Category Archives: FIN 486 (NEW)

FIN 486 Week 5 Team Assignment Case Study Casa de Diseno NEW

FIN 486 Week 5 Team Assignment Case Study Casa de Diseno NEW

 

Chapter 16
Case Study: Casa de Diseno

In January 2012, Teresa Leal was named treasurer of Casa de Diseno. She decided that she could best orient herself by systematically examining each area of the company’s financial operations. She began by studying the firm’s short-term financial activities.Casa de Diseno is located in Southern California and specializes in a furniture line called “Ligne Moderna.” Of high quality and contemporary design, the furniture appeals to the customer who wants something unique for his or her home or apartment. Most Ligne Miderna furniture is built by special order because a wide variety of upholstery, accent trimming, and colors is available. The product line is distributed through exclusive dealership arrangements with well-established retail stores. Casa de Diseno’s manufacturing process virtually eliminates the use of wood. Plastic and metal provide the basic framework, and wood is used only for decorative purposes.

Casa de Diseno entered the plastic-furniture market in late 2004. The company markets its plastic-furniture products as indoor-outdoor items under the brand name “Futuro.” Futuro plastic furniture emphasizes comfort, durability, and practicality and is distributed through wholesalers. The Futuro line has been very successful, accounting for nearly 40 percent of the firm’s sales and profits in 2011. Casa de Diseno anticipates some additions to the Futuro line and also some limited change of direction in its promotion in an effort to expand the applications of the plastic furniture.
Leal has decided to study the firm’s cash management practices. To determine the effects of these practices, she must first determine the current operating and cash conversion cycles. In her investigations, she found that Casa de Diseno purchases all of its raw materials and production supplies on open account. The company is operating at production levels that preclude volume discounts. Most suppliers do not offer cash discounts, and Casa de Diseno usually receives credit terms of net 30. An analysis of Casa de Diseno’s accounts payable showed that its average payment period is 30 days. Leal consulted industry data and found that the industry average payment period was 39 days. Investigation of six California furniture manufacturers revealed that their average payment period was also 39- days.
Next, Leal studied the production cycle and inventory policies. Casa de Diseno tries not to hold any more inventory than necessary in either raw materials or finished goods. The average inventory age was 110 days. Leal determined that the industry standard, as reported in a survey done by Furniture Age, the trade association journal, was 83 days.
Casa de Diseno sells to all of its customers on a net-60 basis, in line with the industry trend to grant such credit terms on specialty furniture. Leal discovered, by aging the accounts receivable, that the average collection period for the firm was 75 days. Investigation of the trade association’s and California manufacturers’ averages showed that the same collection period existed where net-60 credit terms were given. Where cash discounts were offered, the collection period was significantly shortened. Leal believed that if Casa de Diseno were to offer credit terms of 3/10 net 60, the average collection period could be reduced by 40 percent.
Casa de Diseno was spending an estimated $26,500,000 per year on operating-cycle investments. Leal considered this expenditure level to be the minimum she could expect the firm to disburse during 2012. Her concern was whether the firm’s cash management was as efficient as it could be. She knew that the company paid 15 percent annual interest for its resource investment. For this reason, she was concerned about the financing cost resulting from any inefficiencies in the management of Casa de Diseno’s cash conversion cycle. (Note: Assume a 365-day year and that the operating –cycle investment per dollar of payables, inventory, and receivables is the same.)

To Do

A. Assuming a constant rate for purchases, production, and sale throughout the year, what are Casa de Diseno’s existing operating cycle (OC), cash conversion cycle(CCC), and resource investment need?
B. If Leal can optimize Casa de Diseno’s operating cycle (OC), cash conversion cycle (CCC), and resource investment need to be under these more efficient condition?
C. In terms of resource investment requirements, what is the cost of Casa de Diseno’s Operational inefficiency?
D. (1) If in addition to achieving industry standards for payables and inventory, the firm can reduce the average collection period by offering credit terms of 3/10 net 60, what additional savings in resource investment costs will result from the shortened cash conversion cycle, assuming that the level of sales remains constant?
(2) If the firm’s sales (all on credit) are $40,000,000 and 45% of the customers are expected to take the cash discount, by how much will the firm’s annual revenues be reduced as a result of the discount?
(3) If the firm’s variables cost of the $40,000,000 in sales is 80%, determine the reduction in the average investment in accounts receivable and the annual savings that will result from this reduced investment, assuming that sales remain constant.
(4) If the firm’s bad-debts expenses decline from 2% to 1.5% of sales, what annual savings will result, assuming that sales remain constant?
(5) Use your findings in parts (2) through (4) to assess whether offering the cash discount can be justified financially. Explain why or why not.
E. On the basis of your analysis in parts a through d, what recommendations would you offer Teresa Leal?
F. Review for Teresa Leal the key sources of short-term financing, an account payable, that she may consider for financing Casa de Diseno’s resource investment need calculated in part b. Be sure to mention both unsecured and secured sources. 

