International Financial Management FINAL REQUIREMENT

2nd Term, SY 2019 – 2020
FINAL REQUIREMENT

ADM M004/International Financial Management

I. CAPITAL BUDGETING
Direction: Carefully read and analyze the requirements below. Identify what is being asked for.

A company has three projects under consideration. The cash flow for each of them is shown in the following table. The firm has a 10 percent cost of capital.

PROJECT PROJECT X PROJECT Y PROJECT Z
Initial Investment 750,000 750,000 750,000
Annual Cash Inflows:
Year 1 280,000 560,000 350,000
2 280,000 240,000 200,000
3 280,000 200,000 250,000
4 280,000 200,000 300,000
5 280,000 200,000 300,000

Requirements:
1. Calculate each project’s payback period.
2. Calculate each project’s net present value.
a. Indicate if the project is acceptable or not. Write ACCEPT OR REJECT.
b. Which project is preferred?
3. Comment on your findings in 1 and 2, recommend the best project. Explain your recommendation.

II. LEVERAGE
Direction: Carefully read and analyze the requirements below. Identify what is being asked for.
RBF Corporation makes a patented product that wholesales for $6.00. Each product has variable operating costs of $3.50. Fixed operating costs are $50,000 per year. The firm pays $13,000 interest and preferred dividends of $7,000 per year. At this point, the firm is selling 30,000 units per year and is taxed at a rate of 40%.
a. Calculate operating breakeven point.
b. On the basis of the firm’s current sales of 30,000 units per year and its interest and preferred dividend costs, calculate its EBIT and earnings available for common.
c. Calculate the firm’s degree of operating leverage (DOL).
d. Calculate the firm’s degree of financial leverage (DFL).
e. Calculate the firm’s degree of total leverage (DTL).
f. The company has entered into a contract to produce and sell an additional 15,000 latches in the coming year. Use the DOL, DFL, and DTL to predict and calculate the changes in EBIT and earnings available for common. Check your work by a simple calculation of Carolina Fastener’s EBIT and earnings available for common, using the basic information given.

III. WORKING CAPITAL MANAGEMENT
Direction: Carefully read and analyze the requirements below. Identify what is being asked for.

As a financial adviser of Buenaflor Corporation, the company is asking for your assistance with the management of their cash conversion cycle. The company is using 360 days per year. The company gave you the following information:
a. Average age of inventory = 60 days
b. Average collection period = 30 days
c. Average payable period = 20 days
d. Firms total spending on operating cycle per year = Php20,000,000.00
A) How many days would take an operating cycle to be completed?
B) How many days would take a total cash conversion cycle?
C) How much will Buenaflor Corporation need to support the cash conversion cycle?
D) How much is the daily cash operating cycle?
E) The company is choosing for two options to reduce the resources invested:
Option 1: Reduce accounts receivables by 5 days.
Option 2: increase accounts payables by 7 days
As an adviser which of the two options would you recommend? Support your recommendation with proper solutions.