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FINE 332 Corporate Finance I

Module 8 Problem Set Short Term Debt

1. You are in a team compiling a report to send to your firm’s bank. You are supposed to take the firm’s last three periods and provide the following for each period:

Days receivable Days inventory Operating cycle Days payable Cash cycle

You have all the financials in the spreadsheet so all you need to do is make the calculations.

2. ABC Maintenance Service a. ABC FBO sells maintenance services to various private jet operators. For these, it demands

payment within 30 days. It is considering changing this policy to 0.75%/5, net 20. What is the implicit annual rate in the new policy? Use a notional purchase of $1,000.

b. ABC’s maintenance service business grosses some $3M per year before discounts and its average days receivable is 30. If 15% of its clients opt to follow the new policy, what will be the change in receivables? If ABC’s WACC is 7.0%, what are the projected savings of the new policy? If its gross margin is 28%, by how much will gross dollar revenues have to rise to offset the loss from discounts in dollars and in percent?