Finance Assignment

Assignment 1 (Word document)
1. Demonstrate and explain how the cash conversion cycle (CCC) is valuable to the
CFO in managing the firm’s working capital.
Cash Conversion Cycle (CCC) is a metric that depicts how a company converts its
investments in inventory and other resources into cash flows from the available sales. CCC tends
to measure how long a dollar can be utilized in the process of production and sales to come up
with the final product in the long run. In this case, the inventory takes into account the period
necessary for the company to sell its inventory, the time taken for receivable collection and the
amount of time spent in payment of the bills (Attari & Raza,2012). In this case, CCC is one of
the quantitative metrics that managers incorporate to evaluate the efficient of a company
operations and management.
Cash conversion cycle (CCC) is a useful instrument in the management of Working capital in a
business organization.
CCC= Days of inventory outstanding (DIO) + Days sales outstanding (DSO) –
Days payables outstanding (DPO)
The tool is useful in the analysis of Account receivable, inventory and account
receivables in a certain period marked in days. For instance Chief Financial Officer can make a
comparative between the cash conversion cycle in their company and that of the competitors to
determine the financial health of the business. Thus, the company’s management can use the
metric to measure if the working capital for the company’s management may be deteriorating or
improving. Also, the analysis of the market conversion between the company and that of its
competitors is important as it offers a chance for the company to gauge if the CC is normal in
relation to the standards of the industry (Attari & Raza, 2012). In particular, CCC is important
since it assists business enterprises to know how much their cash is tied up before being collected
from clients. Thus, it is easier for the operations department of the company to foster operation
efficiency in the company through the management of its resources.
Assignment 2
HOT AIR Company of Atlanta sells fans and heaters to retail outlets throughout the Southeast.
Joe Smith, the president of the company, is thinking about changing the firm’s credit policy to
attract customers away from competitors. The present policy calls for a 1/10, net 30 cash
discount. The new policy would call for a 3/10, net 50 cash discount. Currently, 30 percent of
Hot Air customers are taking the discount, and it is anticipated that this number would go up to
50 percent with the new discount policy. It is further anticipated that annual sales would increase
from a level of $400,000 to $600,000 as a result of the change in the cash discount policy.
The increased sales would also affect the inventory level. The average inventory carried by Hot
Air is based on a determination of an EOQ. Assume sales of fans and heaters increase from
15,000 to 22,500 units. The ordering cost for each order is $200 and the carrying cost per unit is
$1.50 (these values will not change with the discount). The average inventory is based on
EOQ/2. Each unit in inventory has an average cost of $12.
Cost of goods sold is equal to 65 percent of net sales; general and administrative expenses are 15
percent of net sales, and interest payments of 14 percent will only be necessary for the increase
in the accounts receivable and inventory balances. Taxes will be 40 percent of before-tax
income.
a. Compute the accounts receivable balance before and after the change in the cash
discount policy. Use the net sales (total sales minus cash discounts) to determine
the average daily sales.
Account Received =Average Collection period *Average Daily Sales
The Average Collection Period =
Thus before the change of policy, the average collection period is determined as:
=10*40/100= 4days
30*60/100=18 days
Thus the total number of days remain= 4+18=22 days
The average daily sales in the long run remains= (Credit sales –Discount)/360
=Average Daily Credit sales = ((400000*30%)-(400000*30%*0.01))/360
=The Average Daily sales =$330
Thus, the average daily credit sales is $330
Next, substituting the value of the Average sales in Account receivables,
Account Receivables =10 days *$330 per Day
=$3300
There are 70% of sales that is not availing cash discount. Since the average collection period is
30 days,
Average Credit sales =Credit sales /360
=$400000*0.07)/360=777.777=$778
The Account receivables become: 30 days *$778
=$778*30 days=$23340
In this case, the total value of account receivables before the change in policy is:
=$3300+$23340
Thus, the total amount of Account receivables before the change in policy becomes= $26 640
Computing for After Cash Discount Policy:50% sales Availing Cash Disount
The Average collection period for the sales becomes =10 days
The Average Daily sales =Credit sales After Change of Policy/360
= (($600,000*50%)-($600000*50%*3%))/360
= 808.33=$808
The Value of Average Credit sales remains $808
Substituting in Account receivables
=Account Receivables =10 days *808
=$8080
For 50% Sales and not availing cash discount
The Average Credit sales =Credit sales /360
= (600000*50)/360
=$833
The value of average credit sales for Hot Air Company becomes=$833
Account receivables =50days *$833
= $41,650
The overall account receivable from the Change of Policy becomes: $41650+$8080
=$49,730
The overall receivable value after Policy change is $49,730
b. Determine EOQ before and after the change in the cash discount policy.
Translate this into average inventory (in units and dollars) before and after the
change in the cash discount policy.
The Econcomic Order Quantity (EOQ) before policy change
=EOQ=SQRT (2SO/C)
=S=Unit Consumed in 1 Year=15000 Units
Cost of Ordering,O= $200per Order
Carrying cost,C =1.5/Litre
EOQ=SQRT(2*15000*200)/2
=SQRT(60000000/1.5)=2000
The value of Economic Order Quantity =2000 units
On the other hand, the Average Inventory becomes=2000/2=1000 units
The Average Inventory for 1000 units
=1000*$12
=$12, 000
The Average order of Quantity after the change in Discount Policy:
=EOQ=SQQRT (2*22500*200/1.5)]=2449.49=2450 units
=The Average Inventory becomes =2450/2=1225 units

