Business Finance 2

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Final Assessment – Summer II - 2021 Written assignment (essay) Activity brief – 4 mini essays BCO222 – Business Finance II Online campus Professor: Miguel Corte-Real. Email: [email protected]

Description Please read the 4 cases below, and answer the corresponding questions.

Format This activity must meet the following formatting requirements:

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

Goal(s) The student should be able to demonstrate the learning of the above outcomes making the link between the material covered during the seminars and the research requested to answer each of the questions.

Due date Date: WEEK 8, September 20th, 2021, 14:00CEST

Weight towards final grade

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

Learning outcomes

The Student should be able to demonstrate the knowledge gathered during the seminars in reference to the below topics: Short term financial planning

• Working capital management

• Estimating the cost of short-term credit

Assessment criteria

Please refer to: Rubric written assignment provided below.

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CASE 1 (25 points) 1.1. Listed below are five transactions that Joma Sports might make. Indicate how each transaction would affect (a) cash and (b) working capital. The transactions are:

I. Pay out an extra $10 million cash dividend. II. Receive $2,500 from a customer who pays a bill resulting from a previous sale. III. Pay $50,000 previously owed to one of its suppliers. IV. Borrow $10 million long term and invest the proceeds in inventory. V. Borrow $10 million short term and invest the proceeds in inventory.

1.2. State how each of the following events would impact the Joma’s Sports balance sheet. State whether each change is a source or use of cash.

a. An automobile manufacturer increases production in response to a forecasted increase in demand. Unfortunately, the demand does not increase. b. Competition forces the firm to give customers more time to pay for their purchases. c. Rising commodity prices increase the value of raw material inventories by 20%. d. The firm sells a parcel of land for $100,000. The land was purchased five years earlier for $200,000. e. The firm repurchases its own common stock.

CASE 2 (25 points)

1. What are the trade-offs involved in the decision of how much inventory the firm should carry? In what way does the cash manager face a similar trade-off?

2. Company X sells on a 1/30, net 60 basis. Customer Y buys goods invoiced at $1,000.

a. How much can Y deduct from the bill if Y pays on day 30? b. What is the effective annual rate of interest if Y pays on the due date rather than on day 30?

3. How would you expect payment terms to change if:

a. The goods are perishable. b. The goods are not rapidly resold. c. The goods are sold to high-risk firms.

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4. The lag between the purchase date and the date on which payment is due is known as the terms lag. The lag between the due date and the date on which the buyer actually pays is the due lag, and the lag between the purchase and actual payment dates is the pay lag. Thus, Pay lag = terms lag + due lag

State how you would expect the following events to affect each type of lag:

a. The company imposes a service charge on late payers. b. A recession causes customers to be short of cash. c. The company changes its terms from net 10 to net 20.

CASE 3 (25 points)

1. UPS provides package delivery services throughout the United States and the World. Discuss the impact of the seasonal variations in the delivery business for forecasting the firm’s financing requirements.

2. Discuss the shortcomings of the percent of sales method of financial forecasting (explain the percentage sales method and its problems)

3. What would be the probable effect on a form’s cash position of the following events? a. Rapidly rising sales b. A delay in the payment of payables c. A more liberal credit policy on sales (to the firm’s customers)

4. A cash budget is usually thought of as a means of planning for future financing needs. Why would a cash budget also be important for a firm that has

excess cash on hand?

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CASE 4 (25 points) Fila Sports Corporation has the following data: (assume a 365-day fiscal year).

Annual sales = €90,000 Annual cost of goods sold = €63,000 Average Inventory = €8,000 Average Accounts receivable = €4,000 Average Accounts payable = €4,400 Benchmark Cash Cycle – (industry) average) 52 days

1. Calculate the following:

a. Inventory period b. Receivables period c. Payables period d. Operating cycle e. Cash cycle

2. How does the firm's cash cycle compare to the industry benchmark? Please justify your answer.

3. Explain some of the collection and disbursement techniques used by the companies to manage cash.

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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.