6.A) The optimal credit policy minimizes the total cost of granting credit.

Firms should avoid

offering credit at all cost. An increase in a firm's average collection period generally indicates
that an increased number of customers are taking advantage of the cash discount. The costs of
the credit application process and the costs expended in the collection process are carrying
costs of granting credit. Capacity refers to the ability of a firm to meet its credit obligations out
its operating cash flows. The optimal credit policy is the policy that produces the largest
amount of sales for a firm.

The optimal amount of credit the firm should offer depend on the competitive conditions under
which the firm operates. These conditions will determine the carrying cost assosiated with
granting credit & opportunity cost of the lost sales resulting from refusing to offer credit. the
optimal credit policy minimize the sum of these two costs.

3. a) Important factors:

Cash offering may be cash from existing acquirer balances or from a debt issue.

In Securities offering, Target shareholders receive shares of common stock,

preferred stock, or debt of the acquirer.The exchange ratio determines the number of
securities received in exchange for a share of target stock.

Factors influencing method of payment:

- Sharing of risk among the acquirer and target shareholders.

- Signaling by the acquiring firm.

- Capital structure of the acquiring firm.

b)In business the term synergy is often associated with the merger or acquisition of
companies. Synergy implies that the outcomes resulting from the merger of two companies
will be greater than the sum of the outcomes that would have been achieved if the
organizations had not merged. Synergy is sometimes described as 1 + 1 = 3.

Let's use an example. Suppose a company operates solely in the U.S. Another company
operates in Asia. The two companies decide to merge because they believe the combined
company will have greater results than the total of the two companies operating
independently. The synergy might come from shared research, ability to meet the needs of
each other's customers, ability to attract new customers that want a single global supplier,
elimination of duplicate information technology, and so on.

19th Batch

1. a) Stockholder wealth maximization is a long-run goal. Companies, and consequently

the stockholders, prosper by management making decisions that will produce long-term
earnings increases. Actions that are continually shortsighted often catch up with a firm
and, as a result, it may find itself unable to compete effectively against its competitors.
There has been much criticism in recent years that U.S. firms are too short-run profit-
oriented. A prime example is the U.S. auto industry, which has been accused of
continuing to build large gas guzzler automobiles because they had higher profit
margins rather than retooling for smaller, more fuel-efficient models.
b) Useful motivational tools that will aid in aligning stockholders and managements
interests include: (1) reasonable compensation packages, (2) direct intervention by
shareholders, including firing managers who dont perform well, and (3) the threat of
takeover.
c)

2. a). Working capital is used by the firm to determine its ability to meet the short term
obligations. The issues considered here are the current assets that include the cash
receivables the cash and cash equivalents as well as the inventory to have a picture of
the available current asset. Firms hold the working capital for three major reasons. The
first is the transaction needs. These are the cost that are payable at regular basis on a
routine manner. They include the monies that the firm collects on a routine basis which
are usually very predictable. The second reason of holding working capital is the
precautionary scenarios. This includes the need to meet unexpected future cash
payments or to meet unforeseen fluctuation in the inflows. Thirdly, firms hold working
capital for speculative reasons. This is meant to give the firm a bargaining power in
situation of bargaining purchases and opportunities. The right amounts to be held as the
working capital depends with the industry and the nature of the activities of the firm. If
the services are involved and not much cash payments are needed, lower working capital
will be needed. If the firm holds too much working capital, the effect is having idle
funds that are not earning any returns having too low.

The cash cycle comprises of three components: Accounts Receivable, Inventory and Accounts
Payable. The first two components, which are out-of-pocket, tend to lengthen the cash cycle
because this cash is out to fund your inventory and sales. On the other hand, the third component
often shortens the cash cycle, if it is not of cash terms. Therefore, to measure the components of
the cash cycle, you need to compute the above three components in terms of days such as Days
Receivable, Days Inventory and Days Payable. The Cash Cycle equation will be as follows:
Cash Conversion Cycle Equation = Days Receivable + Days Inventory - Days Payable