Foundations of Finance (9th Edition) (Pearson Series in Finance)
9th Edition
ISBN: 9780134083285
Author: Arthur J. Keown, John D. Martin, J. William Petty
Publisher: PEARSON
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Chapter 17, Problem 3SP
a)
Summary Introduction
To determine: The amount of cash balance.
b)
Summary Introduction
To determine:
c)
Summary Introduction
To determine: Projected annual cost of operating the new or proposed system.
d)
Summary Introduction
To discuss: Whether company P should adopt the system and determine the net annual loss or gain related to the adopting a system.
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A company with annual sales of $22,000,000 is considering changing its payment terms from net 40 to net 30 to encourage customers to pay more promptly. The company forecasts that customers would respond by paying on day 32 rather than day 44 as at present (assume a 360 day year) but would decrease their purchases by $400,000 per year. The company also forecasts that its idle cash balance would decrease by $80,000 and administrative costs would be reduced by $30,000 per year. The company's variable costs average 62% of sales, it is in the 35% marginal tax bracket, and it has an 8% cost of capital.
Part A: Calculate the incremental cash flows from accepting this proposal, and organize your cash flows into a cash flow spreadsheet.
Part B: Calculate the proposal's NPV, IRR, and NAB.
Part C: Should the company shorten its payment terms?
A company with annual sales of
$22,000,000 is considering changing its
payment terms from net 40 to net 30 to
encourage customers to pay more promptly.
The company forecasts that customers
would respond by paying on day 32 rather
than day 44 as at present (assume a 360
day year) but would decrease their
purchases by $400,000 per year. The
company also forecasts that its idle cash
balance would decrease by $80,000 and
administrative costs would be reduced by
$30,000 per year. The company's variable
costs average 62% of sales, it is in the 35%
marginal tax bracket, and it has an 8% cost
of capital.
Part A: Calculate the incremental cash flows
from accepting this proposal, and organize
your cash flows from part A into a cash flow
spreadsheet.
Part B: Calculate the proposal's NPV, IRR,
and NAB.
Part C: Should the company shorten its
payment terms?
To increase sales, management is considering reducing its credit standards. This action is expected to increase sales by $120,000. Unfortunately, it is anticipated that 7 percent of the sales will be uncollectible. Accounts receivable turnover is expected to be seven times a year, and it costs the firm 11 percent to carry its receivables. Collection costs will be 4 percent of sales, and the cost of the additional goods sold is $62,000. Will earnings increase? Round your answer to the nearest dollar.
Net in earnings is $ .
Chapter 17 Solutions
Foundations of Finance (9th Edition) (Pearson Series in Finance)
Ch. 17 - Prob. 1RQCh. 17 - Prob. 2RQCh. 17 - Prob. 3RQCh. 17 - What are the two major objectives of the firms...Ch. 17 - Prob. 5RQCh. 17 - Prob. 6RQCh. 17 - Prob. 7RQCh. 17 - Prob. 8RQCh. 17 - Prob. 9RQCh. 17 - Prob. 10RQ
Ch. 17 - Prob. 11RQCh. 17 - Prob. 1SPCh. 17 - Prob. 2SPCh. 17 - Prob. 3SPCh. 17 - Prob. 4SPCh. 17 - (Interest rate risk) Two years ago your corporate...Ch. 17 - Prob. 7SPCh. 17 - Prob. 8SPCh. 17 - Prob. 9SPCh. 17 - Prob. 10SPCh. 17 - Prob. 11SPCh. 17 - Prob. 12SPCh. 17 - Prob. 1MCCh. 17 - Prob. 2MCCh. 17 - Prob. 3MCCh. 17 - Prob. 4MC
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