TRƯỜNG ĐẠI HỌC NGOẠI THƯƠNG/ Formative assessment 4

FOREIGN TRADE UNIVERSITY

NĂM HỌC/ ACADEMIC YEAR:2024-
KHOA ĐÀO TẠO QUỐC TẾ/ 2025
FACULTY OF INTERNATIONAL EDUCATION MÔN/ SUBJECT: Business Finance
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Họ và tên/ Student name: Nguyen Thi Phuong Ngày thi/ Exam date: 03/01/2025
Trang Lớp/ Class: F-UON-M7D
MSSV/ Student ID: 2205000235

Thời gian làm bài/ Duration: 30 phút/ minutes

(bao gồm thời gian đọc đề/ including the reading time)

I. PHẦN I/ PART I: (5 MARKS)

Mary is evaluating companies in the office supply industry and has compiled the following
information:

1. Which of the companies had the highest number of days of receivables for the year
20X1?
2. Which of the companies has the lowest accounts receivable turnover in the year 20X2?
3. How did the industry average receivables collection period change from 20X1 to 20X2?
4. Which of the companies reduced the average time it took to collect on accounts
receivable from 20X1 to 20X2?
5. Mary determined that Company A had an operating cycle of 100 days in 20X2, whereas
Company D had an operating cycle of 145 days for the same fiscal year. What does this
mean?
1.
Company A: DSO = (1.2 million / 5.0 million) x 365 = 87.6 days
Company B: DSO = (1.0 million / 3.0 million) x 365 = 121.7 days
Company C: DSO = (0.8 million / 2.5 million) x 365 = 116.8 days
Company D: DSO = (0.1 million / 0.5 million) x 365 = 73 days
Industry Average: DSO = (5.0 million / 20.0 million) x 365 = 91.25 days

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Based on the calculations, Company B had the highest number of days of receivables in
20X1 with a DSO of 121.7 days. This means it took Company B on average 121.7 days to
collect its receivables.
2.
Company A: Turnover = 6.0 million / 1.2 million = 5 times
Company B: Turnover = 4.0 million / 1.5 million = 2.67 times
Company C: Turnover = 3.0 million / 1.0 million = 3 times
Company D: Turnover = 0.6 million / 0.2 million = 3 times
Industry Average: Turnover = 28.0 million / 5.4 million = 5.19 times
Based on the calculations, Company B has the lowest accounts receivable turnover in 20X2
with a turnover of 2.67 times. This means that Company B collected its average receivables
balance 2.67 times during the year. A lower turnover ratio generally indicates a longer collection
period for receivables.
3.
Industry DSO in 20X1:
DSO = (5.0 million / 20.0 million) x 365 = 91.25 days
Industry DSO in 20X2:
DSO = (5.4 million / 28.0 million) x 365 = 70.25 days
Change in Receivables Collection Period:
Change = DSO in 20X2 - DSO in 20X1 = 70.25 days - 91.25 days = -21 days
Interpretation:
The industry average receivables collection period decreased by 21 days from 20X1 to 20X2.
This indicates that, on average, companies in the industry were collecting their receivables faster
in 20X2 compared to 20X1.
4.

Company A: DSO (20X1) = (1.2 million / 5.0 million) x 365 = 87.6 days DSO (20X2) = (1.2
million / 6.0 million) x 365 = 73 days

Company B: DSO (20X1) = (1.0 million / 3.0 million) x 365 = 121.7 days DSO (20X2) = (1.5
million / 4.0 million) x 365 = 136.9 days

Company C: DSO (20X1) = (0.8 million / 2.5 million) x 365 = 116.8 days DSO (20X2) = (1.0
million / 3.0 million) x 365 = 121.7 days

Company D: DSO (20X1) = (0.1 million / 0.5 million) x 365 = 73 days DSO (20X2) = (0.2
million / 0.6 million) x 365 = 121.7 days

Analysis:

• Company A: DSO decreased from 87.6 days to 73 days, indicating a reduction in

collection time.

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 • Company B: DSO increased from 121.7 days to 136.9 days, indicating an increase in
collection time.
• Company C: DSO increased from 116.8 days to 121.7 days, indicating an increase in
collection time.
• Company D: DSO increased from 73 days to 121.7 days, indicating an increase in
collection time.

Conclusion:

Only Company A reduced the average time it took to collect on accounts receivable from
20X1 to 20X2.

5.

