Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
15th Edition
ISBN: 9780134476315
Author: Chad J. Zutter, Scott B. Smart
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 15, Problem 15.13P
Lengthening the credit period Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills $450,000 for sales and has $345,000 in variable costs. The change in credit terms is expected to increase sales to $510,000. Bad-debt expenses will increase from 1% to 1.5% of sales. The firm has a required
- a. What additional profit contribution from sales will be realized from the proposed change?
- b. What is the cost of the marginal investment in accounts receivable?
- c. What is the cost of the marginal
bad debts ? - d. Do you recommend this change in credit terms? Why or why not?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
A firm is considering relaxing credit standards, which will result in annual sales increasing from P1.5 million to P1.75 million, the cost of annual sales increasing from P1,000,000 to P1,125,000, and the average collection period increasing from 40 to 55 days. The bad debt loss is expected to increase from 1 percent of sales to 1.5 percent of sales. The firm's required return on investments is 20 percent. The firm's cost of marginal investment in accounts receivable is?
Format: 11,111.11
A company plans to tighten its credit policy. The new policy will decrease the average number of days in collection from 75 to 50 days and reduce the ratio of credit sales to total revenue from 70% to 60%. The company estimates that projected sales would be 5% less if the proposed new credit policy were implemented. The firm’s short-term interest cost is 10%. Projected sales for the coming year are P100 million. Assume a 360-day year, the increase (decrease) on A/R of this proposed change in credit policy is
A. P0
B. (P5,000,000)
C. (P6,666,6667)
D. (P13,000,000)
Lockbox system Eagle Industries believes that a lockbox system can shorten its accounts receivable collection period by 3 days. Credit sales are $3,240,000 per year, billed on a continuous basis. The firm has other equally risky investments that earn a return of 15%. The cost of the lockbox system is $9,000 per year. (Note: Assume a 365-day year.)
a. What net benefit (cost) will the firm realize if it adopts the lockbox system? Should it adopt the proposed lockbox system?
Chapter 15 Solutions
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
Ch. 15.1 - Why is working capital management one of the most...Ch. 15.1 - Prob. 15.2RQCh. 15.1 - Prob. 15.3RQCh. 15.2 - Prob. 15.4RQCh. 15.2 - Prob. 15.5RQCh. 15.2 - What are the benefits, costs, and risks of an...Ch. 15.2 - Prob. 15.7RQCh. 15.3 - Prob. 15.8RQCh. 15.3 - Briefly describe the following techniques for...Ch. 15.3 - Prob. 15.10RQ
Ch. 15.4 - Prob. 15.11RQCh. 15.4 - Prob. 15.12RQCh. 15.4 - What are the basic tradeoffs in a tightening of...Ch. 15.4 - Prob. 15.14RQCh. 15.4 - Prob. 15.15RQCh. 15.4 - Prob. 15.16RQCh. 15.5 - Prob. 15.17RQCh. 15.5 - What are the firms objectives with regard to...Ch. 15.5 - Prob. 15.19RQCh. 15.5 - Prob. 15.20RQCh. 15.5 - Prob. 15.21RQCh. 15 - EOQ analysis Thompson Paint Company uses 60,000...Ch. 15 - Learning Goal 4 ST15- 3 Relaxing credit standards...Ch. 15 - Learning Goal 2 E15-1 Everdeen Inc. has a 90-day...Ch. 15 - Learning Goal 2 E15-2 Icy Treats Inc. is a...Ch. 15 - Prob. 15.3WUECh. 15 - Forrester Fashions has annual credit sales of...Ch. 15 - Prob. 15.1PCh. 15 - Learning Goal 2 P15-2 Changing cash conversion...Ch. 15 - Learning Goal 3 P15-5 EOQ analysis Tiger...Ch. 15 - EOQ, reorder point, and safety stock Alexis...Ch. 15 - Prob. 15.7PCh. 15 - Prob. 15.8PCh. 15 - Prob. 15.9PCh. 15 - Relaxation of credit standards Lewis Enterprises...Ch. 15 - Initiating an early payment discount Gardner...Ch. 15 - Shortening the credit period A firm is...Ch. 15 - Lengthening the credit period Parker Tool is...Ch. 15 - Prob. 15.14PCh. 15 - Prob. 15.15PCh. 15 - Prob. 15.16PCh. 15 - Prob. 15.18P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Expected sales in the forthcoming year is $ 50,00. The firm plans to stick to the following policies towards the working capital; Debtors would be maintained at 30 days of sales, Creditors would be maintained at 30 days of cost of sales and Inventories would be maintained at 30 days of cost of sales. Assume that the firm wants to keep Working capital sufficient to finance Expected Credit Sales for the length of the Cash Cycle, how much working capital would the firm need? Consider 365 as the number of days in an year for you cycle calculations. (Select the option closest to the answer). 411 487 398 509 426 352arrow_forward(Efficiency analysis) ALei Industries has credit sales of $143 million a year ALef's management revwed ts anddei t is the maximum level of accounts receivable that ALei can carry and have a 45-day average colledtion period? Leis current accounts receivable collection period is 55 days, how much would it have lo reduce its level of accounts recelvable in oander to adi a. What is the maximum level of accounts receivable that ALei can carry and have a 45-day average collection period? b. The maximum level of accounts receivable vilbe smillion Round to one decimal place) The maximum level of accounts receivable will be S million.arrow_forwardNeed helparrow_forward
