FIN 3150 Financial Management
Spring 2012
Assignment 1
Due: February 6, 2012
1. Attached are financial statements for Boeing and Embraer.
a. Find the operating cycle for each firm for each of the three years, 2009-2010. Determine the cash cycle for each firm for each of the three years. Comment on your findings.
b. Assuming money used to fund net working capital costs each company 5% per year, what is the net cost of working capital for each company in 2010? (Assume that net working capital includes only receivables and inventory, less accounts payable. That is, there is no net cost for cash equivalents, not net gain from short term investments and that companies consider the cost of short term debt and the current portion of long term debt as debt costs rather than including it in the cost of net working capital.
2a. A hedge fund has cash inflows from dividends and interest paid by investments the hedge fund has made. No hedge fund investors are permitted to cash out for the next five years (however they can sell their interests to others if they want to terminate their investment in the hedge fund). The fund expects cash inflows in each of the next five years to average $43,500,000. The hedge fund’s founding documents permit it to reinvest funds received in investments similar to those already held. The fund’s investments have limited liquidity so transaction costs associated with each such reinvestment are $16750. If the fund realizes an average return of 10.5% on its investments, how much cash should it accumulate before reinvesting?
b. A mutual fund has cash inflows from new investment in mutual fund shares. It has cash outflows when investors sell their shares and when management fees are paid to fund advisors. Net daily cash flows are random with a standard deviation (over the last six months) of $12500. If it costs the fund $2250 per transaction to convert cash to or from investments and the fund’s average return on investments is 7.75% per annum, what dollar value of investments should it sell when its cash balance reaches zero (assume the fund maintains no minimum cash balance), how much cash should it accumulate before making additional investments, and how much should it invest when additional investments are purchased?
3. A company’s agreement with a supplier includes terms of payment as follows: 1.75/15 net 60. a.Under what circumstances should the firm take the cash discount by paying early?
b. What is the value to the firm of paying early (taking the cash discount) if the firm’s cost of capital is 10.75% and the amount of the invoice is $180,000?
4a. Air Products and Chemicals, Inc. had average accounts receivable of $2 billion during 2011. If the company’s cost of capital is 16.1%, how much could the company save if it could reduce its average collection period by three days? What other factors should the company consider in connection with any plan to reduce its average collection period?
b. Air Products’ wholesale price for one item in its catalog is $50 per unit. Variable production costs for that item are $40 per unit. A prospective customer has ordered 1000 units and has requested six months credit. If there is a 20% chance that the customer will go bankrupt and make no payment, should the firm accept the order? Explain. (Assume the firm’s discount rate is 12%, if solvent the firm will pay in full at the end of the six months period, there is no chance of additional orders from the customer, and the production costs associated with the order must be incurred immediately.)
c. What probability of a second order from the customer in part b must exist in order for the firm to accept the initial order? (Assume any second order would be made after six months for an additional 1000 units on the same terms and that there is only a 5% chance the returning customer will fail to payment for the second order.)
