AK/ADMS 4541 Advanced Corporate Finance

Winter 2013

Mid-Term Exam Answer Key

Question 1 (35 marks)

a.)

b.)

(8 marks)

(4 marks)

Calculating the EOQ.

EOQ =

SQRT(2 * F * T / H) = (2 * 80 * 200,000 / 1.00)0.5

EOQ =

5,656.85 kg

(4 marks)

Calculating the EOQ savings.

Total cost = (F * T/Q) + (H * Q / 2) = (80 * 200,000 / 10,000) + (1.00 * 10,000/2)

Total Cost @10,000 kg =

$6,600

Total Cost EOQ = (F * T / Q) + (H * Q / 2) where Q = 5,656.85 kg

= (80 * 200,000 / 5,656.85) + (1.00 * 5,656.85 / 2) = $5,656.85

Savings with EOQ = $943.15

= $6,600 - $5,656.85 per planning period

(10 marks) Try Q (actually, EOQ) = 5,656.85 kg.

Then total cost = order costs + holding costs + purchase costs

= (80)(200,000) / 5,656.85 + (1.00)(5,656.85) / 2 +
*…show more content…*

Note: Using compound interest here is acceptable:

PVDC = -96,470.09

PVDisney = -97,298.19

Question 3 (35 marks)

a.)

Proposed

Terms (E)

$2,750,000

$7,534.25

Sales per 365-day year

Sales per day, S

Sales growth rate, g

-7.27%

Up-front Variable Cost Ratio (VCR)

70.00%

Collection expenses (EXP) at DSO

1.45%

Bad debt expense ratio, b , at DSO

7.00%

Discount percent, d

0

Discount period, days

0

Proportion taking discount, p

0

Non-discount period, days

56

k = company 's annual nominal cost of capital

15%

i = daily cost of capital

15% / 365 =

Current

Terms (N)

$2,550,000

$6,986.30

70.00%

1.25%

7.00%

0

0

0

56

4.1096%

Note: an annual nominal cost of 15% compounded daily implies an annual effective cost of { [ (1 + .15/365)^365 ] - 1 } * 100 = 16.18% per year.

Cashflow timeline under proposed terms (11 marks)

Proposed Terms

In terms of the Zn formula

1st term

PV from discount period

$0.00

no discount period

2nd term

PV from credit period $6,849.22 = 7,534.25*(1-0.07)/(1+ i*56)

3rd term

4th term

PV variable costs

PV credit expenses

($5,273.97) = 70%*$7534.25

($106.79) = 1.45% *7534.25/(1+ i*56)

Zn

=$1,468.46 = NPV per day of proposed terms

Cashflow timeline under current terms

(11 marks)

In terms of the Ze formula

Current Terms

1st term

PV from discount period

$0.00

no discount period

2nd term

PV from credit

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