Contemporary Financial Management
14th Edition
ISBN: 9781337090582
Author: R. Charles Moyer, James R. McGuigan, Ramesh P. Rao
Publisher: Cengage Learning
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Chapter 18, Problem 10P
Summary Introduction
To determine: The net variations in the pretax profits.
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Blossom Inc. currently grants no credit, but it is considering offering new credit terms of net 30. As a result, the price of its product will
increase by $2 per unit. The original price per unit is $40. Expected sales will increase by 1,000 units per year. The original sales
are 11.000 units. Variable costs will remain at $25 per unit and bad debt losses will amount to $2.000 per year. The firm will finance
the additional investment in receivables by using a line of credit, which charges 5-percent interest. The firm's tax rate is 20 percent.
Calculate the NPV. (Assume Blossom benefits from the credit policy change indefinitely.) (Round answer to 2 decimal places, e.g. 15.75.
Enter negative amounts using either a negative sign preceding the number eg.-45 or parentheses eg.(45))
NPV $
513836
Should the firm begin extending credit under the terms described?
Yes
Brevard Inc is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $2,250,000 and the average collection period (DSO) is 75 days. Brevard Inc. estimates that tightening the credit terms would reduce annaul sales to $2,025,000 but accounts recievable would drop to 39 days of sales. Brevard's variable cost ratio is 59% and its average cost of funds is 11.2%. Should the change in credit terms be made? Assume all operating costs are paid when inverntory is sold and that all sales are collected at the DSO.
XYZ, Inc., produces and commercializes engines for cars. To stimulate sales, the financial manager is contemplating
lengthening its credit period from the existing net 30 terms to net 35 terms. The credit analyst estimates that the new credit
policy increases sales by 15 percent. The financial manager asks you to analyze the impacts of the proposed credit change on
the firm's value.
The variable costs, as a percent of sales, equal 70%. The existing monthly credit sales is $90 million. The existing bad debt
loss rate is 2% and will increase by o.75% after lengthening the credit period. The existing credit & collection expenses
equal 2.5% of sales and those under 35-day terms will be 3% of sales. The company's cost of capital is presently 10 percent.
Under the new credit policy, the firm offers a 2% cash discount if they pay within one week and the percent of sales made to
cash discount-takers will be 15%.
1) Calculate the NPV of one day's sales under the existing credit policydits)
Chapter 18 Solutions
Contemporary Financial Management
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