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ASSUMPTIONS Balance Sheets (current assets shaded) 2007 2008 2009-(Answered)

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Question

ASSUMPTIONS

Balance Sheets

(current assets shaded)

2007

2008

2009

2010

2011

Cash & Equivalents

$75

$75

$90

$100

$100

Accounts Receivable

300

400

600

550

500

Inventory

150

250

350

250

250

Net Fixed Assets

525

575

610

540

465

Total Assets

$1,050

$1,300

$1,650

$1,440

$1,315

(current liabilities shaded)

Accounts Payable

$125

$175

$250

$225

$200

Notes Payable

165

162

178

136

99

Accrued Operating Exp.

60

161

165

89

76

Long-Term Debt

500

400

300

100

50

Shareholders Equity

200

402

757.2

890.2

890.2

Total Liabilities & NW

$1,050

$1,300

$1,650

$1,440

$1,315

Income Statements

Revenues (Sales)

$1,500

$2,250

$3,000

$2,000

$1,500

Cost of Goods Sold

600

900

1200

800

600

Operating Expenses

600

797

895

750

725

Depreciation

35

50

65

70

75

Interest

30

33

28

25

10

Taxes

94

188

325

142

36

Net Profit

141

282

487.2

213

54

Dividends

40

80

132

80

54

2.) Suppose a firm pays a $50,000 trade credit obligation to a supplier in cash.

A. What impact does this transaction have on the firm's current ratio if the initial current ratio equaled 1?

B. What impact does this transaction have on the firm?s current ratio if the intial current ratio is 0.5?

C. What impact does this transaction have on the firm?s current ratio if the initial current ratio equaled 1.7?

4. Mississippi Delta, Inc. has been selling switching equipment to computer companies on net-30 terms, in which payment is expected by 30 days from the invoice date. Concerned about deteriorating collection patterns, the credit manager has divided customers into two groups for examination purposes:

Prompt payors and laggards. Prompt payors (80 percent of Mississippi Delta?s customers) pay, on average, in 35 days, versus a 72-day average for the laggards. The manager wonders if the credit terms should be modified to include a 2 percent cash discount on invoices paid within 10 days. The average invoice is the same for both groups, roughly $4,000. The manager expects 50% of the prompt payors to pay in exactly 10 days and the average on the other half to slip to 40 days. He thinks that 20% of the laggards will pay in 10 days and the average on the others will slip to 80 days. Given these forecasts, he is not sure that the lost revenue from discount takes (who would then pay only 98% of the invoiced dollar amount) justifies the improved collection. The company?s annual cost of capital is 11%.

A.) Using NPV calculations, show the PV of the present collection experience.

B.) Calculate the NPV of the proposed 2/10, net-30 terms.

C.) Based on your NPV analysis, should Mississipi Delta Inc. adopt the cash discount?

D.) What other factors should be taken into account before Mississippi Delta Inc. makes a switch, assuming such is justifiable on an NPV basis?

E.) Sensivity analysis involves varying the key assumptions, one at a time, and observing the effect on the key decision criterion-such as profits or NPV. In the NPV analysis above, how could could one carry out sensitivity analysis? (If you have a financial spreadsheet available, conduct a sensitivity analysis that varies the number of prompt payors who will pay in exactly 10 days and report your findings.)


ASSUMPTIONS

 

(current assets shaded)

 

Cash & Equivalents

 

Accounts Receivable

 

Inventory

 

Net Fixed Assets

 


 

2007

 

$75

 

300

 

150

 

525

 


 

Total Assets

 

$1,050

 

(current liabilities shaded)

 

Accounts Payable

 

$125

 

Notes Payable

 

165

 

Accrued Operating Exp.

 

60

 

Long-Term Debt

 

500

 

Shareholders Equity

 

200

 

Total Liabilities & NW

 


 

$1,050

 


 

Balance Sheets

 

2008

 

$75

 

400

 

250

 

575

 

$1,300

 

$175

 

162

 

161

 

400

 

402

 

$1,300

 

Income Statements

 


 

2009

 

$90

 

600

 

350

 

610

 

$1,65

 

0

 

$250

 

178

 

165

 

300

 

757.2

 

$1,65

 

0

 


 

2010

 

$100

 

550

 

250

 

540

 


 

2011

 

$100

 

500

 

250

 

465

 


 

$1,440

 


 

$1,315

 


 

$225

 

136

 

89

 

100

 

890.2

 


 

$200

 

99

 

76

 

50

 

890.2

 


 

$1,440

 


 

$1,315

 


 

$3,00

 

Revenues (Sales)

 

$1,500

 

$2,250

 

0

 

$2,000 $1,500

 

Cost of Goods Sold

 

600

 

900

 

1200

 

800

 

600

 

Operating Expenses

 

600

 

797

 

895

 

750

 

725

 

Depreciation

 

35

 

50

 

65

 

70

 

75

 

Interest

 

30

 

33

 

28

 

25

 

10

 

Taxes

 

94

 

188

 

325

 

142

 

36

 

Net Profit

 

141

 

282

 

487.2

 

213

 

54

 

Dividends

 

40

 

80

 

132

 

80

 

54

 

2.) Suppose a firm pays a $50,000 trade credit obligation to a supplier in cash.

 

A. What impact does this transaction have on the firm's current ratio if the initial current ratio equaled 1?

 

B. What impact does this transaction have on the firm?s current ratio if the intial current ratio is 0.5?

 

C. What impact does this transaction have on the firm?s current ratio if the initial current ratio equaled 1.7?

 

4. Mississippi Delta, Inc. has been selling switching equipment to computer companies on net-30 terms,

 

in which payment is expected by 30 days from the invoice date. Concerned about deteriorating

 

collection patterns, the credit manager has divided customers into two groups for examination purposes:

 

Prompt payors and laggards. Prompt payors (80 percent of Mississippi Delta?s customers) pay,

 

on average, in 35 days, versus a 72-day average for the laggards. The manager wonders if the

 

credit terms should be modified to include a 2 percent cash discount on invoices paid within 10

 

days. The average invoice is the same for both groups, roughly $4,000. The manager expects

 

50% of the prompt payors to pay in exactly 10 days and the average on the other half to slip to

 

40 days. He thinks that 20% of the laggards will pay in 10 days and the average on the others will

 

slip to 80 days. Given these forecasts, he is not sure that the lost revenue from discount takes

 

(who would then pay only 98% of the invoiced dollar amount) justifies the improved collection.

 

The company?s annual cost of capital is 11%.

 


 

A.) Using NPV calculations, show the PV of the present collection experience.

 

B.) Calculate the NPV of the proposed 2/10, net-30 terms.

 

C.) Based on your NPV analysis, should Mississipi Delta Inc. adopt the cash discount?

 

D.) What other factors should be taken into account before Mississippi Delta Inc. makes a switch,

 

assuming such is justifiable on an NPV basis?

 

E.) Sensivity analysis involves varying the key assumptions, one at a time, and observing the effect on the

 

key decision criterion-such as profits or NPV. In the NPV analysis above, how could could one carry out

 

sensitivity analysis? (If you have a financial spreadsheet available, conduct a sensitivity analysis that

 

varies the number of prompt payors who will pay in exactly 10 days and report your findings.)

 


 

 

Paper#9210129 | Written in 27-Jul-2016

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