 0 0

Additional information:

• Half the company’s sales are transacted on a cash basis. The other half are paid for with a 1-month delay. • The company pays all of its credit purchases with a 1-month delay. • Credit purchases in June were €30. • Total sales in June were €180. • Cash balance at 1 July was €100.

Instructions:

a) Explain the role of cash budget. (5 points) b) Using the above information, complete the following cash budget. (15 points) Note: You need to show separately your detailed calculations for cash collections

and payments for purchases.

July August September

Beginning cash balance ? ? ?

Cash receipts:

Cash sales ? ? ?

Cash collections from credit sales ? ? ?

Total cash available ? ? ?

Cash disbursements:

Cash purchases ? ? ?

Payments for credit purchases ? ? ?

Labor and administrative expenses ? ? ?

Capital expenditures ? ? ?

Taxes, interest, and dividends ? ? ?

Total cash disbursements ? ? ?

Ending cash balance ? ? ?

CASE 3 (20 points)

Lilly Corporation has €1,425,000 in current assets, out of which €637,500 are considered permanent current assets. In addition, the firm has €1,125,000 invested in fixed assets. Earnings before interest and taxes are estimated at €500,000. The company has two financing plans under consideration:

Plan 1: Lilly wishes to finance all fixed assets and permanent current assets with long-term financing costing 9 percent. Its temporary current assets will be financed with short-term financing, which currently costs 5 percent. The tax rate is 30 percent. Plan 2: As an alternative, Lilly might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same tax rate and interest rates apply as in Plan 1. Instructions:

a) Determine Lilly’s earnings after taxes under each financing plan. (10 points)

b) Which plan should Lilly choose? Justify. (5 points)

c) What are some of the risks and cost considerations associated with each of these financing plans? (5 points)

CASE 4 (20 points)

Consider the following situations:

1. Each business day, on average, a company writes checks totaling €65,000 to pay its suppliers. The usual clearing time for these checks is 2.4 days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling €93,000. The cash from the payments is available after 1.7 days. Calculate the company’s disbursement float, collection float, and net float. (5 points)

2. A company spends €300,000 a month to pay bills and maintains a lower cash balance limit of €50,000. The applicable interest rate is 5.28 percent and the fixed cost of transferring funds is €43. What is the optimal initial cash balance based on the BAT model? (5 points)

3. A company plans to borrow €500,000 for 180 days. It was agreed with the bank that the interest for all the period of the loan will be €30,000. Calculate the effective interest rate. (5 points)

4. A company is being offered credit terms 5/20, net 60 from its supplier. In order to take the discount, the firm will have to borrow the funds from the bank and pay interest at 14 percent. Should it proceed with the discount? (5 points)

Points are stated at the end of each question.

Rubrics

Descriptor

9-10 The student demonstrates an excellent understanding of the concepts.

8-8.9 The student demonstrates a good understanding of the concepts.

7-7.9 The student demonstrates a fair understanding of the concepts.

6-6.9 The student demonstrates some, but insufficient understanding of the concepts.

3-5.9 The student demonstrates insufficient understanding of the concepts. They may mention some relevant ideas or concepts, although it is clear that the relationship between them is not understood by the student.

1-2.9 The student demonstrates insufficient understanding of the concepts and does not mention any relevant ideas or concepts.

0 The student leaves the question blank or cheats.