On the Other hand, the Average inventory becomes=1225*$12
=$14,700
c. Complete the following income statement.

Before Policy Change
After Policy Change
Net sales (Sales – Cash discounts)................

Before =$398,800
After=$591,000
Cost of goods sold........................................
65% of the Net Sales

Before=$259,220
After=$384,150
Gross profit...................................................
Gross Profit =Net Sales-COGS

Before=$139,580
After=$206,850
General and administrative expense.............

15% of the Net sales
=before=$59,820
After=$88,650
Operating profit............................................
Operating Profit=Gross Profits –General Administrative Expenses

Before=$79,760
After=$118,200
Interest on increase in accounts
Receivable and inventory (14%).................
Before= (38640*0.14)=$5,410
After=(64,430*0.14)=$9020
Income before taxes......................................

Operating Profit-Interest Accrued
Before =$74350
After=$109,180
Taxes.............................................................
40% *Income before Taxes

Before =$29,740
After Policy=$43,672
Income after taxes........................................

=Income Before Taxes-Taxes
Before=$44,610
After Policy=$65,508
c. Should the new cash discount policy be utilized? Briefly comment.

The New Cash Discount Policy should be utilized. Before the policy, the accrued income for the
company is $43,672 while after policy the income becomes 65,508.Thus, the policy lead to the
increase in the company’s income.
Assignment 3
1. Complete the analysis and cash forecast in the below "Build a Model” attachment
(click link)
Check Excel Sheet
Assignment 4
complete the model AND explain how it works (click link)
Check Excel sheet
Assignment 5
Choose an industry and a stock within that industry and attempt to compute the return on
equity using the CAPM model
You will need to cite the sources of your risk free rate (Rf), the average return for the
industry (Rm) , and the beta factor you used. (b)
Company: Apple Inc.

Capital Asset Pricing Model allows investors to determine the expected return on the investment
given the investment risk, risk free rate of return, beta and the expected rate of return.
CAPM=Risk free Return+ Systematic Risk Premium
E(ri ) = Rf + βi(E(rm) – Rf)
In this case the required rate of return
Using CAPM, Return on equity= risk free rate + (Market return-Risk free rate)*Beta
Risk free rate for Apple Inc.: 1.43% (5 year rate of maturity)
Market risk premium according to Finbox.com= 4.7%
Beta= 1.29 (Sensitivity for APPL According to Finbox.com
= Return on APPL = 1.43% + 1.29*(4.7%-1.43%) =0.0565
=5.65%
References
Attari, M. A., & Raza, K. (2012). The optimal relationship of cash conversion cycle with firm
size and profitability. International Journal of Academic Research in Business and Social
Sciences, 2(4), 189.
Equity Risk Premium (Operating Country) for Apple Inc.

https://finbox.com/NASDAQGS:AAPL/explorer/country_equity_risk_premium

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Assignment 1 (Word document)

=The Average Inventory becomes =2450/2=1225 units

c. Complete the following income statement.

After Policy Change

Net sales (Sales – Cash discounts)................

Cost of goods sold........................................

65% of the Net Sales

Gross Profit =Net Sales-COGS

General and administrative expense.............

Operating Profit=Gross Profits –General Administrative Expenses

Income before taxes......................................

40% *Income before Taxes

Income after taxes........................................

c. Should the new cash discount policy be utilized? Briefly comment.

Check Excel sheet

Company: Apple Inc.

Market risk premium according to Finbox.com= 4.7%

Beta= 1.29 (Sensitivity for APPL According to Finbox.com

= Return on APPL = 1.43% + 1.29*(4.7%-1.43%) =0.0565

Equity Risk Premium (Operating Country) for Apple Inc.

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