UJIAN AKHIR SEMESTER GASAL 2022/2023

MAGISTER MANAJEMEN
MATA KULIAH : FINANCIAL MANAGEMENT

PETUNJUK :
1. Kerjakan 1 (satu) kasus saja diantara 4 (empat) kasus berikut ini!
2. Jawaban atas kasus yang saudara pilih tersebut di upload di bella
paling lambat hari RABU, tgl 21 DESEMBER 2022, jam 18.00
3. Kerjakan diketik dengan font: Times New Roman 12

KASUS 1: WORKING CAPITAL MANAGEMENT

CASA de DISENO
In January 2015, Teresa Leal was named treasurer of Casa de Diseño. She decided that she
could best orient herself by systematically examining each area of the company’s financial
operations. She began by studying the firm’s short-term financial activities.
Casa de Diseño, located in southern California, specializes in a furniture line called “Ligne
Moderna.” Of high quality and contemporary design, the furniture appeals to the customer who
wants something unique for his or her home or apartment. Most Ligne Moderna furniture is built by
special order because a wide variety of upholstery, accent trimming, and colors is available. The
product line is distributed through exclusive dealership arrangements with well-established retail
stores.
Casa de Diseño’s manufacturing process virtually eliminates the use of wood. Plastic and
metal provide the basic framework, and wood is used only for decorative purposes. Casa de Diseño
entered the plastic-furniture market in late 2007. The company markets its plastic-furniture products
as indoor–outdoor items under the brand name “Futuro.” Futuro plastic furniture emphasizes
comfort, durability, and practicality and is distributed through wholesalers. The Futuro line has been
very successful, accounting for nearly 40 percent of the firm’s sales and profits in 2014. Casa de
Diseño anticipates some additions to the Futuro line and also some limited change of direction in its
promotion in an effort to expand the applications of the plastic furniture.
Leal has decided to study the firm’s cash management practices. To determine the effects of
these practices, she must first determine the current operating and cash conversion cycles. In her
investigations, she found that Casa de Diseño purchases all its raw materials and production supplies
on open account. The company is operating at production levels that preclude volume discounts.
Most suppliers do not offer cash discounts, and Casa de Diseño usually receives credit terms of net
30. An analysis of Casa de Diseño’s accounts payable showed that its average payment period is 30
days. Leal consulted industry data and found that the industry average payment period was 39 days.
Investigation of six California furniture manufacturers revealed that their average payment period
was also 39 days.
Next, Leal studied the production cycle and inventory policies. Casa de Diseño tries not to
hold any more inventory than necessary in either raw materials or finished goods. The average
inventory age was 110 days. Leal determined that the industry standard, as reported in a survey
done by Furniture Age, the trade association journal, was 83 days.
 Casa de Diseño sells to all its customers on a net-60 basis, in line with the industry trend to
grant such credit terms on specialty furniture. Leal discovered, by aging the accounts receivable, that
the average collection period for the firm was 75 days. Investigation of the trade association’s and
California manufacturers’ averages showed that the same collection period existed where net-60
credit terms were given. Where cash discounts were offered, the collection period was significantly
shortened. Leal believed that if Casa de Diseño were to offer credit terms of 3/10 net 60, the average
collection period could be reduced by 40 percent.
Casa de Diseño was spending an estimated $26,500,000 per year on operating cycle
investments. Leal considered this expenditure level to be the minimum she could expect the firm to
disburse during 2015. Her concern was whether the firm’s cash management was as efficient as it
could be. She knew that the company paid 15 percent annual interest for its resource investment.
For this reason, she was concerned about the financing cost resulting from any inefficiencies in the
management of Casa de Diseño’s cash conversion cycle. (Note: Assume a 365-day year, and assume
that the operating-cycle investment per dollar of payables, inventory, and receivables is the same.
QUESTIONS
1. Assuming a constant rate for purchases, production, and sales throughout the year, what are
Casa de Diseño’s existing operating cycle (OC), cash conversion cycle (CCC), and resource
investment need?
2. If Leal can optimize Casa de Diseño’s operations according to industry standards, what will
Casa de Diseño’s operating cycle (OC), cash conversion cycle (CCC), and resource investment
need to be under these more efficient conditions?
3. In terms of resource investment requirements, what is the cost of Casa de Diseño’s
operational inefficiency?
4. (a) If in addition to achieving industry standards for payables and inventory the firm can
reduce the average collection period by offering credit terms of 3/10 net 60, what additional
savings in resource investment costs will result from the shortened cash conversion cycle,
assuming that the level of sales remains constant?
(b) If the firm’s sales (all on credit) are $40,000,000 and 45% of the customers are expected
to take the cash discount, by how much will the firm’s annual revenues be reduced as a
result of the discount?
(c) If the firm’s variable cost of the $40,000,000 in sales is 80%, determine the reduction in
the average investment in accounts receivable and the annual savings that will result from
this reduced investment, assuming that sales remain constant.
(d) If the firm’s bad-debts expenses decline from 2% to 1.5% of sales, what annual savings
will result, assuming that sales remain constant?
(e) Use your findings in parts (b) through (d) to assess whether offering the cash discount
can be justified financially. Explain why or why not.
5. On the basis of your analysis in parts a through d, what recommendations would you offer
Teresa Leal?
6. Review for Teresa Leal the key sources of short-term financing, other than accounts payable,
that she may consider for financing Casa de Diseño’s resource investment need calculated in
part 2. Be sure to mention both unsecured and secured sources.
KASUS 2: FINANCING DECISION

