Reed plc is considering how to improve its debtor collection policy. The following information is available. Current Credit Sales: £912,000Average debtor collection period (days): 94 daysWishing to introduce a new policy of payment within (days): 60 days Anticipated reduction in sales per year: £40,000Increased collection costs per yer: £2,000Short-term cost of borrowing (%): 30%Sales contribution to profit: 20%Required What will be the net benefit if Reed successfully enforces the new policy?When a corporation raises finance, there are two options: long-term debt finance (bank loan or corporate bonds) and equity finance (ordinary shares). The two approaches have fundamental consequences to the corporation. What are the main differences between the two approaches? Reed plc is considering how to improve its debtor collection policy. The followinginformation is available.Current Credit Sales£912,00094 days60 daysAverage debtor collection period (days)Wishing to introduce a new policy of payment within (days)Anticipated reduction in sales per yearIncreased collection costs per yearShort-term cost of borrowing (%)Sales contribution to profit£40,000£2,00030%20%Requiredi.What will be the net benefit if Reed successfully enforces the new policy?ii.When a corporation raises finance, there are two options: long-term debt finance(bank loan or corporate bonds) and equity finance (ordinary shares). The twoapproaches have fundamental consequences to the corporation. What are the maindifferences between the two approaches?

i. Current New Sales £912,000 £872000 (912,000-40000) (-) VC (80%, Since contribution is…

Answered: Reed plc is considering how to improve…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Reed plc is considering how to improve its debtor collection policy. The following information is available.

Current Credit Sales: £912,000

Average debtor collection period (days): 94 days

Wishing to introduce a new policy of payment within (days): 60 days

Anticipated reduction in sales per year: £40,000

Increased collection costs per yer: £2,000

Short-term cost of borrowing (%): 30%

Sales contribution to profit: 20%

Required

What will be the net benefit if Reed successfully enforces the new policy?
When a corporation raises finance, there are two options: long-term debt finance (bank loan or corporate bonds) and equity finance (ordinary shares). The two approaches have fundamental consequences to the corporation. What are the main differences between the two approaches?

Reed plc is considering how to improve its debtor collection policy. The following
information is available.
Current Credit Sales
£912,000
94 days
60 days
Average debtor collection period (days)
Wishing to introduce a new policy of payment within (days)
Anticipated reduction in sales per year
Increased collection costs per year
Short-term cost of borrowing (%)
Sales contribution to profit
£40,000
£2,000
30%
20%
Required
i.
What will be the net benefit if Reed successfully enforces the new policy?
ii.
When a corporation raises finance, there are two options: long-term debt finance
(bank loan or corporate bonds) and equity finance (ordinary shares). The two
approaches have fundamental consequences to the corporation. What are the main
differences between the two approaches?

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