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ABC Inc. currently sells P12,000,000 per annum. Its credit period and DSO are both 30 days, and 1.5% of its sales end up as bad debts. The credit manager estimates that if the firm extends Its credit period to 40 days so that its DSC increases to 40 days, sales will increase by P3,000,000 but their bad debts losses on the incremental sales will be 2.5%. Variable costs are 60%, and the cost of carrying receivables is 10%. Tax rateis 40%. (Assume 360 days per year). Compute the incremental Investment required to finance the increase in receivables if the change is implemented.

ABC Inc. currently sells P12,000,000 per annum. Its credit period and DSO are both 30 days, and 1.5% of its sales end up as bad debts. The credit manager estimates that if the firm extends Its credit period to 40 days so that its DSC increases to 40 days, sales will increase by P3,000,000 but their bad debts losses on the incremental sales will be 2.5%. Variable costs are 60%, and the cost of carrying receivables is 10%. Tax rateis 40%. (Assume 360 days per year). Compute the incremental Investment required to finance the increase in receivables if the change is implemented.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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ABC Inc. currently sells P12,000,000 per annum. Its credit period and DSO are both 30 days, and 1.5% of its sales end up as bad debts. The credit manager estimates that if the firm extends Its credit period to 40 days so that its DSC increases to 40 days, sales will increase by P3,000,000 but their bad debts losses on the incremental sales will be 2.5%. Variable costs are 60%, and the cost of carrying receivables is 10%. Tax rateis 40%. (Assume 360 days per year).

  1. Compute the incremental Investment required to finance the increase in receivables if the change is implemented.
  2. What would be the Incremental cost of carrying receivables?
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