- 3. Show solution in good accounting formarrow_forwardBRLM Company is planning to relax its credit standards to boost sales. As a result, sales are expected to increase 16 percent from 3,000 units per year to 3,480 units per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1.5 percent level. The price per unit is P4,250, the variable cost per unit is P3,060. The firm’s required return on investment is 20 percent.What is the cost of marginal bad debts under the proposed plan? Group of answer choices P168,300 P19,445 P38,838 P258,923 What is the net result of implementing the proposed plan? Group of answer choices –P312,474 +P168,274 +P319,260 –P168,274arrow_forwardThe Blue Company has under study a new credit policy that they believe will increase annual sales from P11 million to P14 million. However, the new plan is also expected to increase bad debt losses from P800,000 to P1.2 million each year. The average collection period on collectible sales is now averaging 90 days. This ratio will increase to 120 days for both old and new slaes if the new credit policy is adopted. The increase in sales is expected to increase the company's investment in inventory by P20,000. Assuming a pre-tax reuired rate of return of 25% and a variable cost-to-sales ration of 60%, should the Blue Company adopt the new credit policy? Assume a 360-day year.arrow_forward
- A trader has current sales at Rs Six lakhs per annum and an average collection period of 30 days wants to pursue a more liberal policy to improve sales. The selling price per unit is Rs.3, Average cost per unit is Rs.2.25 and the variable cost per unit is Rs 2. The current bad debt loss is 1%. Required return on additional investment is 20%. Assume as 360 days a year. Calculate net profit for each proposed plans. Which of the above policies would you recommend for adoption based on the study made by Management Consultant. Credit Policy Increase in Collection Period (Days) Increase in Sales (₹) Present Default Anticipated (%) A 10 30000 1.5 B 20 48000 2 C 30 75000arrow_forwardIf the interest rates rise by 1.5%, what is the change in net interest income assuming a parallel shift in the yield curve? Define the maturity bucket approach as an extension to the gap analysis, and how it can be used to manage interest rate risk.B.A bank has $100 million in earning assets, a net interest margin of 5%, and a 1-year cumulative GAP of $10 million. Interest rates are expected to increase by 2%. If the bank does not want net interest income to fall by more than 25% during the next year, how large can the cumulative GAP be to achieve the allowable change in net interest income?arrow_forwardYour company is evaluating a switch from a cash policy to a net 30 policy. The price per unit is $49, and the variable cost per unit is $20. The company currently sells 100 units per month. Under the proposed policy, the company expects to sell 110 units per month. The required monthly return is 2%. a-What is the effective annualized rate for this “loan” triggered by the credit policy?arrow_forward
- A firm will earn a taxable net return of $500 million next year. If it took on debt today, it would have to pay creditors\varepsilon(rDebt) = 5% + 10% x wDebt2. Thus, if the firm has 100% debt, the financial markets would demand 15% expected rate of return. Further, assume that the financial markets will lend the firm capital at this overall net cost of 15%, regardless of how the firm is financed. The firm is in the 25% marginal tax bracket. 1. If the firmis fully equity-financed, what is its value? 2. Using APV, if the firm is financed with equal amounts of debt and equity today, what is its value? 3. Using WACC, if the firm is financed with equal amounts of debt and equity today, what is its value? 4. Does this firm have an optimal capital structure? If so, what is its APV and WACC?arrow_forwardSelect the correct statement: A. In managing the firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period sufficiently. B. A firm that makes 90% of its sales on credit and 10% cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate. C. Ceteris paribus, if a firm can shorten its days of sales outstanding, this will lead to a higher current ratio. E. Answer not givenarrow_forwardThe Branson Corporation is considering a change in its cash - only policy. The new terms would be net one period. The required return is 2.0 percent per period. Current Policy New Policy Price per unit $ 50 $ 52 Cost per unit $ 30 $ 30 Unit sales per month 2,000? What is the break - even quantity for the new credit policy?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
The management of receivables Introduction - ACCA Financial Management (FM); Author: OpenTuition;https://www.youtube.com/watch?v=tLmePnbC3ZQ;License: Standard YouTube License, CC-BY