O’Grady Apparel Company

O ’Grady Apparel Company was founded nearly 160 years ago when an Irish merchant
named Garrett O’Grady landed in Los Angeles with an inventory of heavy canvas, which he hoped to
sell for tents and wagon covers to miners headed for the California goldfields. Instead, he turned to
the sale of harder-wearing clothing.
Today, O’Grady Apparel Company is a small manufacturer of fabrics and clothing whose
stock is traded in the OTC market. In 2015, the Los Angeles–based company experienced sharp
increases in both domestic and European markets resulting in record earnings. Sales rose from $15.9
million in 2014 to $18.3 million in 2015 with earnings per share of $3.28 and $3.84, respectively.
European sales represented 29% of total sales in 2015, up from 24% the year before and
only 3% in 2010, 1 year after foreign operations were launched. Although foreign sales represent
nearly one-third of total sales, the growth in the domestic market is expected to affect the company
most markedly. Management expects sales to surpass $21 million in 2016, and earnings per share
are expected to rise to $4.40. (Selected income statement items are presented in Table 1.)
Because of the recent growth, Margaret Jennings, the corporate treasurer, is concerned that
available funds are not being used to their fullest potential. The projected $1,300,000 of internally
generated 2016 funds is expected to be insufficient to meet the company’s expansion needs.
Management has set a policy of maintaining the current capital structure proportions of 25% long-
term debt, 10% preferred stock, and 65% common stock equity for at least the next 3 years. In
addition, it plans to continue paying out 40% of its earnings as dividends. Total capital expenditures
are yet to be determined.
Jennings has been presented with several competing investment opportunities by division
and product managers. However, because funds are limited, choices of which projects to accept
must be made. A list of investment opportunities is shown in Table 2. To analyze the effect of the
increased financing requirements on the weighted average cost of capital (WACC), Jennings
contacted a leading investment banking firm that provided the financing cost data given in Table 3.
O’Grady is in the 40% tax bracket.
TABLE 1
SELECTRD INCOME 2013 2014 2015 Projected
STATEMENT ITEMS 2016
Net sales $13,860,000 $15,940,000 $18,330,000 $21,080,000
Net profits after taxes $1,520,000 $1,750,000 $2,020,000 $2,323,000
Earnings per share (EPS) 2.88 3.28 3.84 4.40
Dividends per share 1.15 1.31 1.54 1.76

TABEL 2

INVESTEMENT OPPORTUNITIES
Investment Opprtunity Internal Rate of Return (IRR) Initial Investment
A 21% $400,000
B 19% $200,000
C 24% $700,000
D 27% $500,000
E 18% $300,000
F 22% $600,000
 G 17% $500,000

TABEL 3
FINANCING COST DATA
Long-term debt: The firm can raise $700,000 of additional debt by selling 10-year, $1,000, 12%
annual interest rate bonds to net $970 after flotation costs. Any debt in excess of $700,000 will
have a before-tax cost, rd , of 18%.
Preferred stock: Preferred stock, regardless of the amount sold, can be issued with a $60 par
value and a 17% annual dividend rate. It will net $57 per share after flotation costs.
Common stock equity: The firm expects its dividends and earnings to continue to grow at a
constant rate of 15% per year. The firm’s stock is currently selling for $20 per share. The firm
expects to have $1,300,000 of available retained earnings. Once the retained earnings have been
exhausted, the firm can raise additional funds by selling new common stock, netting $16 per share
after underpricing and flotation costs.

