Current credit policy proposed credit policy Cash price $48.00 $48.00 Credit price n/a $50.00 Variable cost $36.00 $36.00 Quantity 120 120 Monthly return 2.00% 2.00% Credit terms n/a
Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
| Current credit policy | proposed credit policy | ||
| Cash price | $48.00 | $48.00 | |
| Credit price | n/a | $50.00 | |
| Variable cost | $36.00 | $36.00 | |
| Quantity | 120 | 120 | |
| Monthly return | 2.00% | 2.00% | |
| Credit terms | n/a | Net 30 | |
| % Uncollectable | n/a | 3.00% |
Assume the customer will either pay in 30 days or will default.
What is the cost of switching the credit policy?
A) $ 6,000
B) $ 4,320
C) $ 5,333
D) $ 5,000
E) $ 5,760
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