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Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Textbook Question
Chapter 21, Problem 16P
The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 2/10, net 30, but it can delay payment for an additional 35 days—paying in 65 days and thus becoming 35 days past due—without a penalty because its suppliers currently have excess capacity. What is the effective, or equivalent, annual cost of the trade credit?
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The Thompson Corporation projects an increase in sales from $1.5 million to $2 million, but it needs an additional $300,000 of current assets to support this expansion.
Thompson can finance the expansion by no longer taking discounts, thus increasing accounts payable. Thompson purchases under terms of 3/10, net 30, but it can delay
payment for an additional 15 days - paying in 45 days and thus becoming 15 days past due - without a penalty because its suppliers currently have excess capacity. What is
the effective, or equivalent, annual cost of the trade credit?
O 37.35%
O 32.22%
O 102.12%
O 10.21%
O 14.35%
The Thompson Corporation projects an increase in sales from $1.5 millionto $2 million, but it needs an additional $300,000 of current assets to support this expansion. Thompson can finance the expansion by no longertaking discounts, thus increasing accounts payable. Thompson purchasesunder terms of 2/10, net 30, but it can delay payment for an additional35 days—paying in 65 days and thus becoming 35 days past due—withouta penalty because its suppliers currently have excess capacity. What is theeffective, or equivalent, annual cost of the trade credit?
Butler Corp. (BC) sells its stainless-steel products on terms of “2/10, net 40”. BC is considering granting credit to retailers with total assets as low as $400,000. Currently the lowest asset limit is $850,000. BC believes sales will increase $10 million from the new credit group but the average collection period for this new group will be 80 days versus the current average collection period of 30 days. If management estimates that 40% of the new customers will take the cash discount and 10% of the new business will be written off as bad-debt loss, should BC lower its credit standards? Assume BC’s variable cost ratio is 0.80 and its required pretax rate of return on current assets investment is 14%. BC also estimates that an additional investment in inventory of $750,000 is necessary for the anticipated sales increase
Chapter 21 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 21 - a. Working capital; net working capital; net...Ch. 21 - Prob. 2QCh. 21 - Is it true that, when one firm sells to another on...Ch. 21 - What are the four elements of a firm’s credit...Ch. 21 - Prob. 5QCh. 21 - Prob. 6QCh. 21 - Prob. 7QCh. 21 - Is it true that most firms are able to obtain some...Ch. 21 - What kinds of firms use commercial paper?Ch. 21 - Prob. 1P
Ch. 21 - Medwig Corporation has a DSO of 17 days. The...Ch. 21 - What are the nominal and effective costs of trade...Ch. 21 - A large retailer obtains merchandise under the...Ch. 21 - A chain of appliance stores, APP Corporation,...Ch. 21 - Prob. 6PCh. 21 - Calculate the nominal annual cost of nonfree trade...Ch. 21 - If a firm buys on terms of 3/15, net 45, but...Ch. 21 - Grunewald Industries sells on terms of 2/10, net...Ch. 21 - The D.J. Masson Corporation needs to raise...Ch. 21 - Negus Enterprises has an inventory conversion...Ch. 21 - Strickler Technology is considering changes in its...Ch. 21 - Payne Products had $1.6 million in sales revenues...Ch. 21 - Dorothy Koehl recently leased space in the...Ch. 21 - Suppose a firm makes purchases of $3.65 million...Ch. 21 - The Thompson Corporation projects an increase in...Ch. 21 - The Raattama Corporation had sales of $3.5 million...Ch. 21 - Karen Johnson, CFO for Raucous Roasters (RR), a...Ch. 21 - Prob. 2MCCh. 21 - Prob. 3MCCh. 21 - Prob. 4MCCh. 21 - Prob. 5MCCh. 21 - Prob. 6MCCh. 21 - Prob. 7MCCh. 21 - Prob. 8MCCh. 21 - What is the impact of higher levels of accruals,...Ch. 21 - Prob. 10MCCh. 21 - Prob. 11MCCh. 21 - Prob. 12MCCh. 21 - Prob. 13MCCh. 21 - Prob. 14MCCh. 21 - Prob. 15MCCh. 21 - Prob. 16MC
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- Please solve for all sub-parts of the question displayed on image.arrow_forwardCompany A is currently cash-constrained, and must make a decision about whether to delay paying one of its suppliers, or taking out a loan. They owe the supplier $12,245, and they can borrow the money from Bank B, which has offered to lend the firm $12,245 for 1 months at an APR of 13% (compounded). The loan has a 1.54% loan origination fee. What would be the cost for Company A if they decide to borrow from Bank B?arrow_forwardJamboo Corporation is considering extending trade credit to some customers previously considered poor risks. Sales would increase by $230009 if credit is extended. 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 75 percent of sales. The firm needs to pay 1,500 tax on additional sales. Compute Net income after tax. ANSWER FORMAT: 1234.56 Answer:arrow_forward
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