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FIN 486 Week 5 Team Assignment Asor Products, Inc NEW

FIN 486 Week 5 Team Assignment Asor Products, Inc NEW

evaluation of a proposed capital expenditure for equipment that would expand the firm’s manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because NPV traditional = -$1,700 < $0 Before recommending rejection of the proposed project, she has decided to assess whether there might be real options embedded in the firm’s cash flows. Her evaluation uncovered three options:
Option 1; Abandonment; The project could be abandoned at the end of 3 years, resulting in an addition to NPV of $1,200.
Option 2; Expansion; If the project outcomes occurred, an opportunity to expand the firm’s product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $ 3,000 to the projects NPV.
Option 3: Delay; Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm’s forecast revenues to develop more slowly than planned. Such a delay in implementation at that point has a NPV of $10,000.
Jenny estimated that there was a 25% chance that the abandonment option would need to be exercised, a 30% chance that the expansion option would be exercises, and only a 10% chance that the implementation of certain phases of the project would have to be delayed.
a) use the information provided to calculate the strategic NPV, NPV strategic , for Asor Products’ proposed equipment expenditure.
b) judging on the basis of the findings in part a, what action should jenny recommend to management with regard to the proposed equipment expenditure?
c) In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions?

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FIN 486 Week 5 Learning Team Assignment Strategic Financial Plan (2 Papers) NEW

FIN 486 Week 5 Learning Team Assignment Strategic Financial Plan (2 Papers) NEW

This Tutorial contains 2 Different Papers
Resource: The previously completed budgeting spreadsheets
Create the financial portion of the strategic plan. The plan must include 3 years of income statements, balance sheets, and cash flow statements.
Write a 700- to 1,050-word memo that explains the plan’s major assumptions and identifies areas of risk. The memo must include the following:
· A review of cash flow statements and a recommendation of implementing new short-term working capital strategies on long-term cash flow
· An explanation of corporate risk mitigation techniques used in capital budgeting
· An analysis of the effect of a company’s capital structure on strategic financial planning and how it affects risk
Refer to the Mergent Online database available in the University Library for financial plan examples.
Format your memo consistent with APA guidelines.
Click the Assignment Files tab to submit your assignment.

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FIN 486 Week 5 Individual Assignment Eboy Corporation NEW

FIN 486 Week 5 Individual Assignment Eboy Corporation NEW

The current balance in accounts receivable for Eboy Corporation is $443,000. This level was achieved with annual (365 days) credit sales of $3,544,000. The firm offers its customers credit terms of net 30. However, in an effort to help its cash flow position and to follow the actions of its rivals, the firm is considering changing its credit terms from net 30 to 2/10 net 30. The objective is to speed up the receivable collections and thereby improve the firm’s cash flows. Eboy would like to increase its accounts receivable turnover to 12.0.
The firm works with a raw material whose current annual usage is 1,450 units. Each finished product requires one unit of this raw material at a variable cost of $2,600 per unit and sells for $4,200 on terms of net 30. It is estimated that 70% of the firm’s customers will take the 2% cash discount and that, with the discount, sales of the finished product will increase by 50 units per year. The firm’s opportunity cost of funds invested in accounts receivable is 12.5%.
In analyzing the investment in accounts receivable, use the variable cost of the product sold instead of the sale price because the variable cost is a better indicator of the firm’s investment.
TO DO
Create a spreadsheet similar to Table 15.3 to analyze whether the firm should initiate the proposed cash discount. What is your advice? Make sure that you calculate the following:
·         a. Additional profit contribution from sales.
·         b. Average investment in accounts receivable at present (without cash discount).
·         c. Average investment in accounts receivable with the proposed cash discount.
·         d. Reduction in investment in accounts receivable.
·         e. Cost savings from reduced investment in accounts receivable.
·         f. Cost of the cash discount.
·         g. Net profit (loss) from initiation of proposed cash discount.

