PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Question
Chapter 30, Problem 33PS
a)
Summary Introduction
To determine: Company G’s current profit margin allows for
b)
Summary Introduction
To discuss: The way new credit scoring system would affect the profits if firm’s estimates of default rates are right.
c)
Summary Introduction
To discuss: Reasons of Company G estimates of default rates are not realized in real and consequences of such overestimating the accuracy of credit scoring scheme.
d)
Summary Introduction
To discuss: Effect on the assessment proposal when the customer has an existing account with Company G.
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Galenic Inc. is a wholesaler for a range of pharmaceutical products. Before deducting any losses from bad debts, Galenic operates on a profit margin of 5%. For a long time the firm has employed a numerical credit-scoring system based on a small number of key ratios. This has resulted in a bad debt ratio of 1.00%.
Galenic has recently commissioned a detailed statistical study of the payment record of its customers over the past 8 years and, after considerable experimentation, has identified five variables that could form the basis of a new credit-scoring system. On the evidence of the past 8 years, Galenic calculates that for every 10,000 accounts it would have experienced the following default rates:
Number of Accounts
Credit Score under Proposed System
Defaulting
Paying
Total
Better than 80
70
9,090
9,160
Worse than 80
30
810
840
Total
100
9,900
10,000
By refusing credit to firms with a poor credit score (worse than 80),…
Everbusiness Corporation has been reviewing its credit policies. The credit standard it has been applying have resulted in an annual credit sales of $5,000,000.00. Its average collection period is 30 days with a bad debts/loss ratio of 1%. Everbusiness Corporation is considering a reduction in its credit standards. As a result, it expects incremental credit sales of $400,000.00 of which the average collection period would be 60 days, in which the bad BCR to sales for Everbusiness Corporation is 70%. The required investment on receivables is 15%. Evaluate the relaxation in credit standards that Everbusiness Corporation is considering. Use 0.04% per year/365 days.
Provide detailed explanation and solutions.
1.) Beltline Co. had credit sales of $100,000 for the year, and based on experience estimates that approximately 1% of these sales will be uncollectible. Under the percent of sales method,
a.the adjusting entry to record the uncollectible sales would involve a debit to Allowance for Doubtful Accounts and a credit to Bad Debt Expense.
b.the estimated uncollectible sales should not be recorded until there is firm evidence that a customer will not pay.
c.the estimated bad debt expense is $1,000.
d.the estimated bad debt expense is $10,000.
2.) Under the percentage of receivables method theory,
a.the majority of accounts receivable portion will not be collected.
b.some portion of the existing accounts receivable will not be collected.
c.the percentage of uncollectible accounts is calculated as Average Uncollectible Accounts divided by Average Accounts Receivable.
d."some portion of the existing accounts receivable will not be collected" and "the percentage of uncollectible…
Chapter 30 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 30 - Inventory What are the trade-offs involved in the...Ch. 30 - Prob. 2PSCh. 30 - Prob. 3PSCh. 30 - Prob. 4PSCh. 30 - Prob. 5PSCh. 30 - Prob. 6PSCh. 30 - Prob. 7PSCh. 30 - Credit policy How should your willingness to grant...Ch. 30 - Cash management Complete the passage that follows...Ch. 30 - Prob. 10PS
Ch. 30 - Prob. 11PSCh. 30 - Prob. 12PSCh. 30 - Prob. 13PSCh. 30 - Prob. 14PSCh. 30 - Credit terms Phoenix Lambert currently sells its...Ch. 30 - Prob. 16PSCh. 30 - Prob. 17PSCh. 30 - Prob. 18PSCh. 30 - Prob. 19PSCh. 30 - Prob. 20PSCh. 30 - Prob. 21PSCh. 30 - Prob. 22PSCh. 30 - Prob. 23PSCh. 30 - Prob. 24PSCh. 30 - Prob. 25PSCh. 30 - Money-market yields In Section 30-4 we described a...Ch. 30 - Money-market yields Look again at the previous...Ch. 30 - Prob. 29PSCh. 30 - Prob. 30PSCh. 30 - Prob. 31PSCh. 30 - Prob. 33PS
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