FUND. OF CORPORATE FIN 2 YEARS CONNECT
16th Edition
ISBN: 9781260123678
Author: Ross
Publisher: MCG
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 20, Problem 6CRCT
Summary Introduction
To discuss: The length of credit period.
Introduction:
Credit period length refers to number of days for which credit is offered.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
P14–10 Relaxation of credit standards Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year, the average collection period is expected to increase from 45 to 60 days, and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40, and the variable cost per unit is $31. The firm’s required return on equal-risk investments is 10%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.)
Assume the credit terms offered to your firm by your suppliers are 2/20, net 40. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 40. (Hint: Use a 365-day year.)
30
[Question text] Syarikat Sinergi is considering a new credit policy. The current policy is cash only. The new policy would involve extending credit for one period or net 30. Based on the following information, determine if the switch is advisable. The interest rate is 2.5% per period.
CURRENT POLICY
NEW POLICY
Price per unit
RM175
RM175
Cost per unit
RM130
RM130
Sales per period in units
1,000
1,100
Select one:
A. Yes, the switch should be made because the NPV is RM8,000.
B. No, the switch should not be made because the NPV is -RM8,000.
C. Yes, the switch should be made because the NPV is RM4,500.
D. No, the switch should not be made because the NPV is -RM4,500.
Chapter 20 Solutions
FUND. OF CORPORATE FIN 2 YEARS CONNECT
Ch. 20.1 - Prob. 20.1ACQCh. 20.1 - Prob. 20.1BCQCh. 20.2 - What considerations enter into the determination...Ch. 20.2 - Explain what terms of 3/45, net 90 mean. What is...Ch. 20.3 - Prob. 20.3ACQCh. 20.3 - Explain how to estimate the NPV of a credit policy...Ch. 20.4 - What are the carrying costs of granting credit?Ch. 20.4 - What are the opportunity costs of not granting...Ch. 20.4 - Prob. 20.4CCQCh. 20.5 - Prob. 20.5ACQ
Ch. 20.5 - Prob. 20.5BCQCh. 20.6 - Prob. 20.6ACQCh. 20.6 - What is an aging schedule?Ch. 20.7 - What are the different types of inventory?Ch. 20.7 - What are three things to remember when examining...Ch. 20.7 - Prob. 20.7CCQCh. 20.8 - Prob. 20.8ACQCh. 20.8 - Which cost component of the EOQ model does JIT...Ch. 20.A - Prob. 1ACQCh. 20.A - Prob. 1BCQCh. 20.A - Evaluating Credit Policy [LO2] Bismark Co. is in...Ch. 20.A - Credit Policy Evaluation [LO2] The Johnson Company...Ch. 20.A - Prob. 3QPCh. 20.A - Prob. 4QPCh. 20.A - Prob. 5QPCh. 20 - What is the difference between the accounts...Ch. 20 - Prob. 20.2CTFCh. 20 - Prob. 20.7CTFCh. 20 - Prob. 1CRCTCh. 20 - Prob. 2CRCTCh. 20 - Prob. 3CRCTCh. 20 - Five Cs of Credit [LO1] What are the five Cs of...Ch. 20 - Prob. 5CRCTCh. 20 - Prob. 6CRCTCh. 20 - Prob. 7CRCTCh. 20 - Prob. 8CRCTCh. 20 - Prob. 9CRCTCh. 20 - Prob. 10CRCTCh. 20 - Prob. 1QPCh. 20 - Size of Accounts Receivable [LO1] The Red Zeppelin...Ch. 20 - Prob. 3QPCh. 20 - Prob. 4QPCh. 20 - Terms of Sale [LO1] A firm offers terms of 1/10,...Ch. 20 - Prob. 6QPCh. 20 - Prob. 7QPCh. 20 - Prob. 8QPCh. 20 - Evaluating Credit Policy [LO2] Air Spares is a...Ch. 20 - Prob. 10QPCh. 20 - Prob. 11QPCh. 20 - Prob. 12QPCh. 20 - Prob. 13QPCh. 20 - Prob. 14QPCh. 20 - Prob. 15QPCh. 20 - Prob. 16QPCh. 20 - Prob. 17QPCh. 20 - Prob. 18QPCh. 20 - Prob. 19QPCh. 20 - Prob. 20QPCh. 20 - Prob. 21QPCh. 20 - Prob. 22QPCh. 20 - Credit Policy at Howlett Industries Sterling...Ch. 20 - Prob. 2M
