Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 20, Problem 10QP
Summary Introduction
To evaluate: The credit policy of the firm.
Introduction:
Credit policy refers to a set of procedures that include the terms and conditions for providing goods on credit and principles for making collections.
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Problem 7-20 (Algo) Credit policy decision with changing variables [LO7-4]
Slow Roll Drum Company is evaluating the extension of credit to a new group of customers. Although these customers will provide
$432,000 in additional credit sales, 9 percent are likely to be uncollectible. The company will also incur $17,500 in additional collection
expense. Production and marketing costs represent 77 percent of sales. The firm is in a 35 percent tax bracket. No other asset buildup
will be required to service the new customers. The firm has a 12 percent desired return. Assume the average collection period is 180
days.
a. Compute the return on incremental investment.
Note: Input your answer as a percent rounded to 2 decimal places. Use a 360-day year.
Return on incremental investment
%
Chapter 3
A company has prepared the following projections for a year 2021
The data for the 2020 is given below
Sales 21000 units
Selling Price per unit RO.40
Variable Costs per unit RO.25
Total Costs per unit RO.35
Credit period allowed One Month. For the year 2021 company proposes to increase the credit
period allowed to its customers from one month to two month. It is expected that due to change
in policy as above will increase the sales by 8 % Calculate the closing receivable for the year
2021
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Chapter 20 - Problems
4
Codiac Corp. currently has an all-cash credit policy. It is considering making a change in the credit policy by going to terms of net 30
days. The required return is 0.85% per month.
Price per unit
Cost per unit
Unit sales per month
Current Policy
$ 220
$ 164
1,590
New Policy
225
169
$
1,640
Calculate the NPV of the decision to change credit policies. (Negative answer should be indicated by a minus sign. Do not round
intermediate calculations. Round the final answer to 2 decimal places. Omit $ sign in your response.)
NPV
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Chapter 20 Solutions
Fundamentals of Corporate Finance
Ch. 20.1 - Prob. 20.1ACQCh. 20.1 - Prob. 20.1BCQCh. 20.2 - What considerations enter into the determination...Ch. 20.2 - Explain what terms of 3/45, net 90 mean. What is...Ch. 20.3 - Prob. 20.3ACQCh. 20.3 - Explain how to estimate the NPV of a credit policy...Ch. 20.4 - What are the carrying costs of granting credit?Ch. 20.4 - What are the opportunity costs of not granting...Ch. 20.4 - Prob. 20.4CCQCh. 20.5 - Prob. 20.5ACQ
Ch. 20.5 - Prob. 20.5BCQCh. 20.6 - Prob. 20.6ACQCh. 20.6 - What is an aging schedule?Ch. 20.7 - What are the different types of inventory?Ch. 20.7 - What are three things to remember when examining...Ch. 20.7 - Prob. 20.7CCQCh. 20.8 - Prob. 20.8ACQCh. 20.8 - Which cost component of the EOQ model does JIT...Ch. 20.A - Prob. 1ACQCh. 20.A - Prob. 1BCQCh. 20.A - Evaluating Credit Policy [LO2] Bismark Co. is in...Ch. 20.A - Credit Policy Evaluation [LO2] The Johnson Company...Ch. 20.A - Prob. 3QPCh. 20.A - Prob. 4QPCh. 20.A - Prob. 5QPCh. 20 - What is the difference between the accounts...Ch. 20 - Prob. 20.2CTFCh. 20 - Prob. 20.7CTFCh. 20 - Prob. 1CRCTCh. 20 - Prob. 2CRCTCh. 20 - Prob. 3CRCTCh. 20 - Five Cs of Credit [LO1] What are the five Cs of...Ch. 20 - Prob. 5CRCTCh. 20 - Prob. 6CRCTCh. 20 - Prob. 7CRCTCh. 20 - Prob. 8CRCTCh. 20 - Prob. 9CRCTCh. 20 - Prob. 10CRCTCh. 20 - Prob. 1QPCh. 20 - Size of Accounts Receivable [LO1] The Red Zeppelin...Ch. 20 - Prob. 3QPCh. 20 - Prob. 4QPCh. 20 - Terms of Sale [LO1] A firm offers terms of 1/10,...Ch. 20 - Prob. 6QPCh. 20 - Prob. 7QPCh. 20 - Prob. 8QPCh. 20 - Evaluating Credit Policy [LO2] Air Spares is a...Ch. 20 - Prob. 10QPCh. 20 - Prob. 11QPCh. 20 - Prob. 12QPCh. 20 - Prob. 13QPCh. 20 - Prob. 14QPCh. 20 - Prob. 15QPCh. 20 - Prob. 16QPCh. 20 - Prob. 17QPCh. 20 - Prob. 18QPCh. 20 - Prob. 19QPCh. 20 - Prob. 20QPCh. 20 - Prob. 21QPCh. 20 - Prob. 22QPCh. 20 - Credit Policy at Howlett Industries Sterling...Ch. 20 - Prob. 2M
