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essentials corporate finance

Questions and Answers of Essentials Corporate Finance

4 Short-term Financial Policy Your friend has recently started up a new ice-cream shop business but is worried about the seasonality of cash flows the business will face. This is because the demand
5 Financing Strategies Give an overview of different working capital financing strategies. What are the advantages and disadvantages of each?
6 The Short-term Financial Plan Explain what is meant by cash budgeting. Review the various ways a firm can finance a short-term cash deficit and the various financing policies to manage current
7 Sources and Uses For the last year, you have gathered the following information about Rock Spring plc:(a) The company undertook a £200 million share buyback programme.(b) £300 million was
8 Short-term Financial Management A bank has recently installed a new contactless payment system for rural communities in Malawi. Describe the effect this is likely to have on the company’s
9 Operating and Cash Cycles You have just been appointed as financial manager of a food processing and manufacturing firm. The production engineer has said that the cash cycle of your firm should
10 Shortage Costs Assume you work for Evraz plc, the coal and iron ore miner. What would be the costs of shortages in such a firm? Explain using examples.
11 Reasons for Net Working Capital Why is net working capital always zero in an ideal economy, but positive in the real economy? Does this introduce any risks to a company?
12 Operating and Cash Cycles What impact did this change in payables policy have on Power Assets’operating cycle? Its cash cycle?
13 Operating and Cash Cycles What impact do you think the policy change had on Power Assets’ suppliers?
14 Corporate Ethics Is it ethical for large firms to unilaterally lengthen their payable periods, particularly when dealing with smaller suppliers? Is an 82-day payables period necessarily bad?
15 Payables Period Why do you think Power Assets really reduced its payables period? Is its explanation that this would ‘control costs and optimize cash flow’ sensible? Will there be any direct
16 Accounts Receivable You are the owner of a professional basketball team with €3.5 million in the bank and a monthly cost base of around €1 million. Worried about potentially running out of
17 Changes in the Cash Account Indicate the impact of the following corporate actions on cash, using the letter I for an increase, D for a decrease or N when no change occurs.(a) A dividend is paid
18 Cash Equation IFU Live plc has total non-current assets of £4,938 million. Non-current liabilities are£1,038 million. Current assets, other than cash, are £2,098 million. Current liabilities
19 Changes in the Operating Cycle Indicate the effect that the following will have on the operating cycle.Use the letter I to indicate an increase, the letter D for a decrease and the letter N for no
20 Changes in Cycles Indicate the impact of the following on the cash and operating cycles, respectively.Use the letter I to indicate an increase, the letter D for a decrease and the letter N for no
21 Calculating Cash Collections Assume that Next plc has projected the following quarterly sales amounts for the coming year:Q1 Q2 Q3 Q4 Sales £824m £920m £620m £1,600m(a) Trade receivables at
22 Calculating Cycles Consider the following financial statement information for Bulldog Ice plc. Calculate the operating and cash cycles. How do you interpret your answer?Item Beginning(£)
23 Calculating Payments Lewellen Products has projected the following sales for the coming year:Q1 Q2 Q3 Q4 Sales (£) 540 630 710 785 Sales in the year following this one are projected to be 15 per
24 Calculating Payments Marshall plc’s purchases from suppliers in a quarter are equal to 75 per cent of the next quarter’s forecast sales. The payables period is 60 days. Wages, taxes and other
25 Calculating Cash Collections The following is the sales budget for Freezing Snow plc for the first quarter of the year:January February March Sales budget (£) 150,000 173,000 194,000 Credit sales
26 Calculating the Cash Budget Here are some important figures from the budget of Sagmo AB for the first quarter of the year:January (NKr) February (NKr) March (NKr)Credit sales 380,000 396,000
27 Sources and Uses Refer to the balance sheet of a hypothetical firm below. Determine whether each item is a source or a use of cash, and the amount:CONSOLIDATED BALANCE SHEET as at 31 December€
