KK Corporation is analyzing its option to restrict its credit terms. Current sales level is P6,000,000, average receivables balance is P500,000, bad debts on sales is 10%. With the new policy, sales will be P5,000,000, average receivables balance will be P200,000, and bad debts on sales will be 2%. The variable cost rate is 60% and the effective cost of capital is 18%. Based on these available information, what is the net benefit/(cost) of this change in policy?

KK Corporation is analyzing its option to restrict its credit terms. Current sales level is P6,000,000, average receivables balance is P500,000, bad debts on sales is 10%. With the new policy, sales will be P5,000,000, average receivables balance will be P200,000, and bad debts on sales will be 2%. The variable cost rate is 60% and the effective cost of capital is 18%. Based on these available information, what is the net benefit/(cost) of this change in policy?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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ABC Limited has annual sales of Rs. 50 lacs. The selling price per unit is Rs. 50 per unit and the variable costs is 70% of the selling price. The required rate of return on investment is 20%, average cost per unit is Rs. 40 per unit. Annual collection expenditure is Rs. 60000 and default % is 5%. The credit terms offered by the company is 60 days. The Company is considering change in the credit policy and the expected impact is as follows: Option 1 Collection Period: 45 days Collection expenditure:75000 Default%: 3% Option 2 Collection Period: 30 days Collection expenditure: 140000 Default%: 1% Advise the company on the selection of the Options.
The 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.)
Suppose management is unwilling to permit losses exceeding 18% of a financial institution’s capital to a particular sector? What is the concentration limit if management estimates that the amount lost per dollar of defaulted loans in this sector is 30 cents? What would the concentration limit be if the loss rates on bad loans was 55 cents? What is it 12 cents?
) Prince Edward Bank considers increasing a type of loans in the credit portfolio by $3,500,000,which will generate a gross income of 2.5%p.a. The bank assumes PD is 10% and estimates LGDis 20% and EAD as 80%. The net income, which is gross income minus Expected Loss (i.e. EL),will be used in the RAROC analysis. When doing so, the Bank refers to the net income andunexpected loss (i.e. UL) as the capital-as-risk estimation.Required:If the ROE of Prince Edward Bank is targeted at 25%, analyze whether the loans could be addedto the portfolio by RARoC analysis
Hallmark, the greeting card company, is considering going online. It is anticipated that it will cost the firm RM 1 billion to do so and that the firm will be able to use its current debt capacity to borrow 20% of this investment, at an after-tax cost of 4.5%. Hallmark has a beta of 1.1. Online retailers have a beta of 1.50 and do not carry debt. If the riskless rate is 6% and the market risk premium is 5.5% estimate the cost of capital for the online investment.
A company has annual credit sales of €10 million, and a cost of capital of 7%. At present the company's debtors take on average 45 days to pay for goods bought on credit. The company is considering a discount scheme which it estimates would reduce the period taken by customers to 25 days. Based on the limited information above, what would be the net effect of the proposed discount scheme on the company's profit and loss in a given year? Assume 360 days in a year. Saving of €555,556 Saving of €48,611 Saving of €38,889 Saving of €1,000
The Mitchem Marble company has a target current ratio of 2.2 but has experienced some difficulties financing its expanding sales in the past few months. At present the firm has a current ratio of 2.9 and current assests of $2.62 million. If Mitchem expands its receivables and inventories using its short-term line of credit, how much additional short-term funding can it borrow before its current ratio standard is reached? The additional amount of receivables and inventories (short term debt) is how many million? (rounded to two decimal places)
Company Coinbase is looking to expand its business and considering to borrow from the market. Coinbase has been offered the rates per annum on a $500 million 5-year loan by its bank: (SOFR: Secured Overnight Financing Rate) shown below. With the quotes from its bank, the floating rate is cheaper given the SOFR is 3% at present. However, the board of Coinbase fears that the interest rate will continue rising and think it is too risky to have variable liability in a medium time horizon. They wish to borrow with a fixed liability. Company Biance on the other hand, is to seek opportunities by having floating exposure. The offered rates per annum on a $500 million 5-year loan for Biance are also shown below. Design a swap contract that can facilitate the objectives of Coinbase and Biance. The swap contract should be equally beneficial to both companies. Company Biance Company Coinbase Fixed Rate 5.00% 7.00% Floating Rate SOFR+1.50% SOFR+2.00%
The Sandbox's Company has cash needs of P5 million per month. If Sandbox needs more cash, it can sell marketable securities, incurring a fee of P300 for each transaction. If Sandbox leaves its funds in marketable securities, it expects to earn approximately 0.50% per month on their investment. 1. Using the Baumol model, how much would be the Sandbox’s minimum total costs associated with cash infusion? 2. If Sandbox gets a cash infusion of P1 million each time it needs cash, what are the holding costs associated with its cash investment? 3. Using the Baumol model, what level of cash infusion minimizes Sandbox’s costs associated with cash?
The total in rate sensitive assets for a financial institution is $120 million and the total in rate sensitive liabilities is $95 million. What is the cumulative pricing gap (CGAP) and what is the interest rate sensitivity gap ratio if total assets equals $195 million? What would the projected change to net income be if interest rates rose by 2% on both assets and liabilities? What would the projected change to net income be if interest rates declined by 2% on both assets and liabilities? What would the projected change to net income be if interest rates rose by 1.8% on assets and 1.5% on liabilities? What would the projected change to net income be if interest rates declined by 1.8% on assets and 1.5% on liabilities?
A bank offers a corporate client a choice between borrowing cash at 9% per annum and borrowing Bitcoin at -5% per annum. The risk-free interest rate is 3% per annum, and storage costs are 7% per annum. The interest rates on the two loans are expressed with annual compounding. The risk-free interest rate and storage costs are expressed with continuous compounding. Suppose that the price of Bitcoin is $58,000 and the corporate client wants to borrow $1,160,000. Discuss whether the rate of interest on the Bitcoin loan is too high or too low in relation to the rate of interest on the cash loan. What is the correct rate of interest for Bitcoin loan?
A firm is considering relaxing credit standards, which will result in annual sales increasing from P1.5 million to P1.75 million, the cost of annual sales increasing from P1,000,000 to P1,125,000, and the average collection period increasing from 40 to 55 days. The bad debt loss is expected to increase from 1 percent of sales to 1.5 percent of sales. The firm's required return on investments is 20 percent. The firm's cost of marginal investment in accounts receivable is? Format: 11,111.11

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