On accepting the position of Chief Executive Officer and Chairman of Cameron Machinery, John Jacob changed the firm’s weekly payday from Monday afternoon to the following Friday afternoon. The firm’s weekly payroll was $10 million, and the cost of short-term funds was 13%. Show Solutions and Explanation. A. If the effect of this change was to delay check clearing by 1 week, what annual savings, if any, were realized? (Format: 1,111,111)

On accepting the position of Chief Executive Officer and Chairman of Cameron Machinery, John Jacob changed the firm’s weekly payday from Monday afternoon to the following Friday afternoon. The firm’s weekly payroll was $10 million, and the cost of short-term funds was 13%. Show Solutions and Explanation. A. If the effect of this change was to delay check clearing by 1 week, what annual savings, if any, were realized? (Format: 1,111,111)

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 2P

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Now assume that it is several years later. The brothers are concerned about the firm’s current credit terms of net 30, which means that contractors buying building products from the firm are not offered a discount and are supposed to pay the full amount in 30 days. Gross sales are now running $1,000,000 a year, and 80% (by dollar volume) of the firm’s paying customers generally pay the full amount on Day 30; the other 20% pay, on average, on Day 40. Of the firm’s gross sales, 2% ends up as bad-debt losses. The brothers are now considering a change in the firm’s credit policy. The change would entail: (1) changing the credit terms to 2/10, net 20, (2) employing stricter credit standards before granting credit, and (3) enforcing collections with greater vigor than in the past. Thus, cash customers and those paying within 10 days would receive a 2% discount, but all others would have to pay the full amount after only 20 days. The brothers believe the discount would both attract additional customers and encourage some existing customers to purchase more from the firm—after all, the discount amounts to a price reduction. Of course, these customers would take the discount and hence would pay in only 10 days. The net expected result is for sales to increase to $1,100,000; for 60% of the paying customers to take the discount and pay on the 10th day; for 30% to pay the full amount on Day 20; for 10% to pay late on Day 30; and for bad-debt losses to fall from 2% to 1% of gross sales. The firm’s operating cost ratio will remain unchanged at 75%, and its cost of carrying receivables will remain unchanged at 12%. To begin the analysis, describe the four variables that make up a firm’s credit policy and explain how each of them affects sales and collections.
The Raattama Corporation had sales of $3.5 million last year, and it earned a 5% return (after taxes) on sales. Recently, the company has fallen behind in its accounts payable. Although its terms of purchase are net 30 days, its accounts payable represents 60 days’ purchases. The company’s treasurer is seeking to increase bank borrowing in order to become current in meeting its trade obligations (that is, to have 30 days’ payables outstanding). The company’s balance sheet is as follows (in thousands of dollars): How much bank financing is needed to eliminate the past-due accounts payable? Assume that the bank will lend the firm the amount calculated in part a. The terms of the loan offered are 8%, simple interest, and the bank uses a 360-day year for the interest calculation. What is the interest charge for 1 month? (Assume there are 30 days in a month.) Now ignore part b and assume that the bank will lend the firm the amount calculated in part a. The terms of the loan are 7.5%, add-on interest, to be repaid in 12 monthly installments. What is the total loan amount? What are the monthly installments? What is the APR of the loan? What is the effective rate of the loan? Would you, as a bank loan officer, make this loan? Why or why not?
On accepting the position of chief executive officer and chairman of Reeves Machinery, Frank Cheney changed the firm’s weekly payday from Monday afternoon to the following Friday afternoon. The firm’s weekly payroll was $10 million, and the cost of short-term funds was 13%. If the effect of this change was to delay check clearing by 1 week, what annual savings, if any, were realized? Format: 1,111,111
When he became the president of Jem Incorporated, John Smith changed the date of the weekly payday from the end of the day on Monday to the end of the day on Friday. The company has a weekly payroll of $10 million, and the cost of short-term funds was 13%. If this change delayed check clearing by 1 week, what annual savings were realized? Use the information below for the next two problems. Schlitz Inc. has obtained a 90-day bank loan of $10,000 with an annual interest rate of 15%, payable at maturity. Assume a 365-day year.
When Shortman Haberdashery, Inc., merged with Meyers Men’s Suits, Inc., Shortman’s employees were switched from a weekly to a biweekly pay period. Shortman’s weekly payroll amounted to $750,000. The cost of funds for the combined firms is 11%. What annual savings, if any, are realized by this change of pay period? Format: 11,111
Cainhurst Inc. had sales last year totaling $530,000, and its year-end Accounts Receivable were $62,750. The firm sells on terms that call for customers to pay within 30 days after the purchase, but some customers delay payment beyond this deadline (meaning they pay late). On average, how many days LATE do customers pay? Base your answer on a 365-day year when calculating the DSO.
Each business day, on average, a company writes checks totaling $30,000 to pay its suppliers. The usual clearing time for the checks is four days. Meanwhile, the company is receiving payments from its customers each day, in the form of checks, totaling $50,000. The cash from the payments is available to the firm after two days. a) Calculate the company’s disbursement float and net float. b) How would your answer to part (a) change if the collected funds were available in one day instead of two?
Suppose a firm’s monthly account analysis statement shows a service charge of $10,000 and an earnings credit allowance of $2,000. Discuss why the firm’s liquidity position will not be reduced by $10,000.
No More Pencils, Incorporated, disburses checks every 2 weeks that average $55,000 and take 8 days to clear. How much interest can the company earn annually if it delays transfer of funds from an interest-bearing account that pays 0.02 percent per day for these 8 days? Ignore the effects of compounding interest.
Lowe and Price Co has annual credit sales of $12,000,000, and three months are allowed for payment. The company decides to offer a 2% discount for payments made within ten days of the invoice being sent, and to reduce the maximum time allowed for payment to two months. It is estimated that 50% of customers will take the discount. The company requires a 20% return on investments. Assume that the volume of sales will be unaffected by the discount. What is the reduction in accounts receivable? What is the opportunity income from the reduction in accounts receivable? What is the discount allowed each year? What is the net benefit of new discount policy each year?
When Tallman Haberdashery, Inc., merged with Meyers Men’s Suits, Inc., Tallman’s employees were switched from a weekly to a biweekly pay period. Tallman’s weekly payroll amounted to $750,000. The cost of funds for the combined firms is 11%. 1. What annual savings, if any, are realized by this change of pay period? Format: 11,111
James Inc. currently has P750,000 in accounts receivable, and its day sales outstanding (DSO) is 55 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average sales will fall by 15%. What will be the level of accounts receivable following the change? Assume a 365-day year.