Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 20% from 10,000 to 12,000 units during the coming year; the average collection period is expected to increase from 30 to 45days; and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $45, and the variable cost per unit is $34. The firm's required return on equal-risk investments is 10.3%. Evaluate the proposedrelaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.
Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 20% from 10,000 to 12,000 units during the coming year; the average collection period is expected to increase from 30 to 45days; and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $45, and the variable cost per unit is $34. The firm's required return on equal-risk investments is 10.3%. Evaluate the proposedrelaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.
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
Section: Chapter Questions
Problem 1PS
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Relaxation of credit standards Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by
20%
from
10,000
to
12,000
units during the coming year; the average collection period is expected to increase from
30
to
45
days; and bad debts are expected to increase from
1%
to
3%
of sales. The sale price per unit is
$45,
and the variable cost per unit is
$34.
The firm's required return on equal-risk investments is
10.3%.
Evaluate the proposedrelaxation, and make a recommendation to the firm.
(Note:
Assume a 365-day year.)
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