Short-term Finance

ProblemSet.xlsx

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Instructions

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
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?

Prob. 1

1Q19 Income Statement (in M$)				1Q19 Balance Sheet (in M$)
	Jan.	Feb.	Mar.		Jan.	Feb.	Mar.
Sales				Cash
Cost of goods sold				Receivables
Gross margin				Inventory
Sales, general & admin.				Curr. Assets
Interest expense				PP&E
Taxable income				Total Assets
Taxes
Net income				Payables
				Notes Payable
Key Ratios				Accruals
	Jan.	Feb.	Mar.	LTD
Days Receivable				Curr. Liabilities
Days Inventory				LTD
Operating Cycle				Equity
Days Payable				Total L&E
Cash Cycle

Prob. 2

a) Effective Annual Rate (EAR)		b) Average Collection Period	c) One-Time Client
Notional purchase		Gross revenue	Repair cost
Discount (%)		Avg. receivables before new policy	Default probability
Days difference	alfonso canella: alfonso canella: Difference in days from paying to get discount to paying with no discount	% paying early	NPV of client
		Avg. receivables after new policy	Break-even probability
Discount ($)		Change in receivables	Extend credit if probability of getting paid is higher than
Rate (%)		Cost of capital
Days difference in 1 year		Projected savings in capital costs
		minus: discounts
EAR		Projected savings net of discounts
		Gross margin
		Gross revenues must rise by:
		- in dollars
		- in percent