CORPORATE FINANCE (LL)-W/ACCESS
11th Edition
ISBN: 9781259976360
Author: Ross
Publisher: MCG
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Chapter 28, Problem 19QP
Summary Introduction
To determine: The break-even price per unit that should be charged under the new credit policy.
Credit Policy:
The credit policy is that policy of a company or a government which shows that how much amount is needed and how much is borrowed.
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The Branson Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2.5 percent per period.
Current Policy
New Policy
Price per unit
$ 85
$ 87
Cost per unit
$ 45
$ 45
Unit sales per month
4,250
?
What is the break-even quantity for the new credit policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Taylor Company provides the following information:
Annual credit sales : $ 24,000,000Collection period : 3 monthsTerms : net/30Rate of return : 18%
The company is considering changing the credit discount policy to 4/10, net 30. The company anticipates that thirty percent of consumers will take the discount. The receivable collection period is expected to be reduced to 2 months. Should the discount policy be implemented? Explain with calculations.
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Lewis Lumber 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 $360,000, and the average collection period (DSO) is 60 days. Lewis estimates tightening the credit terms will reduce annual sales to $356,000, but accounts receivable would drop to 35 days of sales. Lewis' variable cost ratio is 60 percent and its average cost of funds is 9 percent. Should the change in credit terms be made? Assume all operating costs are paid at the time inventory is sold and all sales are collected at the DSO. Assume there are 360 days in a year. Do not round intermediate calculations. Round your answers to the nearest cent.
The NPV for the existing credit policy, that is $ , is the NPV for the proposed credit policy, that is $ . Thus, Lewis Lumber change its credit policy.
Chapter 28 Solutions
CORPORATE FINANCE (LL)-W/ACCESS
Ch. 28 - Prob. 1CQCh. 28 - Trade Credit forms In what form is trade credit...Ch. 28 - Prob. 3CQCh. 28 - Five Cs or Credit What arc the five Cs of credit?...Ch. 28 - Credit Period Length What are some of the factors...Ch. 28 - Credit Period Length In each of the following...Ch. 28 - Inventory Types What are the different inventory...Ch. 28 - Just-in-Time Inventory If a company moves to a JIT...Ch. 28 - Inventory Costs If a companys inventory carrying...Ch. 28 - Inventory Period At least part of Dells corporate...
Ch. 28 - Prob. 1QPCh. 28 - Size of Accounts Receivable The Paden Corporation...Ch. 28 - ACP and Accounts Receivable Kyoto Joe, Inc., sells...Ch. 28 - Size of Accounts Receivable Tidwell, Inc., has...Ch. 28 - Terms of Sale A firm offers terms of 1/10, net 30....Ch. 28 - ACP and Receivables Turnover Chen, Inc., bas an...Ch. 28 - Size of Accounts Receivable Essence of Skunk...Ch. 28 - Size of Accounts Receivable The Arizona Bay...Ch. 28 - Evaluating Credit Policy Air Spares is a...Ch. 28 - Credit Policy Evaluation Leeloo, Inc., is...Ch. 28 - EOQ Fhloston Manufacturing uses 1,860 switch...Ch. 28 - EOQ The Trektronics store begins each week with...Ch. 28 - EOQ Derivation Prove that when carrying costs and...Ch. 28 - Credit Policy Evaluation The Harrington...Ch. 28 - Credit Policy Evaluation Happy Times currently has...Ch. 28 - Credit Policy The Silver Spokes Bicycle Shop has...Ch. 28 - Break-Even Quantity In Problem 14, what is the...Ch. 28 - Prob. 18QPCh. 28 - Prob. 19QPCh. 28 - Safety Stocks and Order Points Sach, Inc., expects...Ch. 28 - Evaluating Credit Policy Solar Engines...Ch. 28 - Evaluating Credit Policy In the previous problem,...Ch. 28 - Prob. 1MC
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- Tightening Credit Terms Kim Mitchell, the new credit manager of the Vinson Corporation, was alarmed to find that Vinson sells on credit terms of net 90 days while industry-wide credit terms have recently been lowered to net 30 days. On annual credit sales of 2.5 million, Vinson currently averages 95 days of sales in accounts receivable. Mitchell estimates that tightening the credit terms to 30 days would reduce annual sales to 2,375,000, but accounts receivable would drop to 35 days of sales and the savings on investment in them should more than overcome any loss in profit. Vinsons variable cost ratio is 85%, and taxes are 40%. If the interest rate on funds invested in receivables is 18%, should the change in credit terms be made?arrow_forwardAxis Wells and Excavation (AWE) currently generates $198,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $189,000, and accounts receivable will average $12,600. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days in a year. Round your answers to the nearest whole number. DSOExisting: days DSONew: daysarrow_forwardInitiating a cash discount Gardner Company currently makes all sales on credit and offers no cash discount. The firm is considering offering a 2% cash discount for payment within 15 days. The firm's current average collection period is 60 days, sales are 40,000 units, selling price is $46 per unit, and variable cost per unit is $35. The firm expects that the change in credit terms will result in an increase in sales to 45,000 units, that 70% of the sales will take the discount, and that the average collection period will fall to 30 days. If the firm's required rate of return on equal-risk investments is 10%, should the proposed discount be offered? (Note: Assume a 365-day year.)arrow_forward
