Foundations of Financial Management
16th Edition
ISBN: 9781259277160
Author: Stanley B. Block, Geoffrey A. Hirt, Bartley Danielsen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 7, Problem 19P
Fast Turnstiles Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide
a. Calculate the incremental income after taxes and the
b. Calculate the incremental income after taxes and the return on incremental investment if 15 percent of the new sales prove to be uncollectible. Should credit be extended if 15 percent of the new sales prove uncollectible?
c. Calculate the return on incremental investment if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible. Should credit be extended if the receivables turnover drops to 1.6, and 12 percent of the accounts are uncollectible (as in part a)?
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Animal Kingdom is evaluating the extension of credit to a new grouo of customers. Although these customers will provide P240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur P21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The firm is in a 30% tax bracket and has a receivables turnover of six times. No other asset build up will be required to service the new customers. The firm has a 10% desired return on investment.
Should it extend credit to these customers and should credit be extended if the receivables tumover drops to 1.5 and all other factors are the same?
Can you please show me an explanation and a solution for this? Thank you so much!
Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers.
Although these customers will provide $180,000 in additional credit sales, 12 percent
are likely to be uncollectible. The company will also incur $16,200 in additional
collection expense. Production and marketing costs represent 72 percent of sales. The
firm is in a 34 percent tax bracket. No other asset buildup will be required to service the
new customers. The firm has a 10 percent desired return. Assume the average
collection period is 120 days.
a. Compute the return on incremental investment
b. Should credit be extended?
1
i B IF T
111
Slow Roll Drum Co. is evaluating the extension of credit to a new group of customers. Although these customers will provide $288,000
in additional credit sales, 10 percent are likely to be uncollectible. The company will also incur $16,800 in additional collection
expense. Production and marketing costs represent 70 percent of sales. The firm is in a 25 percent tax bracket. No other asset buildup
will be required to service the new customers. The firm has a 10 percent desired return. Assume the average collection period is 72
days.
a. Compute the return on incremental investment. (Input your answer as a percent rounded to 2 decimal places. Use a 360-day
year.)
Return on incremental investment
%
b. Should credit be extended to the new group of customers?
No
Yes
Chapter 7 Solutions
Foundations of Financial Management
Ch. 7 - Prob. 1DQCh. 7 - Prob. 2DQCh. 7 - Why would a financial manager want to slow down...Ch. 7 - Use The Wall Street Journal or some other...Ch. 7 - Why are Treasury bills a favorite place for...Ch. 7 - Explain why the bad debt percentage or any other...Ch. 7 - What are three quantitative measures that can be...Ch. 7 - Prob. 8DQCh. 7 - What does the EOQ formula tell us? What assumption...Ch. 7 - Why might a firm keep a safety stock? What effect...
Ch. 7 - If a firm uses a just-in-time inventory system,...Ch. 7 - City Farm Insurance has collection centers across...Ch. 7 - Prob. 2PCh. 7 - Orbital Communications has operating plants in...Ch. 7 - Postal Express has outlets throughout the world....Ch. 7 - Thompson Wood Products has credit sales of...Ch. 7 - Oral Roberts Dental Supplies has annual sales of...Ch. 7 - Knight Roundtable Co. has annual credit sales of...Ch. 7 - Darla’s Cosmetics has annual credit sales of...Ch. 7 - Barney’s Antique Shop has annual credit sales of...Ch. 7 - Mervyn’s Fine Fashions has an average collection...Ch. 7 - Route Canal Shipping Company has the following...Ch. 7 - Nowlin Pipe & Steel has projected sales of 72,000...Ch. 7 - Fisk Corporation is trying to improve its...Ch. 7 - Prob. 14PCh. 7 - Diagnostic Supplies has expected sales of 84,100...Ch. 7 - Wisconsin Snowmobile Corp. is considering a switch...Ch. 7 - Johnson Electronics is considering extending trade...Ch. 7 - Henderson Office Supply is considering a more...Ch. 7 - Fast Turnstiles Co. is evaluating the extension of...Ch. 7 - Slow Roll Drum Co. is evaluating the extension of...Ch. 7 - Global Services is considering a promotional...Ch. 7 - Problems 22-25 are a series and should be...Ch. 7 - Problems 22-25 are a series and should be...Ch. 7 - Problems 22-25 are a series and should be...Ch. 7 - Problems 22-25 are a series and should be...
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