a) KYM Ltd currently operates with terms of net 72 days. Its average investment in receivables...

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a) KYM Ltd currently operates with terms of net 72 days. Its average investment in receivables is sh.2, 400,000. Eighty percent of the firm's sales are always on credit. The company is considering introducing terms of 2/20, net of 90 days. Total sales will increase by 50%. All the cash customers and 40 percent of the credit customers will take advantage of the cash discounts. Average collection period will increase to 80 days. Bad debts are expected to remain at 2% of credit sales. Inventory levels are estimated to be 5% of the firm's turnover. Gross margin on sales is 40%. Cost of capital 16%. The corporation tax rate is 30%. Advise the management of the firm on whether they should switch to the new credit policy? (Assume a year of 360 days) (9 Marks) a) KYM Ltd currently operates with terms of net 72 days. Its average investment in receivables is sh.2, 400,000. Eighty percent of the firm's sales are always on credit. The company is considering introducing terms of 2/20, net of 90 days. Total sales will increase by 50%. All the cash customers and 40 percent of the credit customers will take advantage of the cash discounts. Average collection period will increase to 80 days. Bad debts are expected to remain at 2% of credit sales. Inventory levels are estimated to be 5% of the firm's turnover. Gross margin on sales is 40%. Cost of capital 16%. The corporation tax rate is 30%. Advise the management of the firm on whether they should switch to the new credit policy? (Assume a year of 360 days) (9 Marks)

Answer rating: 100% (QA)

To determine whether KYM Ltd should switch to the new credit policy we need to calculate the effect ... View the full answer