30 Cash Management Policy Rework problem 29 assuming the following:(a) Wildcat maintains a minimum cash balance of €45 million.(b) Wildcat maintains a minimum cash balance of €15 million.Based on
31 Short-term Finance Policy Renault SA and Peugeot SA are competing automobile manufacturing firms.Download their annual financial accounts for the most recent period from each company’s
1 Consider the following financial statement information for Orologio SpA. Calculate the operating and cash cycles. How do you interpret your answer? (40 marks)Item Beginning (€) Ending
2 You have been hired by a manufacturing firm that is currently experiencing significant levels of financial distress. The managers have asked you to find ways in which the company can increase its
1 Use the numbers given to complete the cash budget and short-term financial plan.You have recently been hired by Wolgemut Manufacturing to work in its established treasury department.Wolgemut
2 Rework the cash budget and short-term financial plan assuming Wolgemut changes to a minimum cash balance of €70,000.You have recently been hired by Wolgemut Manufacturing to work in its
3 Rework the sales budget assuming an 11 per cent growth rate in sales and a 5 per cent growth rate in sales. Assume a €90,000 target cash balance.You have recently been hired by Wolgemut
4 Assuming the company maintains its target cash balance at €90,000, what sales growth rate would result in a zero need for short-term financing? To answer this question, you may need to set up a
1 Cash and Operating Cycles Find the most recent financial statements for two companies from your country. Calculate the cash and operating cycle for each company for the most recent year. Are the
2 Cash and Operating Cycles Download the most recent quarterly financial statements for another company from your country. Calculate the operating and cash cycle for the firm over each of the last
1 Reasons for Holding Cash Why do firms hold cash? What are the consequences of holding too little cash? Is it possible for a firm to have too much cash? Why would shareholders care if a firm
2 Determining the Target Cash Balance Show, using both the Baumol model and the Miller–Orr model, how a firm can determine its optimal cash balance. What are the advantages and disadvantages of
3 Investing Idle Cash What options are available to a firm if it believes it has too much cash? How about too little?
4 Terms of the Sale Explain what is meant by the credit terms of a sale. Provide an example of a typical trade credit agreement.
5 Establishing a Credit Policy What steps are involved in establishing a credit policy?
6 Optimal Credit Policy Is it possible to have an optimal credit policy? In this context, discuss the total credit curve and its impact on a firm’s approach to trade credit.
7 Credit Analysis What are the ‘five Cs’ of credit? Give an example of what happens when one of the five Cs is not met. Are there any other factors a firm should consider?
8 Collection Policy How can a firm use an ageing schedule of payments to maximize its total collection of outstanding debtors?
9 Opportunity versus Trading Costs Konyagi plc has an average daily cash balance of £10,500.Total cash needed for the year is £65,000. The interest rate is 3 per cent, and replenishing the cash
10 Costs and the Baumol Model Saint-Michel SA needs a total of €54,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells off €20,000 in securities and
11 NPV and Reducing Float Starthub Ltd has an agreement with its bank whereby the bank handles Rm500 million in collections a day and requires a Rm40,000,000 compensating balance. Starthub is
12 Determining Optimal Cash Balances TByrne Ltd is currently holding €700,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by €360,000 per month. How
13 Using Miller–Orr SlapShot plc has a fixed cost associated with buying and selling marketable securities of£100. The interest rate is currently 0.021 per cent per day, and the firm has estimated
14 Using Baumol Grampian plc has a weekly cash requirement of £60,000. The cost of selling marketable securities to raise cash is £50. The interest rate is 7 per cent per annum. Determine the
16 ACP and Accounts Receivable Dalglish plc sells earnings forecasts for British securities. Its credit terms are 2/10, net 30. Based on experience, 65 per cent of all customers will take the
17 Terms of Sale A firm offers terms of 2/9, net 40. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what