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 15. A company is considering increasing the period of credit allowed to customers from 30 days to 45 days. Annual sales are currently £1,200,000, and annual profits are £100,000. It is anticipated that allowing extended credit would increase sales by 15%, while net profit margins would be unchanged. The working capital is financed by using an overdraft costing 10% per annum. Assume that there is no change in the absolute level of the inventory or account payable. What is the financial effect of the proposal (assume a year is 360 days)? A Reduction in profit of £10,000 B Increase in profit of £10,000 C Increase in profit of £15,000 D Increase in profit of £7,750arrow_forwardQ2) Credit Period Credit Sales = $24mn per year Credit Terms = net / 30 Profit Margin = 20% Level of A/R = Credit Sales / Avg. Rec. Turnover, ARTO= 360 / Credit Period Marketing Dept comes and says that if you increase net / 30 to net / 60 then sales will increase by $6 million. Borrowing rate = 20% What do you do? Q3) Discount Sales = $24m Credit Terms = 2/10, net/30 Borrowing rate = 17% 30% customers will avail discount and 70% will not avail. Is this a viable proposition?arrow_forwardA company buys on terms of 2/12, net 28. What is its nominal costof trade credit? (46.6%) The effective cost? (58.5%)arrow_forward
- Given the following information, answer the following questions. TR = $4.5Q TC = $3,500 + $2Q a.) What is the break-even level of output? b.) If the firm sells 1300 units what are its earnings or losses? c.) If sales rise to 2,300 units, what are the firm's earnings or losses?arrow_forwardProblem 12 (DSO and Accounts Receivable) 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.arrow_forwardP15–14 Integrative: Comparison of loan terms Cumberland Furniture wishes to establish a prearranged borrowing agreement with a local commercial bank. The bank’s terms for a line of credit are 3.30% over the prime rate, and each year the borrowing must be reduced to zero for a 30-day period. For an equivalent revolving credit agreement, the rate is 2.80% over prime with a commitment fee of 0.50% on the average unused balance. With both loans, the required compensating balance is equal to 20% of the amount borrowed. (Note: Cumberland currently maintains $0 on deposit at the bank.) The prime rate is currently 8%. Both agreements have $4 million borrowing limits. The firm expects on average to borrow $2 million during the year no matter which loan agreement it decides to use. What is the effective annual rate under the line of credit? What is the effective annual rate under the revolving credit agreement? (Hint:Compute the ratio of the dollars that the firm will pay in interest and…arrow_forward
- 6. Question 6 The attached table shows financial data (year 2009) for two US retailers: Save-A-Lot Retailers and Wally’s Mart. Assume that both companies have an average annual holding cost rate of 20% (i.e. it costs both retailers $2 to hold an item for one entire year that they procured for $10). How many days, on average, does a product stay in Save-A-Lot’s inventory before it is sold? Assume that stores operate 365 days a year.arrow_forwardMay I ask for an explanation and solution to the question for a better understanding. Thank you! 1.If the sales this year amounted to P500,000, sales this year at last year’s prices is P460,000. The cost of sales this year is P300,000, and the cost of sales this year at last year’s price is P260,000. How much is the gross profit variation due to sales price factor? a. P0 b. P400,000 U c. P40,000 F d. P240,000 F e. can't be determinedarrow_forwardYour firm purchases goods from its supplier on terms of 2.3/14, net 40. a. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 40?. (Round to one decimal place.) b. What is the effective annual cost to your firm if it chooses not to take the discount and makes its payment on day 50? (Round to one decimal place.)arrow_forward
arrow_back_ios
arrow_forward_ios
Recommended textbooks for you
Debits and credits explained; Author: The Finance Storyteller;https://www.youtube.com/watch?v=n-lCd3TZA8M;License: Standard Youtube License