FIN4320_Lecture_3_Financial_Concepts(31p)

# FIN4320_Lecture_3_Financial_Concepts(31p) - Financial...

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1 Financial Concepts

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2 Financial Dilemma A company is considering offering 30-day credit terms to customers. The company believes this action would stimulate sales. How do you evaluate the financial impact of this alternative?
3 Objective Maximize shareholder wealth subject to certain constraints.

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4 Two Approaches to Financial Decision-Making Examine Change in Profit Examine Change in Cash Flows (NPV) Changes in relevant cash flows Timing of those cash flows Appropriate discount rate
5 Time Value of Money Financial Statement Approach Valuation Approach Compound Interest PV = Present Value FV = Future Value i = Annual Interest Rate n = Number of Days

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6 Compound Interest Periodic Compounding PV=FV/(1+i) n/365 PV of \$1,000 payment 30 days from now at 8% \$1,000/(1.08 30/365 ) = \$993.69 Daily Compounding PV = FV/(1+ i/365) n PV of \$1,000 payment 30 days from now at 8% \$1,000/(1 + .08/365) 30 = \$993.45
7 Financial Dilemma Solution The cost of changing the credit terms is (\$6.55) per \$1,000 in sales, or approximately (\$65,500) for \$10 million in sales

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Extended Analysis Assume sales will increase by 5% by changing the credit terms. Also assume that the COGS is 50% of the selling price and the company pays its suppliers on net 10 terms. In addition, it takes the company 25 days to
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## This note was uploaded on 04/02/2009 for the course DEPARTMENT FIN 4320 taught by Professor Sherwoodbishop during the Spring '08 term at Southwestern.

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FIN4320_Lecture_3_Financial_Concepts(31p) - Financial...

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