Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
14th Edition
ISBN: 9781337587563
Author: MOYER, R. Charles; McGuigan, James R.; Rao, Ramesh P.
Publisher: Cengage Learning
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Chapter 18, Problem 5P
a)
Summary Introduction
To determine: The released funds due to variation in the credit terms.
b)
Summary Introduction
To determine: The net effect in pre-tax profits.
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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.
Epstein Company, a wholesale distributor of jewelry, sells to retail jewelry stores on
terms of "net 120." Its average collection period is 150 days. The company is con-
sidering the introduction of a 4 percent cash discount if customers pay within 30
days. Such a change in credit terms is expected to reduce the average collection
period to 108 days. Epstein expects 30 percent of its customers to take the cash
discount. Annual credit sales are $6 million. Epstein's variable cost ratio is 0.667,
and its required pretax return on receivables investment is 15 percent. The company
does not expect its inventory level to change as a result of the change in credit
terms. Determine the net effect on Epstein's pretax profits.
Instruction: Please key in the relevant information in the blue cells in the Data Section. Then type
formulas in the yellow cells to determine the net effect on Epstein's pretax profits.
Data Section
Cash discount
Percent of customers taking discount
Current average…
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount.
The firm is considering a 2 percent cash discount for payment within 10 days. The
firm's current average collection period is 90 days, sales are currently $1,000,000,
variable cost is $600,000 (note the variable cost % is 60%). The firm expects that the
change in credit terms will result in an increase in sales to $1,500,000 per year and
variable costs will increase to $900,000 per year. Fizzy projects that 80 percent of the
sales will take the discount, and the average collection period will drop to 30 days.
The firm's required return on equal-risk investments is 10 percent. (Assume a 360-day
year.)
What is the cost (benefit) of the marginal cash discount?
O ($18,000)
O $24,000
($22,000)
O $30,000
Chapter 18 Solutions
Bundle: Contemporary Financial Management, 14th + MindTap Finance, 1 term (6 months) Printed Access Card
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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