EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 18, Problem 6P
a)
Summary Introduction
To determine: The released funds due to variation in the credit terms.
b)
Summary Introduction
To determine: The additional cash discount cost.
c)
Summary Introduction
To determine: The net effect on profit.
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A company plans to tighten its credit policy. The new policy will decrease the average number of days
in collection from 75 to 50 days and will reduce the ratio of credit sales to total revenue from 70% -
60%. The company estimates that projected sales would be 5% less if the proposed new credit policy
is implemented. If projected sales for the coming year are P50 million, calculate the estimated peso
change in the firm's account receivable balance caused by this proposed change in credit policy.
Assume a 365-day year. [Answer format: INCREASE 1234567]
Power Inc. is considering shifting its credit terms from 3/15, n/30 to 4/10, n/30 in order to speed up collections. Currently, 30% of Power Inc.’s customers take the 3% discount, 35% pays on time; the rest on the 35th day. Under the new policy, 40% take the discount, half of the remaining customers pays on time while the rest pays 5 days after. More generous cash discount terms are expected to increase sales from P2,000,000 to P2,500,000 per year. Power Inc.’ variable cost ratio is 60%, the interest rate on funds invested in accounts receivable is 3%, and the firm’s income tax rate is 40%. Use 360 days/year.What is the Days Sales Outstanding before the change in credit policy?How much is the accounts receivable balance under the old credit policy?What is the incremental investment in accounts receivable? How much is the incremental sales? What is the incremental contribution margin?
Gupta & Grant Computer Supplies usually tries to take advantage of cash discounts even if it must borrow the money
for a few days in order to pay the invoice in time. Compute the savings on Gupta & Grant's purchases and terms from
the supplier. Use a 365-day year. Assume that the number of interest days is the time between the due date and the last
date to take advantage of the cash discount.
Interest
Rate
Days
Amount
Cash
on
of
of
Invoice
Terms
Discount
Loan
Interest
Interest
Savings
$1,725
2/15, n/60
9.5%
O 34.50; 45 days; $20.20; $14.30
$34.50; 60 days; $26.94; $7.56
O $34.50; 45 days; $19.80; $14.70
O $34.50; 60 days; $26.40; $8.10
Chapter 18 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Ch. 18 - Prob. 1QTDCh. 18 - Prob. 2QTDCh. 18 - Prob. 3QTDCh. 18 - Prob. 4QTDCh. 18 - Prob. 5QTDCh. 18 - Prob. 6QTDCh. 18 - Prob. 7QTDCh. 18 - Prob. 8QTDCh. 18 - Prob. 9QTDCh. 18 - Prob. 10QTD
Ch. 18 - Prob. 11QTDCh. 18 - Prob. 12QTDCh. 18 - Prob. 13QTDCh. 18 - Prob. 14QTDCh. 18 - Prob. 15QTDCh. 18 - Prob. 16QTDCh. 18 - Prob. 17QTDCh. 18 - Prob. 18QTDCh. 18 - Prob. 19QTDCh. 18 - Prob. 20QTDCh. 18 - Prob. 21QTDCh. 18 - Prob. 22QTDCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - Prob. 3PCh. 18 - Prob. 4PCh. 18 - Prob. 5PCh. 18 - Prob. 6PCh. 18 - Prob. 7PCh. 18 - Prob. 8PCh. 18 - Prob. 10PCh. 18 - Prob. 11PCh. 18 - Prob. 12PCh. 18 - Prob. 13PCh. 18 - Prob. 14PCh. 18 - Prob. 15PCh. 18 - Prob. 16PCh. 18 - Prob. 17PCh. 18 - Prob. 18PCh. 18 - Prob. 19PCh. 18 - Prob. 20PCh. 18 - Prob. 21P
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- Yen Corporation will be relaxing its credit policy. Under the old policy of 2/10, n/25, sales total P5,000,000. Around 40% take the discount while the remainder pay on the 25th day. The proposed policy is 3/10, n/40. The increase in the cash discount and the payment term will like result to a P6,000,000 sales. This is expected to result to average days in receivables of 26.5 days (45% will be settled on the 10h day and the remainder on the 40h day). Variable cost rate will remain at 75%. The weighted average cost of capital is 15%. Using a 360-day year, how much is the annual net benefit/cost of this change? iness 28°Carrow_forwardPLEASE MAKE IT IN EXCEL AND SHOW THE FORMULAS (Take screenshots) La Resolana, S.A., has credit sales of $180,000 per year, with net payment terms of 30 days, which is also the average collection period. La Resolana does not currently offer any cash discounts, so customers take the 30 days to pay. What is the average accounts receivable balance? What is the accounts receivable turnover?arrow_forwardCJ 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_forward
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