The operating cycle is the length of time it takes for a company to convert its inventory into cash.
It includes two key components:

1. Inventory Days: The number of days it takes to sell inventory.

2. Days Sales Outstanding (DSO): The number of days it takes to collect on accounts
receivable (money owed by customers).

In this scenario:

• Company A: Has an operating cycle of 100 days. This means it takes them 100 days on
average to sell their inventory and collect the money from their customers.
• Company D: Has an operating cycle of 145 days. This means it takes them 145 days on
average to sell their inventory and collect the money from their customers.

What does this mean?

• Comparison: Company A has a shorter operating cycle than Company D. This indicates
that Company A is more efficient in managing its inventory and collecting its receivables
compared to Company D.
• Financial Implications: A shorter operating cycle generally means that the company has
better cash flow. This is because the company is converting its inventory into cash more
quickly, which can be used to reinvest in the business, pay off debt, or distribute to
shareholders.

Additional Considerations:

• Industry Standards: The length of the operating cycle can vary significantly depending
on the industry. It's important to compare a company's operating cycle to the industry
average to get a better sense of its performance.
• Efficiency: A shorter operating cycle is generally considered better, but it's important to
strike a balance between efficiency and risk. If a company is too focused on reducing its
operating cycle, it may end up selling inventory too quickly or extending credit too
liberally, which could increase the risk of bad debts.

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Overall, the operating cycle is an important metric for assessing a company's financial
health and efficiency. A shorter operating cycle generally indicates better cash flow and
financial performance.

II. PHẦN II/ PART II (5 MARKS)

1. What does “stock repurchases” mean?
2. What are the potential advantages and disadvantages of stock repurchases?
1.
Stock repurchases refer to a situation where a company buys back its own shares from the
public market.
Here's a breakdown:
• How it works: A company uses its cash reserves to purchase its own outstanding shares
from investors on the stock exchange.
• Why companies do it: There are various reasons why a company might repurchase its
stock:
o To increase earnings per share (EPS): When a company repurchases shares, the
number of outstanding shares decreases. Since earnings remain the same, EPS
increases, which can boost the stock price.
o To signal confidence: Repurchasing stock can be seen as a signal to the market
that the company believes its stock is undervalued.
o To return capital to shareholders: Instead of paying dividends, companies may
choose to repurchase shares as a way to return capital to shareholders.
o To prevent hostile takeovers: By repurchasing a large number of shares, a
company can make it more difficult for another company to acquire it through a
hostile takeover.
o To fund employee stock option plans: Companies may repurchase shares to use
them to fulfill employee stock options.
Impact on investors:
• Shareholders who sell their shares: These shareholders receive cash for their shares.
• Remaining shareholders: Their ownership stake in the company increases as the
number of outstanding shares decreases. This can potentially lead to higher stock prices
and returns.
Important Note: Stock repurchases are not always beneficial for shareholders. If a company
overpays for its own shares or if the repurchase is not strategically aligned with the company's
goals, it can negatively impact shareholder value.

2.
Potential Advantages of Stock Repurchases:
• Increased Earnings Per Share (EPS): When a company repurchases its own shares, the
number of outstanding shares decreases. Since earnings usually remain relatively the
same, this reduction in shares leads to a higher EPS, which is a key metric for investors.
• Signaling Confidence: Repurchasing stock can be seen as a signal to the market that the
company believes its stock is undervalued. This can boost investor confidence and
potentially drive up the stock price.
• Alternative to Dividends: Repurchases can be an alternative way to return capital to
shareholders instead of paying dividends. This can be attractive to investors who prefer
capital gains to dividend income.
• Prevents Hostile Takeovers: By repurchasing a significant number of shares, a company
can make it more difficult for another company to acquire it through a hostile takeover.

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 • Funding for Employee Stock Option Plans: Companies may repurchase shares to use
them to fulfill employee stock options.
Potential Disadvantages of Stock Repurchases:
• Overpaying for Shares: If a company overpays for its own shares, it can negatively
impact shareholder value.
• Timing Risk: If a company repurchases shares at a high price and the stock price
subsequently declines, the company may have overpaid.
• Impact on Research and Development: Repurchasing shares can divert funds that
could be used for research and development, which can hinder long-term growth.
• Tax Implications: In some cases, stock repurchases can have unfavorable tax
implications for shareholders.
• Signal of Lack of Investment Opportunities: Some investors may view stock
repurchases as a sign that the company lacks attractive investment opportunities for its
capital.
Overall, stock repurchases can be a valuable tool for companies, but they should be used
strategically and with careful consideration of the potential risks and benefits.