Finance 3306_ Treasury Risk Unit 2 Homework: Chapters 4-7

Read each question carefully, make sure to answer all questions are answered and show your work

1. Use the following information to determine the implied fixed inventory ordering cost:

EOQ = 83.67 units

Demand = 350 units

Holding Costs = $3

A. $0.36

B. $12.50

C. $25.00

D. $30.0

2. A firm has revenues of $8,000,000 and COGS = 50% of revenues. Receivables = $800,000, Inventory = $500,000, and Payables = $300,000. What is days' inventory held?

A. 36.5 Days

B. 45.6 Days

C. 27.4 Days

D. 54.7 Days

3. Use the following information to determine the implied inventory holding cost: EOQ = 95 units Demand = 350 units Fixed Ordering Costs = $5 A. $0.39

B. $12.50

C. $2.58

D. $2.56

4. 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?

A. $400.00

B. -$157.25

C. $69.25

D. -$69.25

5. Nast stores has derived the following consumer credit-scoring model after years of data collect Y=(0.20 x Employment) + (0.4 x Homeowner) + (0.3 x Cards) Employment = 1 if employed part-time, and 0 if unemployed Cards= 1 if presently has 1-5 credit cards, 0 otherwise Nast determines that a score of at least 0.70 indicates a very good credit risk, and it extends credit to these individuals. (each letter below is a separate question, answer a-d)

a. If Janice is employed part-time, is a homeowner, and has six credit cards at present, does the model indicate she should receive credit?

b. Janice just got a full-time job and closed two of her credit card accounts. Should she receive credit? Has her credit worthiness increased or decreased, according to model?

c. Your boss mentions that he just returned from a trade-association conference, at which one of the speakers recommended that length of time at present residence (regardless of homeownership status) be include in credit-scoring models. If the weight turns out to be 0.25, how do you think the variable would be coded (i.e., 0 stands for what, 1 stands for what, etc)?

d. Suggest other variables that associated might have left out of the model, and tell how you would code them (i.e., 0,1,2 are assigned to what conditions or variables?).

6. Firm X is evaluating a proposal to extend credit to a group of new customers. The new customers will generate an average of $30,000 per day in new sales. On average, they will pay in 60 days. The variable cost ratio (i.e., COGS) is 98% of sales, collection expenses are 1% of sales, and the discount rate is 5%. Assume that the variable costs occur upfront, while the collection costs occur on the date in which the customer's payment is received. What is the NPV of one day's sales if Firm J grants credit? Assume that there is no bad debt loss.

A. $57.88

B. $1,043.56

C. -$239.67

D. -$319.57

7. For each of the following financial situations, calculate the optimal cash discount percentage (each bullet is a separate answer, solve each bullet) Cash discount period = 5 days, credit period = 75 days, and annual cost of capital = 15% Cash discount period = 10 days, credit period = 30 days, and annual cost of capital = 12% Cash discount period = 10 days, credit posted = 45 days, and annual cost of capital = 18% Cash discount period = 10 days, credit period = 30 days, and annual cost of capital = 22% 8. If the annualized cost of trade credit is 7.37%, what is the net trade credit period? Assume a discount percentage of 1% for payments received on or before 20 days

A. 50 Days

B. 70 days

C. 30 days

D. 40 days

9. Calculate the present value savings associated with paying on the last day of the discount trade credit period, as compared to the last day of the net trade credit period. Assume a $40,000 purchase is made from a supplier that offers trade credit terms of 2/10 net 30. Also, assume a discount rate of 5%.

A. $39,836.29

B. $39,836.29

C. $689.92

D. $-689.92

10. If the annualized cost of trade credit is 25.09%, what is the discount trade credit period? Assume a net trade credit period of 60 days and a discount percentage of 3% for early payments.

A. 5 days

B. 30 days

C. 15 days

D. 45 days