18 ACP and Receivables Turnover Muziek Stad NV has an average collection period of 52 days. Its average daily investment in receivables is €46,000. What are its annual credit sales? What is the
19 Early Payment Discount XYZ plc has recently won a very large order to supply a retail chain, called TT Ltd, with items over the next two years. The size of any order may vary considerably and XYZ
20 Size of Accounts Receivable Baker Ginger Ltd sells on credit terms of net 25. Its accounts are, on average, nine days past due. If annual credit sales are £8 million, what is the company’s
22 Credit Policy Evaluation Champions SA is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if
23 Evaluating Credit Policy Bruce Jacks plc is in the process of considering a change in its terms of sale.The current policy is cash only; the new policy will involve one period’s credit. Sales
24 Credit Policy Evaluation Clapton Erich GmbH sells 3,000 pairs of running shoes per month at a cash price of €90 per pair. The firm is considering a new policy that involves 30 days’ credit and
25 Factoring The factoring department of Inter Scandinavian Bank (ISB) is processing 100,000 invoices per year with an average invoice value of €1,500. ISB buys the accounts receivable at 3.5 per
27 Credit Analysis Silicon Wafers plc (SW) is debating whether to extend credit to a particular customer.SW’s products, primarily used in the manufacture of semiconductors, currently sell for
28 Credit Analysis Consider the following information about two alternative credit strategies:Refuse Credit Grant Credit Price per unit £51 £55 Cost per unit £29 £31 Quantity sold per quarter
29 NPV of Credit Policy Switch Suppose a corporation currently sells Q units per month for a cashonly price of P. Under a new credit policy that allows one month’s credit, the quantity sold will be
30 Credit Policy The Wiggins Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 400 bicycles. The average cost to the shop of a
31 Credit Policy Evaluation Dschungel AG is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Dschungel should
32 Baumol Model Lisa Tylor, CFO of Purple Rain Co., concluded from the Baumol model that the optimal cash balance for the firm is $10 million. The annual interest rate on marketable securities is 5.8
33 Miller–Orr Model Gold Star Ltd and Silver Star Ltd both manage their cash flows according to the Miller–Orr model. Gold Star’s daily cash flow is controlled between £95,000 and £205,000,
34 Credit Policy Netal Ltd has annual sales of 50 million rand, all of which are on credit. The current collection period is 45 days, and the credit terms are net 30. The company is considering
1 Leon Dung SA, a large fertilizer distributor based in the north of Spain, is planning to speed up collections from its customers located in the Castille y Leon region. A Vallidolid-area bank will
2 Based on the Miller–Orr model, describe what will happen to the lower limit, the upper limit and the spread(the distance between the two) if the variation in net cash flow grows. Give an
3 Given an annual interest rate of 4 per cent, a fixed order cost of €10 and total cash needed of €5,000, calculate the target cash balance using the Baumol model. How do you interpret your
4 Dagmar Bamberger, the president of Schwarzwald AG, has been exploring ways of improving the company’s financial performance. Schwarzwald manufactures and sells office equipment to retailers. The
1 Reasons for Holding Cash Why do firms hold cash? What are the consequences of holding too little cash? Is it possible for a firm to have too much cash? Why would shareholders care if a firm
2 Determining the Target Cash Balance Show, using both the Baumol model and the Miller–Orr model, how a firm can determine its optimal cash balance. What are the advantages and disadvantages of
3 Investing Idle Cash What options are available to a firm if it believes it has too much cash? How about too little?
4 Terms of the Sale Explain what is meant by the credit terms of a sale. Provide an example of a typical trade credit agreement.
5 Establishing a Credit Policy What steps are involved in establishing a credit policy?
6 Optimal Credit Policy Is it possible to have an optimal credit policy? In this context, discuss the total credit curve and its impact on a firm’s approach to trade credit.
7 Credit Analysis What are the ‘five Cs’ of credit? Give an example of what happens when one of the five Cs is not met. Are there any other factors a firm should consider?
8 Collection Policy How can a firm use an ageing schedule of payments to maximize its total collection of outstanding debtors?
