Molycorp

Topeka Adhesives (I) Cases: TEXT Questions AND Assumptions/Clarifications

FNCE 4500

A. Assume a 360-day year.

B. In Exhibit #2, assume ‘in $1,000’s’, not ‘in $10,000’s’ as inferred from the case.

C. Q.2. Consider the assumption that interest expense will remain constant. No need to recalculate your pro forma, but what is likely to be the impact on the firm’s financing needs if interest expense is realistically forecast?

D. Q.6.b. Construct the Sources & Uses Statement for 1996. Make sure to include an analysis of short-term sources and short-term uses, long-term sources and long-term uses.

E. Q.7. If you would like to (not required): use of the percent of sales method means to forecast the accounts at their historical percent of sales, ignoring any of the assumptions given in the text of the case (which you did use to develop the pro formas in Q.2. and Q.6.).

F. Q.9. When would the firm not want to take the discount?

G. Q.10. Note: don’t get too caught up in the calculation below, think about the impact for the firm of negotiating credit terms with individual firms; what are the short-term v. long-term issues and legal implications the firm should consider. Assume the firm has excess capacity, and the variable cost ratio from 1996. It may be helpful to calculate the incremental after-tax gross profit net of the incremental asset requirements (in receivables and inventory). Assume that the relevant choice is between making this sale while granting 45 days to pay, versus not making the sale and therefore no credit is extended.

In order to analyze a potential variation to a standard credit policy, one choice is to isolate the incremental benefits and incremental costs of the variation...this, of course, would avoid the need to impact pro forma statements.  There are two possible situations relative to a firm's capacity, as follows:

IF A FIRM HAS EXCESS CAPACITY

Incremental benefits would include the incremental after-tax profit...