Corporate finance 25/03

Working capital – current assets

Net working capital – only operating cash (we are excluding non-operating cash and securities).

Cash conversion cycle (given in days) – CCC = Inventories Turnover (in days) + Daily sales outstanding (average collection period) – payables deferral (payables turnover in days)

When CCC = 0 inventories turnover and average collection period equal to payables turnover. It is your goal to do because cash engaged in the ? is close to 0; so we are not using any external financing to finance our operations. Its Maturity Matching.

Relaxed approach might cause some problems as if our policy is relaxed and we give many days to pay for our customers, our supplier might not be that relaxed and we will be short of cash.

IF CCC = 71 days that means that from the moment that we get an order we need 71 days to collect money.

Restricted approach means that we are trying to be more restricted while offering payable period. Strict credit policy. WE offer poor conditions than our competitors so our clients will go to them.

Moderate approach means that you are not relaxed and not strict. Inbetween.

Credit policy – terms that we offer to our customers

Credit period – how long period we give them to pay

Credit standards

Collection policy – how strict we are with credit period

Cash discount

Credit policy:

• Credit standards – perspective of evaluating the client (checking if he is reliable in his liquidity and ability to pay credit)

• Credit terms & conditions (discount, terms of payment -> credit period)

  2/15, net 40 (2 is a discount 15 is jeśli w ciągu 15 dni zapłaci to ma discount, 40 to generalnie ma 40 dni na zapłacenie)

• Collection policy – how we deal with clients that don’t pay on time.

TASK 2

	VP	HP
EBIT	30	30
Interest	2+10,4 = 12,4	8+2,6=10,6
EBT	19,6	19,4
Tax (40%)	7,04	7,76
EAT (NI)	10.56	11,64
Return on equity	10.56%	11.64%

Aggressive financing policy – we use short term debt for financing. We need to be prepared for the risk of changing credit policy.

Conservative policy – we use long term debt for financing

b) 13% * LTD + 10% * CA

	VP	HP
EBIT	30	30
Interest	4+10.4 = 14.4	16+2.6=16.6
EBT	15.6	11.4
Tax (40%)	6.24	4.56
EAT (NI)	9.36	6.84
Return on equity	9.36%	6.84%

TASK 3

A/

DSO = 28 days

% * number of days + % * number of days = 40%*10 + 60%*40 = 28

B/

ACT (average calendar term) = 365 days

Avarage daily sales = 912500/365 = 2500

ADS X DSO = receivables = 2500*28 = 70.000 (we need 70000 to finance that amount)

C/

DSO = 40%*10 + 60%*30 = 22

ADS * DSO = receivables = 2500 * 22 = 55000 (we are realizing 50 000)

TASK 4 we calculate alternative cost

If the price is 1000 and you get 1% discount your actual price will be 990 – true price. If you do not pay within 15 days but later it will cost you 10 zł more cuz you will not get your discount.

1. 1/15, net 20

   CC = 1/100-1 * 365/20-15 = 73,7%

   If you don’t pay after 15 days using discount on average the cost of using that money will be 73,7% - perspective of the client

   From the perspective of the company is too high (it should be little bit more of cost of debt, and a little bit so the customer could take an investment because we want to encourage him to pay faster – it should be around 20%)

2. 2/10, net 60

   CC = 2/100-2*365/60-15 = 15%