Principles of Corporate Finance
13th Edition
ISBN: 9781260465099
Author: BREALEY, Richard
Publisher: MCGRAW-HILL HIGHER EDUCATION
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Chapter 30, Problem 11PS
Summary Introduction
To determine: The effect of credit terms based on original and revised terms.
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Until recently, Augean Cleaning Products sold its products on terms of net 54, with an average collection period of 69 days. In an
attempt to induce customers to pay more promptly, it has changed its terms to 1/10, EOM, net 54. Assume current sales of $100, costs
of $74, an interest rate of 13%, and no defaults. Assume each month has 30 days and a year has 360 days. The initial effect of the
changed terms is as follows:
Average Collection Periods
(Days)
Cash Discount
Percent of Sales with Cash Discount
Net
54
24a
74
asome customers deduct the cash discount even though they pay after the specified date.
a. Calculate the NPV per $100 of sales based on the original terms. (Do not round intermediate calculations. Round your answer to 2
decimal places.)
Net present value
b. Assume that sales volume is unchanged and there are no defaults. Calculate the NPV per $100 of sales based on the revised terms.
(Assume all sales occur in the middle of the month. Do not round intermediate calculations.…
S
Until recently, Augean Cleaning Products sold its products on terms of net 69, with an average collection period of 84 days. In an
attempt to induce customers to pay more promptly, it has changed its terms to 2/10, EOM, net 69. Assume current sales of $100, costs
of $89, an interest rate of 10%, and no defaults. Assume each month has 30 days and a year has 360 days. The initial effect of the
changed terms is as follows:
Percent of Sales with Cash Discount
69
Average Collection
Periods (Days)
Cash Discount Net
39a
89
aSome customers deduct the cash discount even though they pay after the specified date.
a. Calculate the NPV per $100 of sales based on the original terms.
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
b. Assume that sales volume is unchanged and there are no defaults. Calculate the NPV per $100 of sales based on the revised
terms.
Note: Assume all sales occur in the middle of the month. Do
round intermediate calculations. Round your…
ABC & Company is making sales of Rs.16,00,000 and it extends a credit of 90 days to its customers. However, in order to overcome the financial difficulties, it is considering to change the credit policy. The proposed terms of credit and expected sales are given here under: Policy Terms
Sales
1 75 days Rs.15,00,000
II 60 days Rs. 14,50,000
III 45 days Rs 14,25,000
IV 30 days Rs 13,50,000
V 15 days Rs.13,00,000
The firm has variable cost of 80% and fixed cost of Rs.1,00,000. The cost of capital is 15%. Evaluate different policies and which policy should be adopted?
Chapter 30 Solutions
Principles of Corporate Finance
Ch. 30 - Prob. 1PSCh. 30 - Components of working capital True or false? a....Ch. 30 - Inventory True or false? a. Just-in-time inventory...Ch. 30 - Inventory What are the trade-offs involved in the...Ch. 30 - Prob. 5PSCh. 30 - Prob. 6PSCh. 30 - Prob. 7PSCh. 30 - Prob. 8PSCh. 30 - Prob. 9PSCh. 30 - Credit terms Phoenix Lambert currently sells its...
Ch. 30 - Prob. 11PSCh. 30 - Prob. 12PSCh. 30 - Prob. 13PSCh. 30 - Prob. 14PSCh. 30 - Prob. 15PSCh. 30 - Credit policy How should your willingness to grant...Ch. 30 - Prob. 17PSCh. 30 - Prob. 18PSCh. 30 - Prob. 19PSCh. 30 - Prob. 20PSCh. 30 - Cash management Complete the passage that follows...Ch. 30 - Prob. 22PSCh. 30 - Prob. 23PSCh. 30 - Prob. 24PSCh. 30 - Prob. 25PSCh. 30 - Prob. 26PSCh. 30 - Prob. 27PSCh. 30 - Prob. 28PSCh. 30 - Prob. 29PSCh. 30 - Prob. 30PSCh. 30 - Prob. 31PSCh. 30 - Prob. 32PSCh. 30 - Prob. 34PSCh. 30 - Prob. 35PSCh. 30 - Prob. 36PSCh. 30 - After-tax yields Suppose you are a wealthy...Ch. 30 - Prob. 38PSCh. 30 - Prob. 39PS
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- ABC Corp. has net credit sales of P1,440,000 yearly with credit terms of n/30, which is also the average collection period. BECK does not offer discounts for early payment; thus, customers take the full 30 days to pay. (Use 360 days/year) 1.What is the average receivable balance? 2.What is the accounts receivable turnover?arrow_forwardABC Corp. has net credit sales of P1,440,000 yearly with credit terms of n/30, which is also the average collection period. BECK does not offer discounts for early payment; thus, customers take the full 30 days to pay. (Use 360 days/year) If BECK offered 2% discount for payment in 10 days and every customer took advantage of the new terms, what would the new averagereceivable balance be? Continuing from the situation in (1), if BECK reduces its bank loans which cost 10%, by the cash generated from reduced receivables, what will be the net gain/loss to the firm?arrow_forwardSheffield Ltd's main supplier offers it credit terms of 1/10, n/40 on its purchases. Because cash flow is tight for Sheffield, the company's CFO is trying to determine what the annual interest rate would be if the company passes up this discount and pays at the end of the 40-day credit period instead. (Round answer to 2 decimal places, e.g. 15.25.) Annual interest rate 13.01 %arrow_forward
- Big Dom’s Pawn Shop charges an interest rate of 26.8 percent per month on loans to its customers. Like all lenders, Big Dom must report an APR to consumers. a. What rate should the shop report? (Do not round intermediate calculations and enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.) b. What is the effective annual rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forwardYesterday, Smiley Company sold $22,500 of merchandise on credit. The invoice was sent today with the terms, 3/10 net 40. This customer normally pays on the net date. What is the effective rate of interest the customer is paying by not taking the discount? Assume a 365-day year.arrow_forwardYVONE Trading requests credit terms from its trade supplier, Mestle Corporation. YVONE operates 360 days a year. The trade supplier offers two credit terms to YVONE as follows: Credit term number 1: 2/15, net 30 Credit term number 2: 1/10, net 90 Required: 1. Compute the nominal cost of forgoing the cash discount of the two credit terms. 2. Compute the effective cost of credit of the two terms. 3. If the prevailing bank interest rate is 15% of the nominal rate, which credit term should be bypassed to use the money as the source of financing? Discuss your answer briefly. (with solution)arrow_forward
- A firm buys on terms of 2/10, net 30, but generally does not pay until 40 days after the invoice date. Its purchases totaled $1,095,000 per year. How much “non-free” trade credit does the firm use on average each year? What is the nominal cost of “non-free” trade credit? What is the effective cost rate of the costly credit?arrow_forwardngram Office Supplies, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $675,000 per year. On average, what is the dollar amount of costly trade credit (total credit – free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.) Do not round intermediate calculations. $56,959 $64,726 $78,318 $59,548 $53,723arrow_forwardWhite Inc. wishes to speed up collection of its receivables. White currently offers credit terms of 1/20, net 40. It is considering changing to terms of 2/15 net 30. The collection period is expected to be reduced from 40 to 20 days. The percentage of customers paying within the discount period is expected to increase from 50 percent to 75 percent. Bad debt losses average 6 percent of sales and are not expected to change under the proposed policy. The inventory level is expected to increase by $2,000,000. Annual sales are $30 million. The variable cost ratio is 70 percent. The pretax return on funds made available by this change in policy is 10 percent. Assuming the change in terms is made; determine the net effect on White’s pretax profits.arrow_forward
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