Chapter 5 - Page 98

1.

Associated Wet Goods - Consumer credit scoring model.

Y = (a x EMPLOYMENT) + (b x HOMEOWNER) + (c x CARDS)
where:
a = parameter for EMPLOYMENT =
b = parameter for HOMEOWNER =
c = parameter for CARDS =
EMPLOYMENT = 1 if full-time, 0.5 part-time, 0 if unemployed
HOMEOWNER = 1 if homeowner, 0 otherwise
CARDS = 1 if presently have 1-5 credit cards, 0 otherwise
Minimum score =
a.) Consumer credit scoring model.
Value of Janice's variables:
EMPLOYMENT=
HOMEOWNER =
CARDS =
Y=
b.) Consumer credit scoring model.
Value of Janice's variables
EMPLOYMENT=
HOMEOWNER =
CARDS =
Y=
c.) Adding a new variable to a consumer credit scoring model.

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d.) Suggesting other variables for a consumer credit scoring model.

2.

Illustration of a business credit scoring model.

Variable
Applicant Standing
Credit History
Unused Credit
Credit History of Bus.
Industry Type
Avail. Liq. Assets-Bus.
Net Worth-Principal

3.

Applicant Score

Certainty NPV and Uncertainty NPV for Credit Decision.

(The solution assumes that all collection costs are incurred at the time of the credit
sale collection.
a.) The certainty case.
ASSUMPTIONS:
Credit terms, CP
days
i per day =
Opportunity cost of funds, k
APR
Dollar amount of invoice, S
Variable costs, VCR
of sales
Credit administration and collection
of sales
costs, EXP

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ILLUSTRATION OF CASHFLOW TIMELINE

Day 0
Day 45
---|---------------------------------------------------|------------------------------->
|
invoice
EXP
PV of variable costs
|
|
|
|
PV of collections
<---------------------------------------|

b.) The uncertainty case.

Payment Timing
< 45 days
45-60 days
60-90 days
> 90 days

Probability

The impact here is that the firm will spend the variable costs associated with the sale
upfront, but will only receive the expected value of the invoice over time. So we need
to find the expected present value of the invoice.

Payment
Date
(1)
--< 45

Expected
Collection
Period
(2)
------

Payment
Probability
(3)
------

Additional
Collection Costs
(> $300)
(4)
------

Net
Collection Flow
=S-(EXP*S)-(4)

(5)
------

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45-60
60-90
> 90

Net
Collection Flow
= S - (EXP*S) - (4)

(5)
------

PV
Factor
(6)
------

NPV of
Credit
Sale

Expected
Present
Value

=(5) * (6) - S * VCR

= (7) * (3)

(7)
------

(8)
------

Total NPV =

4.

Collection float including invoicing float and the cash consequences.

Order & Invoice Preparation:
Order Entry and Shipping
Invoice Preparation & Sending ("Invoicing Float")
Credit Period:
Credit Terms
Added Delay (customers payables)
Payment Preparation
Payment Collection & Application:
Mail, Processing, Availability Delays
Cash Application
Total Delay from Purchase Communication
to Cash Application:

=====
days

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a.) Calculate the total delay from purchase communication to cash application.
Total delay =
days
b.) From the sellers perspective, what part of the total delay represents cash tied up?

c.) Why should the seller be concerned about the order and invoice preparation delays?

d.) What fraction of the total delay in your answer to (a) is made up of the credit terms?
Based on your answer, comment on the importance of managing all parts of the cash
flow timeline.
Credit Terms =
Total Delay =

days
days

Therefore,
of the total delay is made up of credit terms.
This leaves
of the delay to be managed, some of which is
directly under the control of the seller.
5.

Calculating liquidity, debt, and performance ratios from financial statements.

"Balance sheet only" ratios may be calculated for two years, the other ratios
for one year.
ASSUMPTIONS
Balance Sheets (in 000's)
(current assets shaded)
Current Year
Prior Year
Cash & Equivalents
Short-Term Investments
Accounts Receivable
Inventory
Prepaid Expenses
Property, Plant & Equipment
Total Assets

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(current liabilities shaded)

Accounts Payable
Notes Payable
Accrued Operating Exp.
Current maturities (CMLTD)
Long-term Debt
Common Stock at Par
Paid-in Capital
Retained Earnings
Total Liabilities & Net Worth
Income Statement (000's)
Revenues
Divs. Paid
Cost of Goods Sold
Add to RE
Operating Expenses
EPS
Depreciation
(200,000 shares outstanding)
Interest
Taxes
Net Income (Profit)
Statement of Cash Flows (000's)
Cash Flows from Operating Activities
Net Income
Adjustments to reconcile net income to net cash
Change in Depreciation
Increase in Accounts Receivable
Increase in Inventories
Increase in Accounts Payable
Net Cash Provided (Used) by Operating Activities
Calculating ratios with both a balance sheet numerator and denominator.

Liquidity Ratios:

Formula w/ current year

data for example

Current
Year

Prior
Year

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(measure solvency)
Current Ratio
Net Working Cap. (000's)
Quick Ratio
Liquidity Ratios?
(measure liquidity)
Cash Flow to
Total Debt

NI + Depr.

NA

ST + LT Debt

Cash Flow from

Operations (000's)

Taken from Statement

of Cash Flows

NA

Cash Cycle
(Use PUR vs. COGs)
PUR=(EI-BI)+COGS

DIH + DSO - DPO

NA

Cash Turnover

365 / Cash Cycle

Net Liquid Balance

(Cash + ST Investments) (NP + CMLTD)

Defensive Interval

(see Chapter 2)

Cash + ST Investments
Daily Operating Expenses

Debt Management
& Coverage Ratios:

Formula:

Times Interest Earned

EBIT / Interest

Long-Term Debt
to Capital

Long-Term Debt
Long Term Debt + Equity

NA

NA

NA

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Total Liabilities
to Total Assets

Total Liabilities
Total Assets

Performance
Ratios:

Formula:

Return on Equity

Earnings Available
to Shareholders
Common Equity

NA

Profit Margin on Sales

Net Income / Revenue

NA

Return on Total Assets

Net Income / Total Assets

NA

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So we need

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ash tied up?

aration delays?

e credit terms?
arts of the cash

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