QUESTIONS:
1. Over the relevant ranges noted in the following table, calculate the after-tax cost of each
source of financing needed to complete the table.
Source of capita Range of new financing After-tax cost (%)
Long-term debt $0–$700,000 ………………………………….
$700,000 and above ………………………………….
Preferred stock $0 and above …………………………………
Common stock equity $0–$1,300,000 …………………………………
$1,300,000 and above …………………………………

2. (a). Determine the break point associated with common equity. A break point represents the
total amount of financing that the firm can raise before it triggers an increase in the cost
of a particular financing source. For example, O’Grady plans to use 25% long-term debt
in
its capital structure. So, for every $1 in debt that the firm uses, it will use $3 from other
financing sources (total financing is then $4, and because $1 comes from long-term debt,
its share in the total is the desired 25%). From Table 3, we see that after the firm raises
$700,000 in long-term debt, the cost of this financing source begins to rise. Therefore,
the
firm can raise total capital of $2.8 million before the cost of debt will rise ($700,000 in
debt plus $2.1 million in other sources to maintain the 25% proportion for debt), and
$2.8
million is the break point for debt. If the firms wants to maintain a capital structure with
25% long-term debt and it also wants to raise more than $2.8 million in total financing, it
will require more than $700,000 in long-term debt, and it will trigger the higher cost of
the
additional debt it issues beyond $700,000.
(b). Using the break points developed in part (a), determine each of the ranges of total new
financing over which the firm’s weighted average cost of capital (WACC) remains
constant.
 (c). Calculate the weighted average cost of capital for each range of total new financing.
Draw
a graph with the WACC on the vertical axis and total money raised on the horizontal axis,
and show how the firm’s WACC increases in “steps” as the amount of money raised
increases.
3. (a). Sort the investment opportunities described in Table 2 from highest to lowest return,
and
plot a line on the graph you drew in part (c) above showing how much money is required
to fund the investments, starting with the highest return and going to the lowest. In
other
words, this line will plot the relationship between the IRR on the firm’s investments and
the total financing required to undertake those investments.
(b). Which, if any, of the available investments would you recommend that the firm accept?
Explain your answer.
4. (a). Assuming that the specific financing costs do not change, what effect would a shift to a
more highly leveraged capital structure consisting of 50% longterm debt, 10% preferred
stock, and 40% common stock have on your previous findings? (Note: Rework parts 2
and
3 using these capital structure weights.)
(b). Which capital structure—the original one or this one—seems better? Why?
5. (a). What type of dividend policy does the firm appear to employ? Does it seem appropriate
given the firm’s recent growth in sales and profits and given its current investment
opportunities?
(b). Would you recommend an alternative dividend policy? Explain. How would this policy
affect the investments recommended in part 3(b)?
KASUS 3: CAPITAL BUDGETING

Lasting Impressions Company

Lasting Impressions (LI) Company is a medium-sized commercial printer of
promotional advertising brochures, booklets, and other direct-mail pieces. The firm’s major
clients are ad agencies based in New York and Chicago. The typical job is characterized by
high quality and production runs of more than 50,000 units. LI has not been able to compete
effectively with larger printers because of its existing older, inefficient presses. The firm is
currently having problems meeting run length requirements as well as meeting quality
standards in a cost-effective manner.
The general manager has proposed the purchase of one of two large, six-color
presses designed for long, high-quality runs. The purchase of a new press would enable LI to
reduce its cost of labor and therefore the price to the client, putting the firm in a more
competitive position. The key financial characteristics of the old press and of the two
proposed presses are summarized in what follows.

Old press Originally purchased 3 years ago at an installed cost of $400,000, it is

being depreciated under MACRS using a 5-year recovery period. The old press has a
remaining economic life of 5 years. It can be sold today to net $420,000 before
taxes; if it is retained, it can be sold to net $150,000 before taxes at the end of 5
years.

