CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
11th Edition
ISBN: 9781260269901
Author: Ross
Publisher: MCG CUSTOM
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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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Students have asked these similar questions
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?
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 into a cash flow spreadsheet.
Part B: Calculate the proposal's NPV, IRR, and NAB.
Part C: Should the company shorten its payment terms?
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?
Chapter 26 Solutions
CORPORATE FIN.(LL)-W/ACCESS >CUSTOM<
Ch. 26 - Prob. 1CQCh. 26 - Prob. 2CQCh. 26 - Prob. 3CQCh. 26 - Cost of Current Assets Grohl Manufacturing, Inc.,...Ch. 26 - Prob. 5CQCh. 26 - Shortage Costs What are the costs of shortages?...Ch. 26 - Prob. 7CQCh. 26 - Prob. 8CQCh. 26 - Prob. 9CQCh. 26 - Prob. 10CQ
Ch. 26 - Prob. 11CQCh. 26 - Prob. 12CQCh. 26 - Prob. 1QPCh. 26 - Cash Equation Blizzard Corp. has a book value of...Ch. 26 - Changes in the Operating Cycle Indicate the effect...Ch. 26 - Prob. 4QPCh. 26 - Calculating Cash Collections The Litzenberger...Ch. 26 - Prob. 6QPCh. 26 - Prob. 7QPCh. 26 - Calculating Payments The Thakor Corporations...Ch. 26 - Calculating Cash Collections The following is the...Ch. 26 - Prob. 10QPCh. 26 - Prob. 11QPCh. 26 - Prob. 12QPCh. 26 - Prob. 13QPCh. 26 - Prob. 14QPCh. 26 - Prob. 15QPCh. 26 - Prob. 1MCCh. 26 - Rework the cash budget and short-term financial...Ch. 26 - Rework the sales budget assuming an 11 percent...
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