CORPORATE FINANCE-ACCESS >CUSTOM<
11th Edition
ISBN: 9781260170016
Author: Ross
Publisher: MCG CUSTOM
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Chapter 28, Problem 22QP
Evaluating Credit Policy In the previous problem, assume that the probability of default is 15 percent. Should the orders be filled now? Assume the number of repeat customers is affected by the defaults. In other words, 30 percent of the customers who do not default are expected to be repeat customers.
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Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in order to speed collections. At present, 40 percent of Sonata Company’s customers take the 2 percent discount. Under the new term, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore bad debt losses are not expected to rise above their present 2 percent level. However, the more generous cash discount terms are expected to increase sales from 2 million to 2.6 million per year. Santa Company’s variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is 9 per-cent, and the firm’s income tax rate is 40 percent. (Adapted Comprehensive Reviewer in MAS 2010 Edition, Apolinario D. Bobadilla)
Determine the following:
The days sales…
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.
Panda 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?
Chapter 28 Solutions
CORPORATE FINANCE-ACCESS >CUSTOM<
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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- ABC is deciding to give a cash discount of 1% if the customers pay on the tenth day. It originally offers a credit term of n/30. Without the cash discount, credit sales would be P6750000 with an average age of inventory of 27 days. With the cash discount, credit sales are forecasted to increase by15%, collections within the discount period is 40% and the average age will be 22 days. The variable cost rate is 60% while the effective interest rate that ABC uses for forecasting is 8%. Using the 360-day year, how much is the net benefit or cost of the new policy?arrow_forwardBased on a 360-day year, the proposed relaxation of credit standards would result in an expected increase in the average accounts receivable balance of how much?arrow_forwardALei Industries has credit sales of $146 million a year. ALei's management reviewed its credit policy and decided that it wants to maintain an average collection period of 35 days. a. What is the maximum level of accounts receivable that ALei can carry and have a 35-day average collection period? b. If ALei's current accounts receivable collection period is 55 days, how much would it have to reduce its level of accounts receivable in order to achieve its goal of 35 days?arrow_forward
- Jazz Auto Supply is not satisfied with its present credit policy. A proposal under consideration is to change the credit terms from 1/10, net 30 to 2/10, net 30. The firm's current average collection period is 42 days but it is expected to decline to 38 days. The percentage of credit customers who take discount is expected to increase from 45% to 60% under the new policy. Credit sales are anticipated to remain P400,000 with contribution margin of 25%. The bad debt losses are forecasted to decrease from 3% of credit sales to 2.5%. The firm's opportunity cost for investing in additional receivables is 18%. Should Jazz adopt this change policy?arrow_forwardABC is deciding to give a cash discount of 1% if the customers pay on the tenth day. It originally offers a credit term of n/30. Without the cash discount, credit sales would be P6,750,000 with an average age of 27 days.With the cash discount, credit sales are forecasted to increase by 15%, collections within the discount period is 40% and the average age will be 22 days.The variable cost rate is 60% while the effective interest rate that ABC uses for forecasting is 8%. Using a 360-day year, how much is the net benefit or (cost) of the new policy?arrow_forwardXYZ is evaluating whether to loosen its credit terms from 2/10, net 30 to 3/10, net 30. At present, 50 percent of XYZ'S sales are paid on Day 10, whereas, under the new terms, 60% of sales will be paid on Day 10. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on Day 30, whereas the remainder will pay 15 days late (no bad debts exist). But, as a result of the higher cash discount offered with the new terms, sales are expected to increase from $360,000 to $396,000 per year. XYZ'S variable costratio is 80% and its cost of funds is 9%. All production costs are paid on the day of the sale. Should XYZ change its credit terms? Show your computations and prove your answer.arrow_forward
- Breeze Corp. is planning to change its credit terms from 4/10, n/30 to 5/15, n/35. Currently, 50% of customers take the 4% discount. Under the new term, 5/15, n/35, discount customers are expected to rise to 60%. Under both of the terms, 50% of the customers who do not take the discount are expected to pay on due date, while the remainder will pay 10 days after. What is the increase in days sales outstanding from the old credit term to the proposed credit term? (Use 360 days) a. 25 days b. 2.5 days c. 1.5 days d. 4.25 daysarrow_forwardCampbell Computing Inc. expects to have sales this year of $30 million under its current credit policy. The company offers a credit term of 2/8, net 20. Currently, 60 percent of paying customers take the discount and rest are paying on time. The bad debt loss is 2 percent. The company has a profit margin of 20%, and uses a 5% short-term bank loan to finance its accounts receivables. With 365-day a year assumption, please calculate the following items: a. The bad debt loss of the company this year b. The annual discount given to customers c. The accounts receivables level d. The financing cost of accounts receivablesarrow_forwardCA Inc. assumes new customers will default 15 percent of the time but if they don't default, they will become repeat customers who always pay their bills. Assume the average sale is $500 with a variable cost of $350, and a monthly required return of 1.75 percent. What is the NPV of extending credit for one month to a new customer? Assume 30 days per month.arrow_forward
- 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 centarrow_forwardBarcain Credit Corporation wants to earn an effective annual return on its consumer loans of 16 percent per year. The bank uses daily compounding on its loans what interest rate is the bank required by law to report to potential borrowers? Explain why this rate is misleading to an uninformed borrower.arrow_forwardThe 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.)arrow_forward
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