![Fundamentals of Corporate Finance Standard Edition](https://www.bartleby.com/isbn_cover_images/9780078034633/9780078034633_largeCoverImage.gif)
Case study:
Person SW, thepresident of H industries, has been exploring many ways to increase the financial performance of the company. The sales of H industries were slow. However due to the expansion in the economy, the sales might increase in the future. Person SW has asked Person AP to examine the credit policy of H industries and bring about changes to increase the profitability.
Characters in the case:
- H industries: The manufacturing industry of office equipment
- Person SW: The president of H industries
- Person AP: The company’s treasurer
To discuss: Whether it is plausible when the default rate and administrative cost are higher in option 3 compared to option 2.
Introduction:
Credit policy refers to a set of procedures that include terms and conditions for providing goods on credit and principles for making collections.
Adequate information:
The company has a policy of net 30. The default rate on credit is 1.6%. Person AP came with 3 available options. H industries’ variable cost of production are 45% of sales, the interest rate is 6% of effective annual rate. The options are as follows:
- Option 1: To relax the decision of the company to grant credit.
Option 1 has the following items: The annual sales of $140, default rate of 2.5%, administrative costs of 3.2% and the receivables period of 38 days.
- Option 2: To increase the credit period to net 45
Option 2 has the following items: The annual sales of $137, default rate of 1.8%, administrative costs of 2.4% and the receivables period of 41 days.
- Option 3: Combination of relaxed policy and extension of credit period.
Option 3 has the following items: The annual sales of $150, default rate of 2.2%, administrative costs of 3.0% and the receivables period of 49 days.
![Check Mark](/static/check-mark.png)
Want to see the full answer?
Check out a sample textbook solution![Blurred answer](/static/blurred-answer.jpg)
Chapter 20 Solutions
Fundamentals of Corporate Finance Standard Edition
- Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
- Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage LearningCorporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
![Text book image](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
![Text book image](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)