- CJ Stores has current cash-only sales of 218 units per month at a price of $236.55 a unit. If it switches to a net 30 credit policy, the credit sales price will be $249 while the cash price will remain at $236.55. The switch is not expected to affect the sales quantity but a 3 percent default rate is expected. The monthly interest rate is 1.4 percent. What is the net present value of the proposed credit policy switch? a. 24,727 b. 27,965 c. 26,893 d. 29,481 e. 25,978arrow_forwardThe current credit terms of Brendor Manufacturing Ltd are 2/15, net 45 days. The company’s total annual sales are sh.200 millions with an average collection period of 30 days. Variable costs is 80% of the annual sales. 50% of the customers take advantage of the current discount. The company is considering relaxing its discount terms to 3/15, net 45 days. This relaxation of discount terms is expected to increase by sh.10m, reduce average collection period to 27 days and increase the proportion of customers who will take advantage of the discount to 60%. The company’s cost of capital is 12%. Corporate tax rate is 30%. Assume 360 days in a year. Required: Advise the management of Brendor Manufacturing Ltd on whether to relax its discount termsarrow_forwardJ Ltd. makes credit sales of $424,000 yearly The credit term offered by J Ltd. equals the average collection period ie, net 45 days. The company plans to adopt new credit terms. The new credit terms are 2/18. net 45. It is assumed that all the customers pay on the last day of the discount period. The company plans to use the amount of decrease in accounts receivable to reduce the bank loan that costs 10% Question 16 Assume that the new credit terms would increase the sales to 110% and the company earns 20% on sales before any discounts, determine the amount of net change in income if the company decides to adopt the new credit terms. (Use a 360-day year for calculations. Don't round intermediate calculations. Round the final answer to the nearest whole dollar) $8,400 $2.968 12 13 $2.120 $3.816arrow_forward
- Q2) 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_forwardvv. Axis Wells and Excavation(AWE) currently generates 55,000 in annual sales. AWE sells on terms of net 50, and it’s accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to 36,000, and accounts receivable will average 12,000. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days ina a year. Round your answer to the nearest whole number. DSO existing: Days DSO new: Daysarrow_forwardPanda Co. is planning to change its collection policies that will change the collection period from 5 days to 10 days. The daily projected credit sales for the upcoming year of the company is P40,000. Prevailing rates are expected at 3%. To make the change in collection policy cost-beneficial, the minimum savings in collection cost for the coming year should be?arrow_forward
- Sisa Corporation has the following data: Selling price per unit Variable cost per unit. P70 Variable Cost per unit P45 Annual credit sales - units. 50,400 Collection period. 30 days Rate of return 20% Sisa Corporation is considering easing its credit standards. If it does, sales will increase by 25%; collection period will increase to 45 days; bad debts losses are anticipated to be 4% of the incremental sales; and collection costs will increase by P31,645. If the proposed relaxation in credit standards is implemented, the net benefit (loss) for Sisa Corporation isarrow_forwardCost of Trade Credit If a firm buys under terms of 1/15, net 45, but actually pays on the 20th day and still takes the discount, what is the nominal cost of its nonfree trade credit? Assume a 365-day year. Do not round intermediate calculations. Round your answer to two decimal places. % Does it receive more or less credit than it would if it paid within 15 days? I. Paying after the discount period, but still taking the discount gives the firm more credit than it would receive if it paid within 15 days. II. Paying after the discount period, but still taking the discount gives the firm less credit than it would receive if it paid within 15 days. III. Paying before the discount period and taking the discount gives the firm more credit than it would receive if it paid within 15 days.arrow_forwardFinance in anticipation of an increase in sales manila care needs to increase working capital for receivables and inventory by 740,000. The following alternatives are available: a) issue a commercial paper at 13%p.a less 22% service charge b) discount a 180-day note for 14% c) avail a bank loan at 12% p.a with a 20% required compensating balance. d) daily credit payment to supplier's term of 2/10, n/45 What is the annual effective cost for each?arrow_forward
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