DDR Corporation has a 12 percent opportunity cost of funds and currently sells on terms of net/10, EOM. The company has sales of 10 million a year, which are 80 percent on credit and spread evenly over the year. The average collection period is currently 60 days. If DDR Company offered terms of "2/10, n/30," customers representing 60 percent of its credit sales would take the discount Should DDR Company change its terms from “net/10, EOM" to “2/10, net 30"? Why?

DDR Corporation has a 12 percent opportunity cost of funds and currently sells on terms of net/10, EOM. The company has sales of 10 million a year, which are 80 percent on credit and spread evenly over the year. The average collection period is currently 60 days. If DDR Company offered terms of "2/10, n/30," customers representing 60 percent of its credit sales would take the discount Should DDR Company change its terms from “net/10, EOM" to “2/10, net 30"? Why?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter18: The Management Of Accounts Receivable And Inventories

Section: Chapter Questions

Problem 5P

See similar textbooks

Similar questions

AL Enterprises purchases P4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its nonfree trade credit? (Assume a 365-day year.)20.11%23.45%22.28%21.17%24.63%
Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 5/10, net 105. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.) a. 21.35% b. 21.78% c. 17.68% d. 20.22% e. 19.57%
The major supplier of SS Corp. offers credit terms of 2/10, n/35. What is the net benefit (in rate or percent) of paying on the 35th day instead of obtained a ioan that would cost SS 9% interest per year. Use 360 riays and use the compounded annual effective cost.
Mavericks Cosmetics buys $4,691,301 of product (net of discounts) on terms of 7/10, net 60, and it currently pays on the 10th day and takes discounts. Mavericks plans to expand, and this will require additional financing. If Mavericks decides to forego discounts, what would the effective percentage cost of its trade credit be, based on a 365-day year?
Mahrouq Technologies buys $14,962,649 of materials (net of discounts) on terms of 5/30, net 60, and it currently pays within 30 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit. Answer in % terms to 2 decimal places (no % sign).
The 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 terms
Kirk Development buys on terms of 2/15, net 45 days. It does not take discounts, and it typically pays on time, 45 days after the invoice date. Net purchases amount to $350,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.) a. $43,151 b. $14,384 c. $42,288 d. $14,096 e. $28,767
Hail and Sons operates for 240 days in a year. It has been offered credit terms of 4/30 net 90 days. What will be the nominal annual percentage cost if it is non-free trade credit?
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) 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?
Mahrouq Technologies buys $13,431,550 of materials (net of discounts) on terms of 4/30, net 60, and it currently pays after 5 days and takes discounts. Mahrouq plans to expand, and this will require additional financing. If Mahrouq decides to forego discounts and thus to obtain additional credit from its suppliers, calculate the nominal cost of that credit. Answer in % terms to 2 decimal places (no % sign).
Hinkle Corporation buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $550,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.) a. $94,932 b. $109,895 c. $90,411 d. $104,662 e. $99,678
Newsome Inc. buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year? a. 25.09% b. 30.35% c. 27.59% d. 36.73% e. 33.39%