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Unformatted text preview: E NTREPRENEURIAL F INANCE : Strategy Valuation and Deal Structure Chapter 7. Methods of Financial Forecasting: Integrated Financial Modeling Questions and Problems 1. The cash cycle is the time between when a company pays for inventory and when it receives the cash from its customers. It is defined as the number of days the company has its cash tied up in Accounts Receivable and Inventory, minus the days in Accounts Payable. Using the summary data presented below, calculate Dell Inc.s cash cycle. Summary Financial Data (millions) Fiscal Year 2006 Revenue $55,908 Cost of Good Sold $45,620 Accounts Receivable $5,452 Inventory $576 Accounts Payable $9,840 Dell Incorporated Now use the data from Section 7.3 in the chapter to calculate the cash cycle for Amazon.com in 2009. Compare these results to your Dell calculations. What do you think is behind the differences in the two companys cash cycles? 2. You are developing a business plan for a new wholesale specialty goods retailer. You collect data on typical industry working capital terms. Industry credit terms to customer are 20 days and average inventory days on hand is 30. Suppliers grant wholesalers credit for an average of 15 days. You estimate that adopting the industry terms would produce $3 million of annual revenue. Cost of goods sold will be 70% of revenue. You are considering alternative terms, including offering new customers 45 days to pay, which will increase revenue by 20% to $3.6 million. A new just-in-time inventory system which includes shipments directly from manufacturers to retailers will reduce inventory days on hand to 25. Finally, to establish strong ties with your suppliers, you will keep accounts payable at 10 days. a. Using the industry data, compute the cash cycle and estimate the investment in working capital the business would require. b. Using the alternative terms, compute the cash cycle and estimate the investment in working capital the business would require. What are the pros and cons of the alternative terms? 3. Download the Working Capital Policy Template (Figure 7.2) and use it to contrast the effects of the following policies on net working capital (use the assumptions reflected in Figure 7.2 as a starting point). Although you cannot assess total profitability, evaluate the impact of each of these changes on profit per day (i.e., determine how much daily profit would increase or decrease). a. Product demand is inelastic, so that a $1 price increase is expected to reduce quantity per day to 95 units. Product demand is elastic, so that a $1 price increase is expected to reduce quantity per day to 80 units. b. The company sells only for cash so that quantity per day is expected to decline to 90 units....
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