At the beginning of the period, OpportunisticCo management realizes that:

• They will be very tight on a debt covenant specifying a minimum operating cash flow,

and management must do everything possible to increase their CFO.

• The analysts tend to focus on their top line, and management must do everything possible

to increase their Net Revenues.

• They are starting negotiations with a labor union, and management must do everything

possible to report the lowest possible Net Income. Goals order of importance: 1) maximum CFO, 2) maximum Revenues, 3) minimum NI.

Help them make the following decisions correctly. Correctly means satisfying the three goals per the hierarchy of preference listed above (they dont worry about being true to the underlying economics or getting in trouble with the SEC).

1. Historically their sales returns vary between 2 and 4 percent of total sales per year. What should they assume as a sales return rate?

2. Historically they could not collect between 10 and 15 percent of outstanding Accounts Receivable. What should they assume uncollectability to be this year?

3. They use LIFO and input prices are always increasing. They have a choice to purchase a minimum of 1,000 units of inventory (to meet sales) and a maximum of 4,000 (the warehouse cant store more). How much inventory should they purchase?

4. They are buying a long-lived asset this year and must choose a useful life between 10 and 12 years. What should they assume?

5. Their customer is offering to make a cash deposit for a project scheduled to start next year. In return for getting this deposit, theyll have to offer a slight discount on the full sale price next year. Should they accept the deposit?

6. They can extinguish a bond early by purchasing it on the open market. This would lead to a one-time Loss on Extinguishment recognized. Should they repurchase?

7. They need to decide whether to declare and pay a cash dividend this year.

For each of the 7 decisions above, choose the correct action for the management of OpportunisticCo. Once you decide on the course of action, write it down and note whether it has GOOD, BAD, or ZERO impact on goals 1, 2, and 3. Follow the order (1 is the sales returns decision, ..., 7 is the cash dividends decision).

Example: Suppose a customer wants to receive a product shipment early even though they cant pay OpportunisticCountil the agreed-upon date five months in the future. Should the management agree to ship the product early (this decision wont impact inventory management)?

Answer: Yes this will not affect cash from operations, so it doesnt matter for the first goal. But shipping the product will allow them to recognize revenue sooner, so its good for the second goal. But it will also lead them to have more Net Income for this period, so its bad for goal 3. But because of the order of the goals, theyll still choose to do it.

		Goal 1	Goal 2	Goal 3
	Action	Max CFO	Max Rev	Min NI
	Example: Yes - They should ship the product early.	ZERO	GOOD	BAD
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