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FIN 486 Week 4 Team Assignment Case Study O’Grady Apparel Company NEW

FIN 486 Week 4 Team Assignment Case Study O’Grady Apparel Company NEW

O’Grady Apparel Company was founded nearly 160 years ago when an Irish merchant named Garrett O’Grady landed in Los Angeles with an inventory of heavy canvas, which he hoped to sell for tents and wagon covers to miners headed for the California goldfields. Instead, he turned to the sale of harder-wearing clothing.

Today, O’Grady Apparel Company is a small manufacturer of fabrics and clothing whose stock is traded in the OTC market. In 2015, the Los Angeles–based company experienced sharp increases in both domestic and European markets resulting in record earnings. Sales rose from $15.9 million in 2014 to $18.3 million in 2015 with earnings per share of $3.28 and $3.84, respectively.

European sales represented 29% of total sales in 2015, up from 24% the year before and only 3% in 2010, 1 year after foreign operations were launched. Although foreign sales represent nearly one-third of total sales, the growth in the domestic market is expected to affect the company most markedly. Management expects sales to surpass $21 million in 2016, and earnings per share are expected to rise to $4.40. (Selected income statement items are presented in Table 1.)

Because of the recent growth, Margaret Jennings, the corporate treasurer, is concerned that available funds are not being used to their fullest potential. The projected $1,300,000 of internally generated 2016 funds is expected to be insufficient to meet the company’s expansion needs. Management has set a policy of maintaining the current capital structure proportions of 25% long-term debt, 10% preferred stock, and 65% common stock equity for at least the next 3 years. In addition, it plans to continue paying out 40% of its earnings as dividends. Total capital expenditures are yet to be determined.

Jennings has been presented with several competing investment opportunities by division and product managers. However, because funds are limited, choices of which projects to accept must be made. A list of investment opportunities is shown in Table 2. To analyze the effect of the increased financing requirements on the weighted average cost of capital (WACC), Jennings contacted a leading investment banking firm that provided the financing cost data given in Table 3. O’Grady is in the 40% tax bracket.

TABLE 1
Selected Income Statement Items

TABLE 2

TABLE 3                                Financing Cost Data

Long-term debt: The firm can raise $700,000 of additional debt by selling 10-year, $1,000, 12% annual interest rate bonds to net $970 after flotation costs. Any debt in excess of $700,000 will have a before-tax cost, rd, of 18%.

Preferred stock: Preferred stock, regardless of the amount sold, can be issued with a $60 par value and a 17% annual dividend rate. It will net $57 per share after flotation costs.

Common stock equity: The firm expects its dividends and earnings to continue to grow at a constant rate of 15% per year. The firm’s stock is currently selling for $20 per share. The firm expects to have $1,300,000 of available retained earnings. Once the retained earnings have been exhausted, the firm can raise additional funds by selling new common stock, netting $16 per share after underpricing and flotation costs.

TO DO:
a.      Over the relevant ranges noted in the following table, calculate the after-tax cost of each source of financing needed to complete the table.

Source of capital              Range of new financing        After-tax cost (%)
Long-term debt                 $0–$700,000                           _________
$700,000 and above                _________
Preferred stock                   $0 and above                           _________
Common stock equity         $0–$1,300,000                        _________
$1,300,000 and above             _________

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FIN 486 Week 4 Individual Assignment Capital Budgeting Scenarios NEW

FIN 486 Week 4 Individual Assignment Capital Budgeting Scenarios NEW

Choose a scenario from the Capital Budgeting Worksheet to review and analyze. Using net present value, determine the proposal’s appropriateness and economic viability.
Prepare a 500-word report explaining your calculations and conclusions. Answer the following in your report:
Explain the effect of a higher or lower cost of capital on a firm’s long-term financial decisions.
Analyze the use of capital budgeting techniques in strategic financial management.
Format your report consistent with APA guidelines.

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FIN 486 Week 4 Individual Assignment (P12-1, P12-3, P12-6, P12-17, P12-19) NEW

FIN 486 Week 4 Individual Assignment (P12-1, P12-3, P12-6, P12-17, P12-19) NEW

P12–1
Recognizing risk Caradine Corp., a media services firm with net earnings of $3,200,000 in the last year, is considering the following projects.
LG 1
The media services business is cyclical and highly competitive. The board of directors has asked you, as chief financial officer, to do the following:
a.Evaluate the risk of each proposed project and rank it “low,” “medium,” or “high.”
b.Comment on why you chose each ranking.

