## Question

# MJ, Inc. made a $15,000 sale. Due to their weak competitive position, the firm had to offer trade credit terms of 30 days just to

MJ, Inc. made a $15,000 sale. Due to their weak competitive position, the firm had to offer trade credit terms of 30 days just to make the sale. Calculate the present value of MJ's sale assuming discount rates of

2. Memphis Metro just made a $75,000 purchase from a supplier, subject to the extension of suitable trade credit terms. Because of Memphis Metro's strong balance sheet and stellar credit rating, the firm's most recently issued line of credit is priced at 3.65 percent. Calculate the present value of this cash outflow assuming trade credit terms of

3. For a given change in short-term financial management policies, the CCC is expected to be cut in half. For a credit sale that was just made, the NPV from the shorter CCC is $10,000. Assume a discount rate of 7.30 percent.

- Calculate the cumulative change in firm value from the shorter CCC, assuming that a comparable sale is made each year on this date in perpetuity.

4. Use the following assumptions to calculate the NPV of the gross profit earned on a one-time sale. Assume that the sale was just placed and the firm will be required to produce the good sold.

Revenue = $50,000 CGS = $40,000 Discount rate = 7.30 percent Operating cycle = 50 days DPO = 10 days

5. Building on problem 4, assume that the operating cycle drops to 30 days. Recalculate the NPV and also calculate NPV. Interpret your estimate for NPV.

- Building on your analysis from problems 4 and 5, calculate the change in firm value from shortening the CCC, assuming annual perpetual sales.

- Southern Marketing Affiliates (SMA) would like to determine the effect on operating cash flow from changing its inventory policies. SMA has DIH of 25 days, while the industry benchmark is 30 days. Based on this information, calculate the implied change in SMA's inventory and operating cash flow and interpret your results. SMA has annual CGS of $36.5 million.

8. Management of Textbook Brokers is developing a short-term financial plan for the upcoming year. In particular, management would like to determine the effect on operating cash flow that would occur if the firm managed to maintain the benchmark values for their industry for DIH, DSO, and DPO. Textbook Brokers expects to have revenue and CGS of $3,500,000 and $1,000,000, respectively, in the next year. Use the information to estimate the change in operating cash flow that would occur from meeting the industry benchmark values. Current DIH = 60 days | Industry Benchmark D

Current DIH = 60 days | Industry Benchmark DIH = 50 days Current DSO = 30 days | Industry Benchmark DSO = 10 days Current DPO = 40 days | Industry Benchmark DPO = 60 days

9. By implementing best in practice short-term financial management policies, M&C Express believes it can lower its WCR from $700,000 to $300,000. Assuming a borrowing rate of 5 percent, calculate the before-tax interest expense savings from lowering the WCR.

- Building on the information from problem 9, calculate earnings per share for M&C Express. Financial projections for next year suggest that revenues will be identical to last year, and no expenses other than interest expense will change (year-over-year). M&C Express earned net income last year of $870,000. Assume a tax rate of 20 percent and 100,000 common shares outstanding.

11. Building on problem 10, use the P/E multiple to estimate the share price for M&C Express after short-ening the CCC. Assume an average P/E multiple for the industry of 13X.

- By overlooking the importance of short-term financial management, MJ's CCC increased. Accordingly, EPS dropped from $1.20 to $0.95. If the average P/E multiple for MJ's industry is currently 10X, calculate the change in share price that would result from the longer CCC.

13. Lovelace's Tire Express (LTE) is adopting the necessary short-term financial management practices to shorten the CCC. In the most recent year, LTE reported the following financial values: revenues of $5,000,000, CGS of $2,500,000, SG&A expenses of $500,000, depreciation expense of $250,000, and interest expense of $300,000. LTE has a tax rate of 25 percent, 1,000,000 common shares outstanding, and a credit line with an interest rate priced at 8 percent. Use this information and the values below to calculate the change in share price that would accrue to LTE after shortening the CCC. The industry average P/E multiple is 20X.

Current DIH = 75 days | Benchmark DIH = 25 days Current DSO = 45 days | Benchmark DSO = 20 days Current DPO = 30 days | Benchmark DPO = 45 days

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