Press A This highly automated press can be purchased for $830,000 and will require
$40,000 in installation costs. It will be depreciated under MACRS using a 5-year
recovery period. At the end of the 5 years, the machine could be sold to net
$400,000 before taxes. If this machine is acquired, it is anticipated that the current
account changes shown in the following table would result.
Cash + $ 25,400
Accounts receivable + 120,000
Inventories - 20,000
Accounts payable + 35,000

Press B This press is not as sophisticated as press A. It costs $640,000 and requires
$20,000 in installation costs. It will be depreciated under MACRS using a 5-year
recovery period. At the end of 5 years, it can be sold to net $330,000 before taxes.
Acquisition of this press will have no effect on the firm’s net working capital
investment.
 The firm estimates that its earnings before depreciation, interest, and taxes with the
old press and with press A or press B for each of the 5 years would be as shown in
the table at the top of the next page. The firm is subject to a 40% tax rate. The firm’s
cost of capital, r, applicable to the proposed replacement is 14%.

Earnings before Depreciation, Interest, and Taxes

for Lasting Impressions Company’s Presses
Year Old press Press A Press B
1 $120,000 $250,000 $210,000
2 120,000 270,000 210,000
3 120,000 300,000 210,000
4 120,000 330,000 210,000
5 120,000 370,000 210,000

QUESTIONS:
a. For each of the two proposed replacement presses, determine:
(1) Initial investment.
(2) Operating cash inflows.(Be sure to consider the depreciation in year 6)
(3) Terminal cash flow. (Note: This is at the end of year 5.)
b. Using the data developed in part a, find and depict on a time line the relevant
cash
flow stream associated with each of the two proposed replacement presses,
assuming that each is terminated at the end of 5 years.
c. Using the data developed in part b, apply each of the following decision
techniques:
(1) Payback period. (Note: For year 5, use only the operating cash inflows—
that is, exclude terminal cash flow—when making this calculation.)
(2) Net present value (NPV).
(3) Internal rate of return (IRR).
d. Draw net present value profiles for the two replacement presses on the same set
of axes, and discuss conflicting rankings of the two presses, if any, resulting from
use of NPV and IRR decision techniques.
e. Recommend which, if either, of the presses the firm should acquire if the firm has
(1) unlimited funds or
(2) capital rationing.
f. The operating cash inflows associated with press A are characterized as very risky
in
contrast to the low-risk operating cash inflows of press B. What impact does that
have on your recommendation?
KASUS 4: WORKING WITH FINANCIAL STATEMET

Track Software, Inc.

Seven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned
his position as manager of cost systems for Davis, Cohen, and O’Brien Public Accountants
and started Track Software, Inc. In the 2 years preceding his departure from Davis, Cohen,
and O’Brien, Stanley had spent nights and weekends developing a sophisticated cost-
accounting software program that became Track’s initial product offering. As the firm grew,
Stanley planned to develop and expand the software product offerings, all of which would
be related to streamlining the accounting processes of medium- to large-sized
manufacturers.
Although Track experienced losses during its first 2 years of operation—2009 and
2010—its profit has increased steadily from 2011 to the present (2015). The firm’s profit
history, including dividend payments and contributions to retained earnings, is summarized
in Table 1.
Stanley started the firm with a $100,000 investment: his savings of $50,000 as equity
and a $50,000 long-term loan from the bank. He had hoped to maintain his initial 100
percent ownership in the corporation, but after experiencing a $50,000 loss during the first
year of operation (2009), he sold 60 percent of the stock to a group of investors to obtain
needed funds. Since then, no other stock transactions have taken place. Although he owns
only 40 percent of the firm, Stanley actively manages all aspects of its activities; the other
stockholders are not active in management of the firm. The firm’s stock was valued at $4.50
per share in 2014 and at $5.28 per share in 2015.

TABEL 1
Track Software, Inc.,
Profit, Dividends, and Retained Earnings, 2009–2015
Year Net profits after taxes Dividends paid Contribution to retained earnings
(1) (2) [(1) − (2)] (3)
2009 ($50,000) $ 0 ($50,000)
2010 ( 20,000) 0 ( 20,000)
2011 15,000 0 15,000
 2012 35,000 0 35,000
2013 40,000 1,000 39,000
2014 43,000 3,000 40,000
2015 48,000 5,000 43,000

