Excel: Short-Term Finance

College of Business | worldwide.erau.edu

All rights are reserved. The material contained herein is the copyright property of Embry-Riddle Aeronautical University, Daytona Beach, Florida, 32114. No part of this material may be reproduced, stored in a retrieval system or transmitted in any form, electronic, mechanical, photocopying, recording or otherwise without the prior written consent of the University.

MGMT 332 Corporate Finance I

Module 8: Short-Term Finance Problem Set 8 – Short-Term Finance

1. Apache's first quarter's 2019 financials are being prepared and the CFO wants you to use them to calculate days receivable, days inventory, operating cycle, days payable, and cash cycle for each of the three months of 1Q19. The financials are below: 1Q19 Income Statement (in M$)

Jan Feb Mar Sales 123 131 144 Cost of Goods Sold 78 83 89 Gross Margin 45 48 55 Sales, General, and Admin. 12 13 12 Interest Expense 3 2 2 Taxable Income 30 33 41 Taxes 6 7 9 Net Income 24 26 32

1Q19 Balance Sheet (in M$)

Jan Feb Mar Cash 625 814 900 Receivables 160 177 200 Inventory 105 123 124 Current Assets 890 1,114 1,224 PP&E 1,176 1,176 1,176 Total Assets 2,066 2,290 2,400 Payables 120 122 131 Notes Payable -- -- -- Accruals 30 34 38 LTD 50 50 50 Current Liabilities 200 206 219 LTD 300 300 300 Equity 1,566 1,784 1,881 Total L&E 2,066 2,290 2,400

Continue to the next page

Page 2 of 2

2. Apache sells maintenance services to various private jet operators. For these, Apache's demands payment within 30 days. Apache is considering changing this policy to 1/5, net 30. What is the implicit effective annual rate in this payment policy?

3. Apache's maintenance service business grosses some $20M per year before discounts and its average days receivable is 30 (unlike the overall business where this number is ~40). If 25% of Apache's clients opt to pay earlier and get the discount, what will be the change in the service business's receivables? If Apache's cost of capital is 8%, what are the projected savings of this change in policy? If Apache's gross margin is 40%, by how much will gross dollar revenues have to rise to offset the loss from discounts? In percent?

4. A new client from out of town is quoted $6,000 for a repair. The service people

ask you to approve this. You do a quick check on the client and assess a 15% default risk. What is the NPV of the client? What is the break-even probability? What is the minimum probability of collecting for you to approve the service?