EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 18, Problem 10P
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To determine: The net variations in the pretax profits.
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Brevard Inc is considering changing its credit terms from net 55 to net 30 to bring its terms in line with other firms in the industry. Currently, annual sales are $2,250,000 and the average collection period (DSO) is 75 days. Brevard Inc. estimates that tightening the credit terms would reduce annaul sales to $2,025,000 but accounts recievable would drop to 39 days of sales. Brevard's variable cost ratio is 59% and its average cost of funds is 11.2%. Should the change in credit terms be made? Assume all operating costs are paid when inverntory is sold and that all sales are collected at the DSO.
XYZ, Inc., produces and commercializes engines for cars. To stimulate sales, the financial manager is contemplating
lengthening its credit period from the existing net 30 terms to net 35 terms. The credit analyst estimates that the new credit
policy increases sales by 15 percent. The financial manager asks you to analyze the impacts of the proposed credit change on
the firm's value.
The variable costs, as a percent of sales, equal 70%. The existing monthly credit sales is $90 million. The existing bad debt
loss rate is 29% and will increase by o.75% after lengthening the credit period. The existing credit & collection expenses
equal 2.5% of sales and those under 35-day terms will be 3% of sales. The company's cost of capital is presently 10 percent
Under the new credit policy, the firm offers a 2% cash discount if they pay within one week and the percent of sales made to
cash discount-takers will be 15%.
1) Calculate the NPV of one day's sales under the existing credit policy
XYZ, Inc., produces and commercializes engines for cars. To stimulate sales, the financial manager is contemplating
lengthening its credit period from the existing net 30 terms to net 35 terms. The credit analyst estimates that the new credit
policy increases sales by 15 percent. The financial manager asks you to analyze the impacts of the proposed credit change on
the firm's value.
The variable costs, as a percent of sales, equal 70%. The existing monthly credit sales is $90 million. The existing bad debt
loss rate is 2% and will increase by o.75% after lengthening the credit period. The existing credit & collection expenses
equal 2.5% of sales and those under 35-day terms will be 3% of sales. The company's cost of capital is presently 10 percent.
Under the new credit policy, the firm offers a 2% cash discount if they pay within one week and the percent of sales made to
cash discount-takers will be 15%.
1) Calculate the NPV of one day's sales under the existing credit policydits)
Chapter 18 Solutions
EBK CONTEMPORARY FINANCIAL MANAGEMENT
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