Suppose your firm receives a $4.06 million order on the last day of the year. You fill the order with $2.07 million worth of inventory. The customer picks up the entire order the same day and pays $1.24 million up front in cash; you also issue a billfor the customer to pay the remaining balance of $2.82 million within 40 days. Suppose your firm's tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following:d. Inventorye. Casha. Revenuesb. Earningsc. Receivablesa. RevenuesRevenues will increase by $million. (Select from the drop-down menu and round to two decimal places.)b. EarningsEarnings will increase by $million. (Select from the drop-down menu and round to two decimal places.)c. ReceivablesReceivables will increase by $million. (Select from the drop-down menu and round to two decimal places.)d. InventoryInventory will decrease by $million. (Select from the drop-down menu and round to two decimal places.)e. CashCash will increase by $million. (Select from the drop-down menu and round to two decimal places.)

Receives order of $4.06 million Filled order with inventory = $2.07 Million Cash received = $1.24…

Suppose your firm receives a $4.06 million order on the last day of the year. You fill the order with $2.07 million worth of inventory. The customer picks up the entire order the same day and pays $1.24 million up front in cash; you also issue a bill for the customer to pay the remaining balance of $2.82 million within 40 days. Suppose your firm's tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following: a. Revenues b. Earnings c. Receivables d. Inventory e. Cash

Suppose your firm receives a $4.06 million order on the last day of the year. You fill the order with $2.07 million worth of inventory. The customer picks up the entire order the same day and pays $1.24 million up front in cash; you also issue a bill for the customer to pay the remaining balance of $2.82 million within 40 days. Suppose your firm's tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following: a. Revenues b. Earnings c. Receivables d. Inventory e. Cash

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter22: Providing And Obtaining Credit

Section: Chapter Questions

Problem 9MC: Now assume that it is several years later. The brothers are concerned about the firm’s current...

See similar textbooks

Similar questions

Assume the credit terms offered to your firm by your suppliers are 2/10, net 50. Calculate the cost of the trade credit if your firm does not take the discount and pays on day 50. (Hint: Use a 365-day year.)The main reason that your firm has to pass on the discount and pay on the last allowed day (day 40), is lack of liquidity. The CFO is debating whether to borrow from a local bank, so that your firm has the cash sooner to take advantage of the trade credit. The best interest rate your firm can get from the local bank is 20% EAR. Should your firm borrow from the bank to take advantage of the trade credit? I got the correct answer to be 20.25% i need help on the steps to get this answer.
Han Corp's sales last year were $300,000, and its year-end receivables were $49,000. The firm sells on terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO - Allowed credit period = Average days late, and use a 365-day year when calculating the DSO. Assume all sales to be on credit. Do not round your intermediate calculations.
Hinkle Corporation buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $550,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.) a. $94,932 b. $109,895 c. $90,411 d. $104,662 e. $99,678
Howes Inc. buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On average, what is the dollar amount of costly trade credit (total credit − free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.)
Suppose a company invests in a $50,000 United States Treasury bill at 3.35% interest for 28 days. The bank through which the bill is purchased charges a service fee of $15. What is the cost of the Treasury bill? (whole number)
Kirk Development buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $750,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)
The Patel Company has several financial issues to solve. As the company’s Financial Analyst you have been asked to answer the following 2 questions: Their bank will lend them $100,000 for 90 days at a cost of $1,200 interest. What is the company’s effective annual rate? A major supplier has granted credit terms of 1/10 N120. Assuming the company can borrow any amount of money at the rate you have calculated above (in part 1), should the company take the discount? (Your answer must be supported with a calculation of the cost of not taking the discount – using either simple or effective annual rate)
The Borstal Company has to choose between two machines that do the same job but have different lives. The two machines have the following costs: Year Machine A Machine B $42,500 10,500 10,500 10,500 + replace $52,500 9,000 9,000 9,000 9,000 + replace 4 These costs are expressed in real terms. Suppose that technological change is expected to reduce costs by 10% per year. There will be new machines in year 1 that cost 10% less to buy and operate than A and B. In year 2, there will be a second crop of new machines incorporating a further 10% reduction, and so on. Suppose you are Borstal's financial manager. If you had to buy one or the other machine and rent it to the production manager for that machine's economic life, what annual rental payment would you have to charge at the end of the first year and how would this alter in subsequent years given the expected technological changes? Assume a 9% real discount rate and ignore E taxes. (Do not round intermediate calculations. Enter your…
Now assume that it is several years later. The brothers are concerned about the firm’s current credit terms of net 30, which means that contractors buying building products from the firm are not offered a discount and are supposed to pay the full amount in 30 days. Gross sales are now running $1,000,000 a year, and 80% (by dollar volume) of the firm’s paying customers generally pay the full amount on Day 30; the other 20% pay, on average, on Day 40. Of the firm’s gross sales, 2% ends up as bad-debt losses. The brothers are now considering a change in the firm’s credit policy. The change would entail: (1) changing the credit terms to 2/10, net 20, (2) employing stricter credit standards before granting credit, and (3) enforcing collections with greater vigor than in the past. Thus, cash customers and those paying within 10 days would receive a 2% discount, but all others would have to pay the full amount after only 20 days. The brothers believe the discount would both attract additional customers and encourage some existing customers to purchase more from the firm—after all, the discount amounts to a price reduction. Of course, these customers would take the discount and hence would pay in only 10 days. The net expected result is for sales to increase to $1,100,000; for 60% of the paying customers to take the discount and pay on the 10th day; for 30% to pay the full amount on Day 20; for 10% to pay late on Day 30; and for bad-debt losses to fall from 2% to 1% of gross sales. The firm’s operating cost ratio will remain unchanged at 75%, and its cost of carrying receivables will remain unchanged at 12%. To begin the analysis, describe the four variables that make up a firm’s credit policy and explain how each of them affects sales and collections.
A firm has no cash sales (all sales are on credit and are collected 28 days after the sale). If the receivables are $167,000, what is the level of sales? Assume there are 365 days in a year. Round your answer to the nearest dollar. $
Aggarwal Inc. buys on terms of 1/10, net 20, and it always pays on the 20th day. The CFO calculates that the average amount of costly trade credit carried is $750,000. What is the firm's average accounts payable balance? Assume a 365-day year. a. $1,000,000 b. $1,492,500 c. $1,500,000 d. $1,125,000 e. $1,113,750
The company has sales of $ 10 million per year, all of which are from credit terms that require payment to be made within 30 days, and the company's account receivables amount to $ 2 million. What is the DSO of the company, what is the value if all borrowers pay on time, and how much capital will be released if the company takes actions that lead to timely payment?