Corporate Finance
12th Edition
ISBN: 9781259918940
Author: Ross, Stephen A.
Publisher: Mcgraw-hill Education,
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Question
Chapter 26, Problem 11CQ
Summary Introduction
To explain: All firms do not increase payable period to shorten cash cycle.
Payable Period:
The time period starts when the company purchase raw material from supplier and pay cash back to the supplier this time period is the payable period. Generally large companies lengthen payable period to get the benefit of cash.
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Last month, Bluesky announced that it would stretch out its bill payments from 30days to 45days. The reason given was that the company wanted to “control costs and optimize cash flow”. The increased payables will be in effect for all of the company’s 4,000 suppliers.
a). Why don’t all firms simply increase their payables period to shorten their cash cycles?
b). Bluesky lengthened its payables period to “control costs and optimize cash flow”. Exactly what is the cash benefit to Bluesky from this change?
Ingraham Inc. currently has $500,000 in accounts receivable, and its days sales outstanding (DSO) is 44 days. It wants to reduce its DSO to 20 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 10%. What will be the level of accounts receivable following the change? Assume a 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent
A company with annual sales of
$22,000,000 is considering changing its
payment terms from net 40 to net 30 to
encourage customers to pay more promptly.
The company forecasts that customers
would respond by paying on day 32 rather
than day 44 as at present (assume a 360
day year) but would decrease their
purchases by $400,000 per year. The
company also forecasts that its idle cash
balance would decrease by $80,000 and
administrative costs would be reduced by
$30,000 per year. The company's variable
costs average 62% of sales, it is in the 35%
marginal tax bracket, and it has an 8% cost
of capital.
Part A: Calculate the incremental cash flows
from accepting this proposal, and organize
your cash flows from part A into a cash flow
spreadsheet.
Part B: Calculate the proposal's NPV, IRR,
and NAB.
Part C: Should the company shorten its
payment terms?
Chapter 26 Solutions
Corporate Finance
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