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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Question
Chapter 20, Problem 15QP
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
%
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
171,000
Problem 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.
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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