College Of Business Worldwideeraueduall Rights Are Reserved The M ✓ Solved

College of Business | worldwide.erau.edu 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 Cost of Goods Sold Gross Margin Sales, General, and Admin.

Interest Expense 3 2 2 Taxable Income Taxes 6 7 9 Net Income Q19 Balance Sheet (in M$) Jan Feb Mar Cash Receivables Inventory Current Assets 890 1,114 1,224 PP&E 1,176 1,176 1,176 Total Assets 2,066 2,290 2,400 Payables Notes Payable -- -- -- Accruals LTD Current Liabilities LTD Equity 1,566 1,784 1,881 Total L&E 2,066 2,290 2,400 Continue to the next page 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 M 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 ,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? Module 8: Short-Term Finance Prob. Q19 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

Paper for above instructions

Introduction

Short-term finance is crucial for businesses, particularly for managing cash flows efficiently. This problem set focuses on Apache Corporation's financial analysis for the first quarter of 2019. It involves calculating various metrics like days receivable, days inventory, operating cycle, days payable, cash cycle, and understanding the implications of changing payment policies. Additionally, it analyzes the financial impact of adjustments in customer payment behavior and assesses a potential client based on risk factors.

Part 1: Financial Metrics Calculation

Days Receivable

Days Receivable measures how quickly a company is able to collect payment from its customers. It can be calculated using the formula:
\[
\text{Days Receivable} = \left( \frac{\text{Accounts Receivable}}{\text{Total Sales}} \right) \times \text{Number of Days}
\]
Total sales are provided monthly (in M$):
- January: