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 14QP
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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Students have asked these similar questions
35
Rapterz Renewal Inc.. is considering a change in its cash-only sales policy. The new terms of sale would be net 30 days. You have been
provided with the following:
Current Credit Policy
Sales price per unit
Variable cost per unit
Unit sales per month
Required monthly return
Calculate the NPV of Switching. Show all calculations.
$165
132
1,260
1.5%
Proposed Credit
Policy
$168
132
Should the company switch policies? Explain your answer.
1,290
1.5%
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
%
197360The 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, 630.14
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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- Problem 11 Consider the following information about two alternative credit strategies: Refused Credit Price per unit Cost per unit Grant Credit P75 P71 P32 P33 Quantity sold per quarter Probability of payment 6,200 6,900 1.0 .90 The higher cost per unit reflects the expense associated with credit orders, and the higher price per unit reflects the existence of a cash discount. The credit period will be 90 days, and the cost of debt is .75 percent per month. Required: Based on this information, should credit be granted? a. b. In (a), what does the credit price per unit have to be a break even? c. In (a), suppose we can obtain a credit report for P1.50 per customer. Assuming that each customer buys one unit and that the credit report correctly identifies all customers who will not pay, should credit be extended?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_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_forward
- [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_forwardProblem 28-17 Break-Even Quantity The Branson Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2.0 percent per period. Price per unit Cost per unit Unit sales per month Current Policy New Policy $62 $ 64 $34 $34 2,600 ? 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.) Break-even quantityarrow_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
- Problem 28-17 Break-Even Quantity The Branson Corporation is considering a change in its cash-only policy. The new terms would be net one period. The required return is 2.0 percent per period. Price per unit Cost per unit Unit sales per month Current Policy $68 $36 2,900 New Policy $70 $36 ? 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.) Answer is complete but not entirely correct. Break-even quantity 5,228.57X Earrow_forwardQUESTION 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_forwardProblem 4-28 (Algo) Percent-of-sales method [LO4-3] The Manning Company has financial statements as shown next, which are representative of the company's historical average. The firm is expecting a 30 percent increase in sales next year, and management is concerned about the company's need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales. Sales Expenses Earnings before interest and taxes Interest Earnings before taxes Taxes Earnings after taxes Dividends Income Statement Fixed assets Cash Accounts receivable Inventory Current assets Total assets Assets The firm $ 250,000 184,800 $ 65,200 8,600 $ 56,600 16,600 $ 40,000 $ 16,000 Balance Sheet (in $ millions) $ 125,000 96,000 Liabilities and Stockholders' Equity $4,000 Accounts payable 53,000 Accrued wages 68,000 Accrued taxes Current…arrow_forward
- 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 (p) f10 fs fo f7 f8 www & 50 6 1 7 V 8 A 9 4 0 48 R Ty Y!U I 同 %24arrow_forwardS Problem 4-28 (Algo) Percent-of-sales method [LO4-3] The Manning Company has financial statements as shown next, which are representative of the company's historical average. The firm is expecting a 35 percent increase in sales next year, and management is concerned about the company's need for external funds. The increase in sales is expected to be carried out without any expansion of fixed assets, but rather through more efficient asset utilization in the existing store. Among liabilities, only current liabilities vary directly with sales. Sales Expenses Earnings before interest and taxes Interest Earnings before taxes Taxes Earnings after taxes Dividends Fixed assets Income Statement Cash Accounts receivable Inventory Current assets Total assets The firm Assets needs $ 220,000 171,200 $ 48,800 8,300 $ 40,500 16,300 $ 24,200 $ 7,260 Balance Sheet (in $ millions) $ 110,000 93,000 $8,000 Accounts payable 33,000 Accrued wages 69,000 Accrued taxes Liabilities and Stockholders' Equity…arrow_forwardCompute the Break-Even Point [LO5–5] Mauro Products distributes a single product, a woven basket whose selling price is $15 and whose variable expense is $12 per unit. The company’s monthly fixed expense is $4,200. Required: 1. Solve for the company’s break-even point in unit sales using the equation method. 2 . Solve for the company’s break-even point in dollar sales using the equation method and the CM ratio. 3. Solve for the company’s break-even point in unit sales using the formula method. 4 . Solve for the company’s break-even point in dollar sales using the formula method and the CM ratio.arrow_forward
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