Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 21, Problem 6MC
Summary Introduction
Case summary:
Chief financing officer of Company RR, a speciality coffee manufacturer, is re-thinking about its working capital policy and wants to re-new its line of credit and it wouldn’t ready to build payroll, probably forcing the company out of business.
The scare has forced the company to examine carefully about each component of working capital to make sure it is required, and decide whether the goal is to determine the line of credit are often eliminated entirely.
Previously, it has done little to look at assets and mainly because of poor communication among business functions and the decisions about working capital cannot be made at vacuum.
To discuss: Whether Company RR customers pay more or less promptly compared to its competitors, and suggestion of person X to company regarding credit policy and the four variables that makes up a firm’s credit policy.
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an example of how the factors in a firm's credit policy might differ between relaxed and restrictive policies, and differ in affecting sales and profit.
give an example of how the four factors in a firm's credit policy might differ between relaxed and restrictive policeis and differ in affecting sales and profit
Making changes to a firm’s credit policy involves trade-offs. Assuming that all other factors remain constant, which of the following are outcomes expected to result from an increase in a firm’s cash discount? Check all that apply.
An increase in the cost of the discounts given
An increase in the firm’s bad-debt expenses
An increase in the firm’s credit sales, a speeding up of customer payments, and a reduction in the firm’s receivables investment
An increase in the creditworthiness of the firm’s customers
Chapter 21 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 21 - a. Working capital; net working capital; net...Ch. 21 - Prob. 2QCh. 21 - Is it true that, when one firm sells to another on...Ch. 21 - What are the four elements of a firm’s credit...Ch. 21 - Prob. 5QCh. 21 - Prob. 6QCh. 21 - Prob. 7QCh. 21 - Is it true that most firms are able to obtain some...Ch. 21 - What kinds of firms use commercial paper?Ch. 21 - Prob. 1P
Ch. 21 - Medwig Corporation has a DSO of 17 days. The...Ch. 21 - What are the nominal and effective costs of trade...Ch. 21 - A large retailer obtains merchandise under the...Ch. 21 - A chain of appliance stores, APP Corporation,...Ch. 21 - Prob. 6PCh. 21 - Calculate the nominal annual cost of nonfree trade...Ch. 21 - If a firm buys on terms of 3/15, net 45, but...Ch. 21 - Grunewald Industries sells on terms of 2/10, net...Ch. 21 - The D.J. Masson Corporation needs to raise...Ch. 21 - Negus Enterprises has an inventory conversion...Ch. 21 - Strickler Technology is considering changes in its...Ch. 21 - Payne Products had $1.6 million in sales revenues...Ch. 21 - Dorothy Koehl recently leased space in the...Ch. 21 - Suppose a firm makes purchases of $3.65 million...Ch. 21 - The Thompson Corporation projects an increase in...Ch. 21 - The Raattama Corporation had sales of $3.5 million...Ch. 21 - Karen Johnson, CFO for Raucous Roasters (RR), a...Ch. 21 - Prob. 2MCCh. 21 - Prob. 3MCCh. 21 - Prob. 4MCCh. 21 - Prob. 5MCCh. 21 - Prob. 6MCCh. 21 - Prob. 7MCCh. 21 - Prob. 8MCCh. 21 - What is the impact of higher levels of accruals,...Ch. 21 - Prob. 10MCCh. 21 - Prob. 11MCCh. 21 - Prob. 12MCCh. 21 - Prob. 13MCCh. 21 - Prob. 14MCCh. 21 - Prob. 15MCCh. 21 - Prob. 16MC
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- Does its management typically have complete control over a firm’s credit policy? As a general rule,is it more likely that a company would increase itsprofitability if it tightened or loosened its creditpolicy?arrow_forwardIf a firm's current ratio and quick ratio have been steadily decreasing, the underlying cause might be traced to their credit manager's relaxed attitude about enforcing prompt payment from customers.arrow_forwardI am currently working on a study guide and came across the following question. Which of the following statements correctly reflects the effects of granting credit to customers? a) total revenues may increase if both the quantity sold and the price per unit increase when credit is granted b) a firm's cash cycle generally increases if credit is granted, all else equal c) both the cost of default and the cost of discounts must be considered before granting credit d) a firm may have to increase its borrowing if it decides to grant credit to its new customers e) all of the above My professor stated that the answer is all of the above, but after going through the readings and resources provided I could not find a way to understand how each answer is considered to be correct. I also e-mailed my professor and am waiting for a response, so I decided to post my question here as well.arrow_forward
- Suppose a company’s current credit terms are 1/10,net 30, but management is considering changingits terms to 2/10, net 40, relaxing its credit standards, and putting less pressure on slow-payingcustomers. How would you expect these changesto affect (a) sales, (b) the percentage of customerswho take discounts, (c) the percentage of customers who pay late, and (d) the percentage of customers who end up as bad debts?arrow_forwardWhen firms enter into loan agreements with their bank, it is very common for the agreement to have a restriction on the minimum current ratio the firm has to maintain. So, it is important that the firm be aware of the effects of their decisions on the current ratio. Consider the situation of Advanced Autoparts (AAP) in 2009. The firm has total current assets of $1,780,195,300 and current liabilities of $1,369,381,000. What is the firm’s current ratio? If the firm were to expand its investment in inventory and finance the expansion by increasing accounts payable, how much could it increase its inventory without reducing the current ratio below 1.2? If the company needed to raise its current ratio to 1.5 by reducing its investment in current assets and simultaneously reducing accounts payable and short-term debt, how much would it have to reduce current assets to accomplish this goal?arrow_forwardSuppose you were comparing a discount merchandiser with a high-end merchandiser.Suppose further that both companies had identical ROEs. If you applied the DuPontequation to both firms, would you expect the three components to be the same for eachcompany? If not, explain what balance sheet and income statement items might lead to thecomponent differences.arrow_forward
- A bank that grants loans to firms in a many different lines of business: will increase its information cost and decrease its credit risk will increase both its information cost and its credit risk will decrease its information cost and decerase its credit risk will decrease its information costs and increase its credit riskarrow_forwardHow would each of the following factors affectratio analysis? (a) The firm’s sales are highly seasonal. (b) The firm uses some type of windowdressing. (c) The firm issues more debt and usesthe proceeds to repurchase stock. (d) The firmleases more of its fixed assets than most firmsin its industry. (e) In an effort to stimulate sales,the firm eases its credit policy by offering 60-daycredit terms rather than the current 30-day terms.How might one use sensitivity analysis to helpquantify the answers?arrow_forwardSuppose the firm makes the change but its competitors react by making similar changes to their own credit terms, with the net result being that gross sales remain at the current 1,000,000 level. What would be the impact on the firms after-tax profitability?arrow_forward
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