The Boeing Company thousands
Income Statement
Period Ending 31-Dec-10 31-Dec-09 31-Dec-08
Total Revenue 64306000 68281000 60909000
Cost of Revenue 51843000 56540000 50352000
Gross Profit 12463000 11741000 10557000
Operating Expenses
Research Development 4121000 6506000 3768000
Selling General and Administrative 3644000 3364000 3084000
Non Recurring 0 0 4000
Others 0 0 241000
Total Operating Expenses 0 0 6607000
Operating Income or Loss 4971000 2096000 3950000
Income from Continuing Operations
Total Other Income/Expenses Net 58000 50000 247000
Earnings Before Interest And Taxes 4667000 1906000 4197000
Interest Expense 160000 175000 202000
Income Before Tax 4507000 1731000 3995000
Income Tax Expense 1196000 396000 1341000
Net Income From Continuing Ops 3311000 1335000 2654000
Discontinued Operations 4000 23000 18000
Net Income 3307000 1312000 2672000
Preferred Stock And Other Adjustments 0 0 0
Net Income Applicable To Common Shares 3307000 1312000 2672000
The Boeing Company
Balance Sheet thousands
Period Ending 31-Dec-10 31-Dec-09 31-Dec-08
Assets
Current Assets
Cash And Cash Equivalents 5359000 9215000 3268000
Short Term Investments 5158000 2008000 436000
Net Receivables 5738000 7119000 6648000
Inventory 24317000 16933000 15612000
Total Current Assets 40572000 35275000 25964000
Long Term Investments 5506000 6496000 7185000
Property Plant and Equipment 8931000 8784000 8762000
Goodwill 4937000 4319000 3647000
Intangible Assets 2979000 2877000 2685000
Other Assets 1609000 1240000 1422000
Deferred Long Term Asset Charges 4031000 3062000 4114000
Total Assets 68565000 62053000 53779000
Liabilities
Current Liabilities
Accounts Payable 34447000 32176000 23128000
Short/Current Long Term Debt 948000 707000 560000
Other Current Liabilities - - 7237000
Total Current Liabilities 35395000 32883000 30925000
Long Term Debt 11473000 12217000 6952000
Other Liabilities 18835000 14728000 17196000
Minority Interest 96000 97000 -
Total Liabilities 65799000 59925000 55073000
Stockholders' Equity
Common Stock 5061000 5061000 5061000
Retained Earnings 24784000 22746000 22675000
Treasury Stock -17187000 -15911000 -17758000
Capital Surplus 3866000 3724000 3456000
Other Stockholder Equity -13758000 -13492000 -14728000
Total Stockholder Equity 2766000 2128000 -1294000
Net Tangible Assets -5150000 -5068000 -7626000
Embraer S.A. Thousands
Income Statement
Period Ending 31-Dec-10 31-Dec-09 31-Dec-08
Total Revenue 1406700 1617800 1880500
Cost of Revenue 4338100 4428400 4991700
Gross Profit 1026000 1069400 1343500
Operating Expenses
Research Development 72100 55600 197000
Selling General and Administrative 562200 634400 609500
Non Recurring 0 0 16000
Operating Income or Loss 391700 379400 537000
Income from Continuing Operations
Total Other Income/Expenses Net 1100 68800 71700
Earnings Before Interest And Taxes 408100 320800 437300
Interest Expense 0 0 125000
Income Before Tax 408100 320800 437300
Income Tax Expense 62700 158100 41100
Minority Interest` 0 0 7500
Net Income From Continuing Ops 345400 478900 388700
Net Income 345400 478900 388700
Net Income Applicable To Common Shares 345400 478900 388700
Embraer S.A.
Balance Sheet Thousands
Period Ending 31-Dec-10 31-Dec-09 31-Dec-08
Assets
Current Assets
Cash And Cash Equivalents 1406700 1617800 1880500
Short Term Investments - - 8600
Net Receivables 380600 430100 468900
Inventory 2193400 2438500 2930100
Other Current Assets 1008900 1169000 620900
Total Current Assets 4982800 5642700 5870500
Long Term Investments 592900 527900 586200
Property Plant and Equipment 1205900 1107800 1067600
Goodwill - - 14500
Intangible Assets 716300 725500 689900
Other Assets 754000 713900 726100
Deferred Long Term Asset Charges 139100 171700 10900
Total Assets 8391000 8889500 8951200
Liabilities
Current Liabilities
Accounts Payable 973500 902500 1206600
Short/Current Long Term Debt 185200 728800 843200
Other Current Liabilities 1230000 1119300 1476100
Total Current Liabilities 2388700 2750600 3525900
Long Term Debt 1749700 1866600 1689800
Other Liabilities 1020800 1282800 1123600
Deferred Long Term Liability Charges 100300 106500 86300
Minority Interest 103100 90300 70000
Total Liabilities 5362600 6096800 6495600
Stockholders' Equity
Common Stock 1438000 1438000 1438000
Retained Earnings - -86100 -100200
Treasury Stock -183700 -183700 -183700
Capital Surplus - - -
Other Stockholder Equity 1774100 1624500 1301500
Total Stockholder Equity 3028400 2792700 2455600
Net Tangible Assets 2312100 2067200 1765700
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