Fundamentals of Corporate Finance
11th Edition
ISBN: 9780077861704
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 20.A, Problem 3QP
(a)
Summary Introduction
To evaluate:The credit policy of the firm
Introduction:
Credit analysis estimates the credit worthiness to determine the individual customers who will repay and who will not repay.
(b)
Summary Introduction
To determine: The break-even probability
(c)
Summary Introduction
To determine: The cash discount rate
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[Question text] Syarikat Sinergi is considering a new credit policy. The current policy is cash only. The new policy
would involve extending credit for one period or net 30. Based on the following information, determine if the switch
is advisable. The interest rate is 2.5% per period.
CURRENT POLICY
NEW POLICY
Price per unit
RM175
RM175
Cost per unit
RM130
RM130
Sales per period in units
1.000
1,100
Select one:
A. Yes, the switch should be made because the NPV is RM8,000.
B. No, the switch should not be made because the NPV is -RM4,500.
C. Yes, the switch should be made because the NPV is RM4,500.
D. No, the switch should not be made because the NPV is -RM8,000.
Solve this one
8.38 A biofuel subsidiary of Petrofac, Inc. is planning
to borrow $12 million to acquire and expand the
product line of a small technology-based com-
pany. Due to the risk involved, the rate on a 5-year
loan is highly variable; it could be as low as 7%, as
high as 15%, but is expected to be 10% per year.
Due to revenue projections, the company will
move forward only if the AW of total costs is be-
low $5.7 million per year. The M&O costs are es-
timated at $3.1 million per year. The anticipated
sales price of the company in 5 years could be
$2.1 million if the interest rate is 7% or as much as
$2.5 million if the rate is 15%, but will most likely
be about $2.3 million at the 10% per year rate. Is
the decision to move forward sensitive to the loan
interest rate and sales price estimates?
Chapter 20 Solutions
Fundamentals of Corporate Finance
Ch. 20.1 - Prob. 20.1ACQCh. 20.1 - Prob. 20.1BCQCh. 20.2 - What considerations enter into the determination...Ch. 20.2 - Explain what terms of 3/45, net 90 mean. What is...Ch. 20.3 - Prob. 20.3ACQCh. 20.3 - Explain how to estimate the NPV of a credit policy...Ch. 20.4 - What are the carrying costs of granting credit?Ch. 20.4 - What are the opportunity costs of not granting...Ch. 20.4 - Prob. 20.4CCQCh. 20.5 - Prob. 20.5ACQ
Ch. 20.5 - Prob. 20.5BCQCh. 20.6 - Prob. 20.6ACQCh. 20.6 - What is an aging schedule?Ch. 20.7 - What are the different types of inventory?Ch. 20.7 - What are three things to remember when examining...Ch. 20.7 - Prob. 20.7CCQCh. 20.8 - Prob. 20.8ACQCh. 20.8 - Which cost component of the EOQ model does JIT...Ch. 20.A - Prob. 1ACQCh. 20.A - Prob. 1BCQCh. 20.A - Evaluating Credit Policy [LO2] Bismark Co. is in...Ch. 20.A - Credit Policy Evaluation [LO2] The Johnson Company...Ch. 20.A - Prob. 3QPCh. 20.A - Prob. 4QPCh. 20.A - Prob. 5QPCh. 20 - What is the difference between the accounts...Ch. 20 - Prob. 20.2CTFCh. 20 - Prob. 20.7CTFCh. 20 - Prob. 1CRCTCh. 20 - Prob. 2CRCTCh. 20 - Prob. 3CRCTCh. 20 - Five Cs of Credit [LO1] What are the five Cs of...Ch. 20 - Prob. 5CRCTCh. 20 - Prob. 6CRCTCh. 20 - Prob. 7CRCTCh. 20 - Prob. 8CRCTCh. 20 - Prob. 9CRCTCh. 20 - Prob. 10CRCTCh. 20 - Prob. 1QPCh. 20 - Size of Accounts Receivable [LO1] The Red Zeppelin...Ch. 20 - Prob. 3QPCh. 20 - Prob. 4QPCh. 20 - Terms of Sale [LO1] A firm offers terms of 1/10,...Ch. 20 - Prob. 6QPCh. 20 - Prob. 7QPCh. 20 - Prob. 8QPCh. 20 - Evaluating Credit Policy [LO2] Air Spares is a...Ch. 20 - Prob. 10QPCh. 20 - Prob. 11QPCh. 20 - Prob. 12QPCh. 20 - Prob. 13QPCh. 20 - Prob. 14QPCh. 20 - Prob. 15QPCh. 20 - Prob. 16QPCh. 20 - Prob. 17QPCh. 20 - Prob. 18QPCh. 20 - Prob. 19QPCh. 20 - Prob. 20QPCh. 20 - Prob. 21QPCh. 20 - Prob. 22QPCh. 20 - Credit Policy at Howlett Industries Sterling...Ch. 20 - Prob. 2M
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- i need the answer quicklyarrow_forward222arrow_forwardaper Submarine Manufacturing is investigating a lockbox system to reduce its ollection time. It has determined the following: Average number of payments per day Average value of payment Variable lockbox fee (per transaction) Daily interest rate on money market securities The total collection time will be reduced by three days if the lockbox system is adopted. a. What is the PV of adopting the system? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.) b. What is the NPV of adopting the system? (Do not round intermediate calculations 435 $845 $15 068% and round your answer to the nearest whole number, e.g., 32.) c. What is the net cash flow per day from adopting? Per check? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) a. PV b. NPV c. Net cash flow c.Net cash flow per day per checkarrow_forward
- 3arrow_forwardYour company is considering granting credit to a new customer. The variable cost per unit is RO 20, the current price is RO 25, and the monthly required return is 2.5%. What is the break - even probability of default if we assume a repeat business? Interpret.arrow_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 percent per period. Price per unit Cost per unit Current New Policy Policy $ 86 $ 88 $46 $46 Unit sales per month 4,400 ? What is the break-even quantity for the new credit policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Break-even quantity 4,397.63xarrow_forward
- Sunny Manufacturing is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $220,000 if credit is extended to these new customers. Of the new accounts receivable generated, 10 percent will prove to be uncollectible. Additional collection costs will be 5 percent of sales, and production and selling costs will be 70 percent of sales. a. Compute the incremental income before taxes. $ Incremental income before taxes b. What will the firm's incremental return on sales be if these new credit customers are accepted? (Round the final answer to 2 decimal place.) Incremental return on sales % c. If the receivable turnover ratio is 4 to 1, and no other asset buildup is needed to serve the new customers, what will Sunny Manufacturing's incremental return on new average investment be? (Do round intermediate calculations. Round the final answer to the nearest whole percentage.) Incremental return on new average investment %arrow_forwardam. 118.arrow_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 percent per period. Price per unit Cost per unit Unit sales per month Current New Policy Policy $53 $55 $31 $31 2,150 ? What is the break-even quantity for the new credit policy? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Answer is complete but not entirely correct. Break-even quantity 144.84arrow_forward
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