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 22QP
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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3.
Answer the following questions based on the information below
Current credit policy(n/a) Proposed credit policy (net 30)
Price (RO)
15
17
Variable cost per unit (RO)
8.
12
Quantity
200,000
300,000
Monthly rate
1.25%
a. What is the incremental cash flows from switching credit policies?
b. What is the cost of switching?
c. What is your recommendation?
d. We assume that the variable cost and the price per unit remain stable as in the current policy, calculate and interpret the
break-even sales increase.
e. What is the break-even probability of default if we assume one time scale? Interpret.
Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on
savings accounts is 0.65% at a time when inflation is around 1.45%.
For the average saver, the real rate of interest on his or her savings is %. (Round your response to two decimal places and use a minus sign if necessary.)
If banks expect that the rate of inflation in the coming year will be 4.45% and they want a real return of 5.5% on a certain category of loans, then the nominal rate they
should charge borrowers on those loans is %. (Round your response to two decimal places.
If the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is
O A. debtors (people or businesses who owe money)
O B. creditors (people or institutions that are owed money)
O C. both would benefit equally.
O D. neither benefits.
3.
Answer the following questions based on the information below
Current credit policy(n/a) Proposed credit policy (net 30)
Price (RO)
10
12
Variable cost per unit (RO)
Quantity
100,000
150,000
Monthly rate
2%
What is the incremental cash flows from switching credit policies?
a.
b. What is the cost of switching?
C. What is your recommendation?
d. Assume that the variable cost and the price per unit remain constant, what is the break-
even sales increase? Interpret.
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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- Optimizing economic agents use the real interest rate when thinking about the economic costs and returns of a loan. Suppose the average rate paid by banks on savings accounts is 0.45% at a time when infialion is around 0 9% For the average saver, the real rate of interest on his or her savings is % (Round your response to two decimal places and use a minus sign if necessay.) Il banks expect that the rate of inflation in the coming year will be 3.9% and they want a real return of 8% on a certain category of loans, then the nominal rate they should charge borrowers on those loans is %. (Round your response to two decimal places) 11 the economy experiences an unexpectedly high rate of inflation, the group that would tend to benefit is O A. creditors (people or institutions that are owed money). O B. deblors (pcople or businesses who owe moncy). OC. both would benefit cgqually O D. neilher bencfits.arrow_forward[Question text] Syarikat Sinergi is considering a new credit policy. The current policy is cash only. The new policy would involve extending credit for one period or net 30. Based on the following information, determine if the switch is advisable. The interest rate is 2.5% per period. CURRENT POLICY NEW POLICY Price per unit RM175 RM175 Cost per unit RM130 RM130 Sales per period in units 1.000 1,100 Select one: A. Yes, the switch should be made because the NPV is RM8,000. B. No, the switch should not be made because the NPV is -RM4,500. C. Yes, the switch should be made because the NPV is RM4,500. D. No, the switch should not be made because the NPV is -RM8,000.arrow_forwardIf the economy is getting better, what's the most likley result in the Default Risk Premium Spreads? O. The Demand Curve will shift left (down) O. The Demand Curve will shift right (up) O. Increases (Widens) O. Decreaces (narrows)arrow_forward
- Fisher Equation: Nominal, Real, and Inflation = 10%. Expected inflation is E(T) = Q1) You lend money to a business colleague at a rate of i 3.5%. What is your real rate of return r? Use the exact Fisher Equation. = Q2) How much would you charge a colleague on a loan of $100 if you want your real rate or return to be r = 6% and the expected inflation is E(л) = 4%. E.g., what is the nominal rate i? Use the exact Fisher Equation. Q3) A corporate bond pays investors both a fixed and variable rate of return. The fixed rate is constitutes the real return which is r = 4.5%. The variable rate is indexed to the CPI and is to compensate investors for inflation. If the expected inflation in the next year is E(T) = 2.5%, what is the nominal rate of return i the company will have to pay? Enter your answer in the table below in the cells colored in yellow. You must show all work to receive credit. Q1) r= |Q2) i= ||Q3) i= Answerarrow_forwardMoving to another question will save this response. Question 1 4 Danica Tribbiano believes expected inflation is 2.25% and the real rate of return is 2.75%. Based on this information, she estimates the risk-free rate of return is: OA. 5.00%. B. 0.50%. O C. 2.25%. A Moving to another question will save this response. A+ F3 $ F5 % P F6 F7 & M D F8 * 8 F9 F10 :- F11 O + F12arrow_forwardII. PROBLEMS Suppose that the economy has the following money supply and demand equations: Money Supply: M = 8000 Money Demand: M= 10,000 – 40,000r where money is in billions of dollars and interest rates, r, is written as a decimal (e.g., an interest rate of 10% would be written as .1 in the equation). A. Determine the equilibrium interest rate and quantity of money. B. What will happen in the money market if the interest rate is currently 10%? What is the amount of excess supply of or excess demand for money? C. Show in graph that at this interest rate (10%) there is disequilibrium in the money market. 2. Assume that a particular bank has excess reserves of Php800,000 and checkable deposits of Php1,500,000. If the reserve ratio is 20%, what is the size of the bank's actual reserves? 3. Suppose that GRAB Bank is a newly created bank in your hometown. Consider the following transactions: Owners of the bank sold shares of stocks to the public (which includes owners' equity) amounting to…arrow_forward
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