Stanley has just prepared the firm’s 2015 income statement, balance sheet, and
statement of retained earnings, shown in Tables 2, 3, and 4, along with the 2014 balance
sheet. In addition, he has compiled the 2014 ratio values and industry average ratio values
for 2015, which are applicable to both 2014 and 2015 and are summarized in Table 5. He is
quite pleased to have achieved record earnings of $48,000 in 2015, but he is concerned
about the firm’s cash flows. Specifically, he is finding it more and more difficult to pay the
firm’s bills in a timely manner and generate cash flows to investors, both creditors and
owners. To gain insight into these cash flow problems, Stanley is planning to determine the
firm’s 2015 operating cash flow (OCF) and free cash flow (FCF).
Stanley is further frustrated by the firm’s inability to afford to hire a software
developer to complete development of a cost estimation package that is believed to have
“blockbuster” sales potential. Stanley began development of this package 2 years ago, but
the firm’s growing complexity has forced him to devote more of his time to administrative
duties, thereby halting the development of this product. Stanley’s reluctance to fill this
position stems from his concern that the added $80,000 per year in salary and benefits for
the position would certainly lower the firm’s earnings per share (EPS) over the next couple of
years. Although the project’s success is in no way guaranteed, Stanley believes that if the
money were spent to hire the software developer, the firm’s sales and earnings would
significantly rise once the 2- to 3-year development, production, and marketing process was
completed.
With all these concerns in mind, Stanley set out to review the various data to
develop strategies that would help ensure a bright future for Track Software. Stanley
believed that as part of this process, a thorough ratio analysis of the firm’s 2015 results
would provide important additional insights.

TABEL 2
Track Software, Inc., Income Statement ($000)
for the Year Ended December 31, 2015

Sales revenue $ 1,550

Less: Cost of goods sold $ 1,030
Gross profits $ 520
Less: Operating expenses  
Selling expense $ 150
General and administrative expenses 270
Depreciation expense 11
Total operating expense 431
Operating profits (EBIT) $ 89
Less: Interest expense 29
Net profits before taxes $ 60
Less: Taxes (20%) 12
Net profits after taxes $ 48
=======

TABEL 3
Track Software, Inc., Balance Sheet ($000
 December 31
Assets 2015 2014
------------------------------------------------------------------------------------------------
Cash $ 12 $ 31
Marketable securities 66 82
Accounts receivable 152 104
Inventories 191 145
Total current assets $421 $362
Gross fixed assets $195 $180
Less: Accumulated depreciation 63 52
Net fixed assets $132 $128
Total assets $553 $490
===== =====

Liabilities and stockholders’ equity

Accounts payable $136 $126
Notes payable 200 190
Accruals 27 25
Total current liabilities $363 $341
Long-term debt $ 38 $ 40
Total liabilities $401 $381
Common stock
(50,000 shares outstanding at $0.40 par value) $ 20 $ 20
Paid-in capital in excess of par 30 30
Retained earnings 102 59
Total stockholders’ equity $152 $109
Total liabilities and stockholders’ equity $553 $490
===== =====

TABLE 3
Track Software, Inc., Statement of Retained Earnings ($000)
for the Year Ended December 31, 2015

Retained earnings balance (January 1, 2015) $ 59

Plus: Net profits after taxes (for 2015) 48
Less: Cash dividends on common stock (paid during 2015) 5
Retained earnings balance (December 31, 2015) $102
====
QUESTIONS:
a. (1) On what financial goal does Stanley seem to be focusing? Is it the correct
goal?
Why or why not?
(2) Could a potential agency problem exist in this firm? Explain.
b. Calculate the firm’s earnings per share (EPS) for each year, recognizing that the
number of shares of common stock outstanding has remained unchanged since
the firm’s inception. Comment on the EPS performance in view of your response
in part a.
c. Use the financial data presented to determine Track’s operating cash flow (OCF)
and free cash flow (FCF) in 2015. Evaluate your findings in light of Track’s
current cash flow difficulties.
d. Analyze the firm’s financial condition in 2015 as it relates to
(1) liquidity,
(2) activity,
(3) debt,
(4) profitability, and
(5) market, using the financial statements provided in Tables 2 and 3 and the
ratio data included in Table 5. Be sure to evaluate the firm on both a cross-
sectional and a time-series basis.
e. What recommendation would you make to Stanley regarding hiring a new
software developer? Relate your recommendation here to your responses in
part a.
f. Track Software paid $5,000 in dividends in 2015. Suppose that an investor
approached Stanley about buying 100% of his firm. If this investor believed that
by owning the company he could extract $5,000 per year in cash from the
company in perpetuity, what do you think the investor would be willing to pay
for the firm if the required return on this investment is 10%?
g. Suppose that you believed that the FCF generated by Track Software in 2015
could
continue forever. You are willing to buy the company in order to receive this
perpetual stream of free cash flow. What are you willing to pay if you require a
10% return on your investment?