MGMT 332 Corporate Finance I Module 8: Short-Term Finance

March 2021 | MGMT 332 | College of Business | worldwide.erau.edu

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MGMT 332 Corporate Finance I

Module 8: Short-Term Finance

Problem Set 8 – Short-Term Finance

1. Argo's fourth quarter's 2020 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 4Q20. The financials are below:

4Q20 Income Statement (in M$) Oct Nov Dec

Sales 367 211

420 Cost of Goods Sold 210 215

Sales, General, and Admin. 44 48 50 Interest Expense 13 12 12

Taxes 20 22 29

4Q20 Balance Sheet (in M$) Oct Nov Dec

Cash 311 312 345 Receivables 264 270 300 Inventory 44 47 49

PP&E 788 801 802

Payables 144 133 134 Notes Payable -- -- -- Accruals 40 44 48 LTD 55 55 55

LTD 400 400 400 Equity 768 798 859

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2. Question 2 consists of parts a, b, and c - a. Argo sells maintenance services to various private jet operators. For

these, it demands payment within 20 days. Argo is considering changing this policy to 0.5%/4, net 20. What is the implicit effective annual rate in this payment policy? Use a notional purchase of $1,000.

b. Argo's maintenance service business grosses some $8M per year before discounts and its average days receivable is 25 (unlike the overall business where this number is ~15). If 45% of Argo's clients opt to pay earlier and get the 0.5% discount, what will be the change in the service business's receivables? If Argo's cost of capital is 5.5%, what are the projected savings of this change in policy? If Argo's gross margin is 25%, by how much will gross dollar revenues have to rise to offset the loss from discounts? In percent?

c. A new client from out of town is quoted $3,300 for a repair. The service people ask you to approve this. You do a quick check on the client and assess an 5% 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?