9 Opportunity versus Trading Costs Konyagi plc has an average daily cash balance of £10,500.Total cash needed for the year is £65,000. The interest rate is 3 per cent, and replenishing the cash
10 Costs and the Baumol Model Saint-Michel SA needs a total of €54,000 in cash during the year for transactions and other purposes. Whenever cash runs low, it sells off €20,000 in securities and
11 NPV and Reducing Float Starthub Ltd has an agreement with its bank whereby the bank handles Rm500 million in collections a day and requires a Rm40,000,000 compensating balance. Starthub is
12 Determining Optimal Cash Balances TByrne Ltd is currently holding €700,000 in cash. It projects that over the next year its cash outflows will exceed cash inflows by €360,000 per month. How
13 Using Miller–Orr SlapShot plc has a fixed cost associated with buying and selling marketable securities of£100. The interest rate is currently 0.021 per cent per day, and the firm has estimated
14 Using Baumol Grampian plc has a weekly cash requirement of £60,000. The cost of selling marketable securities to raise cash is £50. The interest rate is 7 per cent per annum. Determine the
16 ACP and Accounts Receivable Dalglish plc sells earnings forecasts for British securities. Its credit terms are 2/10, net 30. Based on experience, 65 per cent of all customers will take the
17 Terms of Sale A firm offers terms of 2/9, net 40. What effective annual interest rate does the firm earn when a customer does not take the discount? Without doing any calculations, explain what
18 ACP and Receivables Turnover Muziek Stad NV has an average collection period of 52 days. Its average daily investment in receivables is €46,000. What are its annual credit sales? What is the
19 Early Payment Discount XYZ plc has recently won a very large order to supply a retail chain, called TT Ltd, with items over the next two years. The size of any order may vary considerably and XYZ
20 Size of Accounts Receivable Baker Ginger Ltd sells on credit terms of net 25. Its accounts are, on average, nine days past due. If annual credit sales are £8 million, what is the company’s
22 Credit Policy Evaluation Champions SA is considering a change in its cash-only sales policy. The new terms of sale would be net one month. Based on the following information, determine if
23 Evaluating Credit Policy Bruce Jacks plc is in the process of considering a change in its terms of sale.The current policy is cash only; the new policy will involve one period’s credit. Sales
24 Credit Policy Evaluation Clapton Erich GmbH sells 3,000 pairs of running shoes per month at a cash price of €90 per pair. The firm is considering a new policy that involves 30 days’ credit and
25 Factoring The factoring department of Inter Scandinavian Bank (ISB) is processing 100,000 invoices per year with an average invoice value of €1,500. ISB buys the accounts receivable at 3.5 per
27 Credit Analysis Silicon Wafers plc (SW) is debating whether to extend credit to a particular customer.SW’s products, primarily used in the manufacture of semiconductors, currently sell for
28 Credit Analysis Consider the following information about two alternative credit strategies:Refuse Credit Grant Credit Price per unit £51 £55 Cost per unit £29 £31 Quantity sold per quarter
29 NPV of Credit Policy Switch Suppose a corporation currently sells Q units per month for a cashonly price of P. Under a new credit policy that allows one month’s credit, the quantity sold will be
30 Credit Policy The Wiggins Bicycle Shop has decided to offer credit to its customers during the spring selling season. Sales are expected to be 400 bicycles. The average cost to the shop of a
31 Credit Policy Evaluation Dschungel AG is considering a change in its cash-only policy. The new terms would be net one period. Based on the following information, determine if Dschungel should
32 Baumol Model Lisa Tylor, CFO of Purple Rain Co., concluded from the Baumol model that the optimal cash balance for the firm is $10 million. The annual interest rate on marketable securities is 5.8
33 Miller–Orr Model Gold Star Ltd and Silver Star Ltd both manage their cash flows according to the Miller–Orr model. Gold Star’s daily cash flow is controlled between £95,000 and £205,000,
34 Credit Policy Netal Ltd has annual sales of 50 million rand, all of which are on credit. The current collection period is 45 days, and the credit terms are net 30. The company is considering

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