Exercise: /Cash conversion cycle, debt and firm value

EXERCISES

1) Suppose the following accounts' balances for M&T Production Inc.:

Accounts Periods
X1 X2
Cash $50 $62
Inventory $25 $20
Account Receivable $20 $16
Supply $6 $12
Account Payable $10 $15
Notes Payables $30 $28
Sales $150
Cost of Goods Sold $70
Order Cost $50
Carrying Cost $20

A) Calculate the Cash Conversion Cycle.
B) Calculate the Economic Order Quantity (EOQ).

2) The capital structure of MPA Consulting Inc. is distributed as follow (in millions): $835 to equity and 35% (total value) to debt. If the rate of return of capital required is 11.5% and rate of return of debt is 6.25%. Calculate the debt, the firm's value and the expected rate of return on a portfolio of all the firm's securities if the firm faces a 33% corporate income tax rate.

3) Two mutually exclusive projects with 10% of opportunity cost of capital, have projected cash flows (CF) as follows:
Projects X0 X1 X2 X3
A ($30,000) $18,000 $15,000 ($2,500) $12,000
B ($50,000) $25,000 $15,000 $20,000 ($4,000)

A) Calculate NPV, IRR, PI and PP for both projects.
B) Which project would you select?. Explain.

4) The A&M Consulting Inc. has the following accounts balance for 2006 (in $ thousands):
Accounts 2006 Percent 2007
Cash 45
Account Receivable 25
Inventory 80
Supply 20
Marketable Security 70
Fixed Assets 180
Account Payable 20
Notes Payable 35
Long-Term Debt 25
Common Stock 100
Net Income 10
Dividend 3
Retained Earnings 7
Sales 380
Cost of Goods Sold 110

A) Fill the percent column and forecast 2007. Write N/A for those accounts that not are related with sales (if apply).
B) Calculate the AFN for 2007 and explain its results considering the following:
a. For 2007, the expected growth of sale is 20%.
b. The assets related with sales are Cash, Account Receivable, Inventory and Fixed Assets.
c. Account Payable is the only liability account related with sales.

5) The Wine Industry Inc, has the following relationships between average wine sales per year (units in thousands) and the average price ($) per unit per year.

Year Sales Price Year Sales Price
1994 25 1.55 2003 50 1.25
1995 30 1.40 2004 60 1.20
1996 40 1.35 2005 37 1.35
1997 38 1.35 2006 28 1.60
1998 52 1.30 2007 39 1.32
1999 47 1.35 2008 47 1.40
2000 35 1.45
2001 43 1.30
2002 45 1.38

A) Realize the simple regression with excel program, write the estimate model and forecast the units wine's sales if the price would be $1.75.
B) Write a paragraph according with findings about R-Square; F test; t test; and the coefficients. (According with discussion in class).