Short-term Finance

2

>Instructions

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:

1

8

12 13 12

3 2 2

7 9

Jan Feb Mar

1,176 1,176

— —

30

50 50

200

LTD

300 300

2,066 2,290 2,400

																																																																																																													1.     Apache’s first quarter’s 201 Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	9
	1Q19 Income Statement (in M$)
	Jan		Feb		Mar
	Sales			12	3		13	144
Cost of Goods Sold		7	83	89
Gross Margin	45	48	55
Sales, General, and Admin.
Interest Expense
Taxable Income		30	33	41
	Taxes	6
Net Income	24	26	32
	1Q19 Balance Sheet (in M$)
	Cash	625	814	900
	Receivables	160	177		200
	Inventory	105	123	124
Current Assets	890	1,114	1,224
	PP&E			1,176
	Total Assets		2,066		2,290		2,400
	Payables	120	122	131
	Notes Payable			—
	Accruals	34	38
			LTD			50
Current Liabilities	206	219
		300
	Equity	1,566	1,784	1,881
	Total L&E
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.

Sales Cash

Receivables

Inventory

PP&E

Total Assets

Taxes

Payables

Notes Payable

Accruals

Jan. Feb. Mar. LTD

LTD

Equity

Total L&E

		Jan.			Feb.			Mar.
Cost of goods sold
	Gross margin
Sales, general & admin.	Curr. Assets
Interest expense
Taxable income
Net income
Key Ratios
Days Receivable	Curr. Liabilities
Days Inventory
Operating Cycle
Days Payable
Cash Cycle

Prob. 2

)

EAR

Gross margin

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
Projected savings net of discounts
Gross revenues must rise by:
– in dollars
– in percent