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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Axis Wells and Excavation (AWE) currently generates $198,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $189,000, and accounts receivable will average $12,600. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days in a year. Round your answers to the nearest whole number. DSOExisting: days DSONew: days
Meyer & Co. expects its EBIT to be $97,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 13 percent. The tax rate is24 percent. What is the WACC? What are the implications of the firm’s decision to borrow? Please work on excel and show formulas
Axis Wells and Excavation (AWE) currently generates $110,000 in annual credit sales. AWE sells on terms of net 50, and its accounts receivable balance averages $11,000. AWE is considering a new credit policy with terms of net 25. Under the new policy, sales will decrease to $104,000, and accounts receivable will average $13,000. Compute the days sales outstanding (DSO) under the existing policy and the proposed policy. Assume there are 360 days in a year. Round your answers to the nearest whole number. DSO Existing: days DSO New: days
ABC Co. has a credit purchase of P40,000 with terms 2/10 net 30 with its supplier. Based on past experience, ABC Co. can manage to pay on the 40t day without penalty. The management of ABC Co. is pondering whether to avail the discount or not. ABC Co. has the following options of raising cash in case it wants to avail the discount:A. Convert its short term investments which is currently earning 14% per year. Transaction cost is estimated at 2%.B. Obtain a P40,000 discounted loan from PI which offers a discounted loan for 20 days at a cost of P320.IF the management makes the right decision, how much is the least possible cost(expressed in % to be incurred related to the trade credit?
(Efficiency analysis) ALei Industries has credit sales of $143 million a year ALef's management revwed ts anddei t is the maximum level of accounts receivable that ALei can carry and have a 45-day average colledtion period? Leis current accounts receivable collection period is 55 days, how much would it have lo reduce its level of accounts recelvable in oander to adi a. What is the maximum level of accounts receivable that ALei can carry and have a 45-day average collection period? b. The maximum level of accounts receivable vilbe smillion Round to one decimal place) The maximum level of accounts receivable will be S million.
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?
Crystals’. currently makes all sales on credit and offers no cash discount. The firm is considering a 3% cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 art pieces per year, selling price is R25 000 per art piece, variable cost per item is R18 750, and the average cost per item is R21 000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 items per year that 75% of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5% of sales. The firm's required return on equal-risk investments is 20%. (Assume a 360-day year). What is the firms marginal profit contribution under the proposed plan? R22500 R40000 R62500 R100 000
Commonwealth Construction (CC) needs $1 million of assets to get started, and it expects to have a basic earning power ratio of 20%. CC will own no securities, all of its income will be operating income. If it so chooses, CC can finance up to 25% of its assets with debt, which will have a 7% interest rate. If it chooses to use debt, the firm will finance using only debt and common equity, so no preferred stock will be used. Assuming a 25% tax rate on taxable income, what is the difference between CC's expected ROE if it finances these assets with 25% debt versus its expected ROE if it finances these assets entirely with common stock? Round your answer to two decimal places. percentage points
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 2.7 and current assets of $2.38 million. If Mitchem expands its receivable 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?
Maynard Inc. has no debt outstanding and a total market value of $ 250,000. Earnings before interest ana taxes, EBIT, are projected to be $ 28,000 if economi conditions are normal. If there is strong expansion in the economy, then EBIT will be 30% higher. If there is a recession, then EBIT will be 50% lower. Maynard is considering a $ 90,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. Suppose the company has a market-to-book ratio 1.0 a. Calculate return of equity (ROE) under each of the three economic scenarios before any debt issued. Also calculate the percentage changes in ROE for economic expansion dan recession, assuming no taxes b. Repeat Part (a) assuming the firm goes through with the proposed recapitalization c. Repeat Part (a) and (b) of this problem assuming the firm has a tax rate of 35 percent Thanks in advance
Bulldogs inc. will least likely experience which of the following if the firm shifts its credit terms from n/25 to 3/10, n/25 a. the computed days sales outstanding will decrease b. the percentage of credit sales from the total sales revenue will increase c. cash conversion cycle will tend to increase d. decrease in short-term borrowings
If a company wishes to extend credit standards in order to increase its sales and generate additional accounts receivable of ¢70,000, a strategy that represents an opportunity cost of 20% for the company, what will be the required return on the additional investment? ? if it is known that: Unit price = 600.00 Unit variable cost = 240.0

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