FIN 644 Exam 1 (solutions)

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FIN 644
Exam 1
Name___________
1. Consider the following balance sheet and income statement data for Landmark
International, figure out the cash profit of the company:
Balance Sheet 12/31/03 ​Balance Sheet 12/31/04
Cash $200 $550
Accounts receivable $800 $700
Inventory $250 $150
Fixed assets $1,000 $1,000
(Accumulated depreciation) ​($400)​
​($600)

Total Assets $1,850 $1,800
Accounts payable $200 $250
Operating accruals $300 $150
Debt $750 $395
Common stock $400 $400
Retained earnings ​$200​ ​$605
$1,850 $1,800
Income Statement for the year ended 12/31/04
Sales $4,500
COGS ​2,200
Gross Profit $2,300
Operating expenses 1,300
Depreciation
​200
Operating profit $800

Interest 75
Taxes
​320
Net Profit $405
Dividends
​0
Addition to retained earnings $405
2. If a firm has purchases of $50,000, a starting inventory of $35,000 and the cost
of goods sold is $45000, what is the dollar amount of its ending inventory?
The following financial data are to be used for questions 3-7:
2000 ​2001
Cash & equivalents $25 $75
Accounts receivable $450 $700
Inventory $400 $500
Gross Fixed assets $1,000 $1,000
(Accumulated Depr.) ​($200)​ ​($250)
Total Assets $1,675 $2,025

Accounts payable $100 $200
Notes payable $50 $275
Operating accruals $60 $55
Current maturities $50 $50
Long-term debt $400 $382
Shareholders’ equity ​$1,015​ ​$1,063
Total Liabilities & Equity $1,675 $2,025
​2000​
​2001
Revenues $1,500 $2,250
COGS $750 $1,125
Operating expenses $700 $750
Depreciation $100 $50
Interest $40 $45
Taxes ​$(36)​ ​$112
Net Income ​$(54)​ ​$168
Dividends $45 $120

3. What is the 2000 quick ratio?
4. What is the 2000 working capital requirement to sales ratio?
5. What is the 2001 cash conversion efficiency?
6. How long is the 2000 cash conversion period?
7. What is the 2001 sustainable growth rate?
8. Torque Manufacturing forecasts that its production will require 500,000 tons of
bauxite over its planning period. Demand for Torque's products is stable over time.
Ordering costs amount to an average of $20.00 per order. Holding costs are estimated
at $1.25per ton of bauxite. What is the EOQ for Torque?
The following information is to be used for questions 9-12:
Lott Manufacturing Inc. has been ordering parts for its production process in lots of
10,000 units. Each order cots the firm $50 to place, and holding costs per unit average
$3. Lott uses 200,000 units every 250 days.
9. EOQ for Lott is?
10. Given the EOQ you calculated for Lott, how many orders should be placed and
what is the average inventory balance?
11. If it takes 2 days to receive an order from suppliers, at what inventory level
should Lott place another order?
12. If Lott was recently been approached by its supplier with a new quantity
discount program, and Lott determines that the optimal order quantity is 4,000 units,

and at this level of order inventory, the company will pay $4.98 per unit. Determine the
total inventory costs for Lott considering the quantity discount.
13. A company purchased inventory worth of $2280 in March. At the end of March
it had inventory balance worth $456. Calculate March balance fraction.
14. Credit analyst John Adams is considering a $1,000 order from a new customer.
The cost of filling the order is $950. John estimates collection costs are $20. The
customer will pay in 60 days. If the appropriate cost of capital is 18%, what is the NPV
of extending credit to the new customer?
15. A credit analyst has received a $10,000 order from a new customer. The cost of
filling the order (i.e., COGS) is $8,000 and collection costs are $200. The credit analyst
notes that the COGS will be paid immediately. Further, it is assumed that the
customer will repay the trade credit obligation in 60 days. It is also assumed that the
collection costs will be incurred in 60 days. If the appropriate discount rate is 8%,
what is the NPV of extending credit to the new customer?
16. A credit analyst has receiveda $20,000 order from a new customer. The cost of
filling the order (i.e., COGS) is $19,100 and collection costs are $500. The credit
analyst notes that the COGS will be paid immediately. Further, it is assumed that the
customer will repay the trade credit obligation in 90 days. It is also assumed that the
collection costs will be incurred in 90 days. If the appropriate discount rate is 10%,
what is the NPV of extending credit to the new customer?

17. East Stores has derived the following consumer credit scoring model:
Y=0.2*Employment + 0.4*Homeowner + 0.3*Cards
Employment=1 if employed full time, 0.5 if employed part-time, and 0 if unemployed;
Homeowner=1 if homeowner, 0 otherwise
Cards=1 if presently has 1-5 credit cards, 0 otherwise
The store determines that a score of at least 0.7 indicates a very good credit risk, and
it will extend credit to the individuals. If Janice is employed half time, is a homeowner,
and has 2 credit cards at present, does the model indicate she should receive credit?
18. Emily Cheney is evaluating a proposal to extend credit to a group of new
customers. The new customers will generate an average of $40,000 per day in new
sales. On average, they will pay in 68 days. The variable cost ratio is 80%, collection
expenses are 2% of sales, and the cost of capital is 10%. What is the NPV of one day's
sales if Emily grants credit? Assume that there is no bad debt loss.
Use the following information for questions 19-21.
Your firm’s CFO has tasked you with evaluating the net present value associated with
changing the firm’s trade credit terms from net 30 days to net 45 days.Other pertinent
assumptions include:
Annual sales with existing credit terms = $5,000,000

Variable cost ratio with existing credit terms = 30% of revenues
Costs of collections with existing credit terms = 1% of revenues
Bad debt expense ratio with existing credit terms = 2% of revenues
Annual sales with new credit terms = $5,500,000
Variable cost ratio with new credit terms = 30% of revenues
Costs of collections with new credit terms = 1% of revenues
Bad debt expense ratio with new credit terms = 3% of revenues
Discount rate = 10%
19. What is the daily net present value of the current trade credit policy? Assume
that the variable costs are paid upfront while the costs of collections occur when the
payment is received from the customer.
20. What is the daily net present value of the new trade credit policy? Assume that
the variable costs are paid upfront while the costs of collections occur when the
payment is received from the customer.
21. What is the aggregate increase in net present value from making this change to
trade credit policy?
22. What is the optimal cash discount percentage with the following financial
situation: Cash discount period=10 days, credit period=30 days, and annual cost of
capital=22%.

23. Besley Inc., manufactures and sells wallboard for use in construction of
modular homes. It sells on net 30 terms to contractors. Following are the last 6
months’ sales and the A/R balances at the end of June, the present (report) month.
Calculate the uncollected balance percentages for this company.
Accounts Receivable Schedule; June 30
Month* Credit Sales Uncollected Amount
January $ 75,000 $ 5,000
February 50,000 5,000
March 100,000 6,000
April 40,000 6,000
May 45,000 8,000

June 50,000 12,000
June 30 A/R balance $42,000
1. * assume all months have 30 days