P12–3
Breakeven cash inflows and risk Blair Gasses and Chemicals is a supplier of highly purified gases to semiconductor manufacturers. A large chip producer has asked Blair to build a new gas production facility close to an existing semiconductor plant. Once the new gas plant is in place, Blair will be the exclusive supplier for that semiconductor fabrication plant for the subsequent 5 years. Blair is considering one of two plant designs. The first is Blair’s “standard” plant, which will cost $30 million to build. The second is for a “custom” plant, which will cost $40 million to build. The custom plant will allow Blair to produce the highly specialized gases that are required for an emerging semiconductor manufacturing process. Blair estimates that its client will order $10 million of product per year if the traditional plant is constructed, but if the customized design is put in place, Blair expects to sell $15 million worth of product annually to its client. Blair has enough money to build either type of plant, and, in the absence of risk differences, accepts the project with the highest NPV. The cost of capital is 12%.
LG 2
a.Find the NPV for each project. Are the projects acceptable?
b.Find the breakeven cash inflow for each project.
c.The firm has estimated the probabilities of achieving various ranges of cash inflows for the two projects as shown in the following table. What is the probability that each project will achieve at least the breakeven cash inflow found in part b?
d.Which project is more risky? Which project has the potentially higher NPV? Discuss the risk–return trade-offs of the two projects.
e.If the firm wished to minimize losses (that is, NPV < $0), which project would you recommend? Which would you recommend if the goal were to achieve a higher NPV?

P12–6
Impact of inflation on investments You are interested in an investment project that costs $40,000 initially. The investment has a 5-year horizon and promises future end-of-year cash inflows of $12,000, $12,500, $11,500, $9,000, and $8,500, respectively. Your current opportunity cost is 6.5% per year. However, the Fed has stated that inflation may rise by 1.5% or may fall by the same amount over the next 5 years.
LG 2
Assume a direct positive impact of inflation on the prevailing rates (Fisher effect) and answer the following questions. (Assume that inflation has an impact on the opportunity cost, but that the cash flows are contractually fixed and are not affected by inflation).
a.What is the net present value (NPV) of the investment under the current required rate of return?
b.What is the net present value (NPV) of the investment under a period of rising inflation?
c.What is the net present value (NPV) of the investment under a period of falling inflation?
d.From your answers in a, b, and c, what relationship do you see emerge between changes in inflation and asset valuation?

P12–17
Real options and the strategic NPV Jenny Rene, the CFO of Asor Products, Inc., has just completed an evaluation of a proposed capital expenditure for equipment that would expand the firm’s manufacturing capacity. Using the traditional NPV methodology, she found the project unacceptable because
LG 6
NPVtraditional = −$1,700 < $0
Before recommending rejection of the proposed project, she has decided to assess whether there might be real options embedded in the firm’s cash flows. Her evaluation uncovered three options:
Option 1: Abandonment. The project could be abandoned at the end of 3 years, resulting in an addition to NPV of $1,200.
Option 2: Growth. If the projected outcomes occurred, an opportunity to expand the firm’s product offerings further would become available at the end of 4 years. Exercise of this option is estimated to add $3,000 to the project’s NPV.
Option 3: Timing. Certain phases of the proposed project could be delayed if market and competitive conditions caused the firm’s forecast revenues to develop more slowly than planned. Such a delay in implementation at that point has an NPV of $10,000.
Jenny estimated that there was a 25% chance that the abandonment option would need to be exercised, a 30% chance that the growth option would be exercised, and only a 10% chance that the implementation of certain phases of the project would affect timing.

a.Use the information provided to calculate the strategic NPV, NPVstrategic, for Asor Products’ proposed equipment expenditure.
b.Judging on the basis of your findings in part a, what action should Jenny recommend to management with regard to the proposed equipment expenditure?
c.In general, how does this problem demonstrate the importance of considering real options when making capital budgeting decisions?

P12–19
Capital rationing: NPV approach A firm with a 13% cost of capital must select the optimal group of projects from those shown in the following table, given its capital budget of $1 million.
LG 6
a.Calculate the present value of cash inflows associated with each project.
b.Select the optimal group of projects, keeping in mind that unused funds are costly.

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