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- [EXCEL] Cash conversion cycle: Northern Manufacturing Company management found that during the last year it took an average of 47 days to pay its suppliers, whereas it took 63 days to collect its receivables. The company's days' sales in inventory was 49 days. What was Northern's cash conversion cycle? pleas use excel.arrow_forwardView Policies Current Attempt in Progress Pharoah's Soft Lemonade is starting to develop a new product for which the cash fixed costs are expected to be $90,000. The projected EBIT is $100,000, and the Accounting DOL is expected to be 2.1. What is the Cash Flow DOL? (Round answer to 2 decimal places, e.g. 15.25.) Cash Flow DOL eTextbook and Media Save for Later Attempts: 0 of 3 used Submit Answer G.. étvarrow_forward197360The Snedecker Corporation is considering a change in its cash - only policy. The new terms would be net one period. The required return is 2 percent per period. Current Policy New Policy Price per unit $ 65 $ 70 Cost per unit $ 39 $ 39 Unit sales per month 4,000 4,080 Determine the NPV of the new policy. Multiple Choice $93, 698.63 $ 103,561.64 $82,191.78 $32,876.71 $98, 630.14arrow_forward
- QUESTION 2: You graduated with Masters in Corporate Governance and the best graduating student for that matter. As a General Manager of your firm did request for the financials of your reputable firm to advise current management on the Key Performing Indicators (KPIs) a Venture Capitalist would look out for before investing in your business in the possible future. The table below is an extract from the financials of NABCO Finance Ltd for the years ended 2020 and 2021 respectively. Details 2020 (GHC) 2021 (GHC) Operating Income 351,800 414,000 Financial expense 100,000 94,000 Net impairment loss, gross loan portfolio 45,000 68,000 Operating expense 97,500 171,000arrow_forward16. Problem 4.20 (DSO and Accounts Receivable) eBook Problem Walk-Through Ingraham Inc. currently has $790,000 in accounts receivable, and its days sales outstanding (DSO) is 61 days. It wants to reduce its DSO to 35 days by pressuring more of its customers to pay their bills on time. If this policy is adopted, the company's average sales will fall by 25%. What will be the level of accounts receivable following the change? Assume a 365-day year. Do not round intermediate calculations. Round your answer to the nearest cent.arrow_forwardQuestion 27 P Flag question The big C is considering a change in its cash-only sales policy. The new terms of sale would be one month. The required return is 1.6 percent per month. Based on the following information, what is the cost of switching to the new policy? Current policy New policy Price per unit (RM) Cost per unit (RM) Unit sales per month Select one: A. RM615,000 B. RM845,000 OC RM735,500 Not yet answered Marked out of 1.00 OD. RM905,000 800 425 1,110 800 425 1,150arrow_forward
- ne Changing cash conversion cycle Camp Manufacturing turns over its inventory 5 times each year, has an average payment period of 30 days, and has an average collection period of 69 days. The firm has annual sales of $3.3 million and cost of goods sold of $2.1 million. (Use a 365-day year.) ptions a. Calculate the firm's operating cycle and cash conversion cycle. b. What is the dollar value of inventory held by the firm? c. If the firm could reduce the average age of its inventory from 73 days to 63 days, by how much would it reduce its dollar investment in working capital? a. Camp's operating cycle, OC, is days. (Round to the nearest whole number.) Camp's cash conversion cycle, CCC, is days. (Round to the nearest whole number.) b. The dollar value of inventory held by the firm is $ (Round to the nearest dollar.) (Round to the c. If the firm could reduce the average age of its inventory from 73 days to 63 days, it would reduce its dollar investment in working capital by $ nearest…arrow_forwardProblem 10 Silicon Wafers Inc., is debating whether or not to extend credit to a particular customer. Silicon's Silicon's products, primarily used in the manufacture of semiconductors, currently sell for P1,140 per unit. The variable cost is P760 per unit. The order under consideration is for 15 units today; payment is promised in 30 days. Required: a. If there is a 20 percent chance of default, should Silicon fill the order? The required return is 2 percent per month. This is a one-time sale and the customer will not buy if credit is not extended. b. What is the break-even probability in (a)? c. In general terms, how do you think your answer to (a) will be affected if the customer will purchase the merchandise for cash if the credit is refused? The cash price is P1,090 per unit.arrow_forwardRelaxing Collection Efforts The Boyd Corporation has annual credit sales of 1.6 million. Current expenses for the collection department are 35,000, bad-debt losses are 1.5%, and the days sales outstanding is 30 days. The firm is considering easing its collection efforts such that collection expenses will be reduced to 22,000 per year. The change is expected to increase bad-debt losses to 2.5% and to increase the days sales outstanding to 45 days. In addition, sales are expected to increase to 1,625,000 per year. Should the firm relax collection efforts if the opportunity cost of funds is 16%, the variable cost ratio is 75%, and taxes are 40%?arrow_forward
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