FIN 644

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 received a $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 firms CFO has tasked you with evaluating the net present value associated with changing the firms 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

* assume all months have 30 days

Please show the workings. Thanks