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 15P
Summary Introduction
To determine: The net variations in the pretax profits.
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ALei Industries has credit sales of
$146
million a year. ALei's management reviewed its credit policy and decided that it wants to maintain an average collection period of
35
days.
a. What is the maximum level of accounts receivable that ALei can carry and have a
35-day
average collection period?
b. If ALei's current accounts receivable collection period is
55
days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of
35
days?
Everbusiness Corporation has been reviewing its credit policies. The credit standard it has been applying have resulted in an annual credit sales of $5,000,000.00. Its average collection period is 30 days with a bad debts/loss ratio of 1%. Everbusiness Corporation is considering a reduction in its credit standards. As a result, it expects incremental credit sales of $400,000.00 of which the average collection period would be 60 days, in which the bad BCR to sales for Everbusiness Corporation is 70%. The required investment on receivables is 15%. Evaluate the relaxation in credit standards that Everbusiness Corporation is considering. Use 0.04% per year/365 days.
Provide detailed explanation and solutions.
White Inc. wishes to speed up collection of its receivables. White currently offers credit terms of 1/20, net 40. It is considering changing to terms of 2/15 net 30. The collection period is expected to be reduced from 40 to 20 days. The percentage of customers paying within the discount period is expected to increase from 50 percent to 75 percent. Bad debt losses average 6 percent of sales and are not expected to change under the proposed policy. The inventory level is expected to increase by $2,000,000. Annual sales are $30 million. The variable cost ratio is 70 percent. The pretax return on funds made available by this change in policy is 10 percent. Assuming the change in terms is made; determine the net effect on White’s pretax profits.
Chapter 18 Solutions
Contemporary Financial Management
Ch. 18 - Prob. 1QTDCh. 18 - Prob. 2QTDCh. 18 - Prob. 3QTDCh. 18 - Prob. 4QTDCh. 18 - Prob. 5QTDCh. 18 - Prob. 6QTDCh. 18 - Prob. 7QTDCh. 18 - Prob. 8QTDCh. 18 - Prob. 9QTDCh. 18 - Prob. 10QTD
Ch. 18 - Prob. 11QTDCh. 18 - Prob. 12QTDCh. 18 - Prob. 13QTDCh. 18 - Prob. 14QTDCh. 18 - Prob. 15QTDCh. 18 - Prob. 16QTDCh. 18 - Prob. 17QTDCh. 18 - Prob. 18QTDCh. 18 - Prob. 19QTDCh. 18 - Prob. 20QTDCh. 18 - Prob. 21QTDCh. 18 - Prob. 22QTDCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - Prob. 3PCh. 18 - Prob. 4PCh. 18 - Prob. 5PCh. 18 - Prob. 6PCh. 18 - Prob. 7PCh. 18 - Prob. 8PCh. 18 - Prob. 10PCh. 18 - Prob. 11PCh. 18 - Prob. 12PCh. 18 - Prob. 13PCh. 18 - Prob. 14PCh. 18 - Prob. 15PCh. 18 - Prob. 16PCh. 18 - Prob. 17PCh. 18 - Prob. 18PCh. 18 - Prob. 19PCh. 18 - Prob. 20PCh. 18 - Prob. 21P
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