EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Question
Chapter 18, Problem 11P
Summary Introduction
To determine: The net profit from providing discount.
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Students have asked these similar questions
Warren Motor Company sells $30 million of its products to wholesalers on terms of "net 30." Currently, the firm's average collection period is 48 days. In an effort to speed up the collection of receivables, Warren is considering offering a cash discount of 2 percent if customers pay their bills within 10 days. The firm expects 50 percent of it's customers to take the discount and it's average collection period to decline to 30 days. The firm's required pretax return (i.e. opportunity cost) on receivables investment is 16 percent. Determine the cost of the cash discounts to Warren.
a.
$300,000
b.
$ 60,000
c.
$ 40,000
d.
$48,000
Dome Metals has credit sales of $288,000 yearly with credit terms of net 120 days, which is also the average collection period. Assume the firm adopts new credit terms of 3/18, net 120 and all customers pay on the last day of the discount period. Any reduction in accounts receivable will be used to reduce the firm's bank loan which costs 10 percent. The new credit terms will increase sales by 15% because the 3% discount will make the firm's price competitive.
a. If Dome earns 20 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a 360-day year.)
b. Should the firm offer the discount?
Dome Metals has credit sales of $198,000 yearly with credit terms of net 120 days, which is also the average collection period. Assume
the firm adopts new credit terms of 4/10, net 120 and all customers pay on the last day of the discount period. Any reduction in accounts
receivable will be used to reduce the firm's bank loan which costs 8 percent. The new credit terms will increase sales by 20% because
the 4% discount will make the firm's price competitive.
a. If Dome earns 25 percent on sales before discounts, what will be the net change in income if the new credit terms are adopted? (Use a
360-day year.)
Net change in income
b. Should the firm offer the discount?
No
Yes
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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