Question: Webb Inc currently makes all sales on credit and offers
Webb Inc. currently makes all sales on credit and offers no cash discounts. The firm is considering offering a 2% cash discount for payments within 10 days. The firm’s current average collection period is 65 days, sales are 400,000 units, selling price is $50 per unit, and variable cost per unit is $40. The firm expects that the changes in credit terms will result in an increase in sales to 410,000 units, that 75% of the sales will take the discount, and that the average collection period will fall to 45 days. Bad debts are expected to drop from 1.0 to 0.9% of sales. If Webb’s required rate of return on investments of similar risk is 25%, should the firm offer the proposed discount? Assume a 365-day year.
Answer to relevant QuestionsMicroboard Inc., a major computer chip manufacturer, is thinking of lengthening its credit period from net 30 days to net 50 days. Presently, its average collection period is 40 days, and the firm’s CFO believes that with ...What is cash position management? What types of firms set a target cash balance? Why? What is the purpose of a bank’s requiring the firm to maintain a minimum balance in its checking account? How does this relate to a bank ...Briefly describe each of the following developments in accounts payable and disbursements. a. Integrated accounts payable b. Purchasing/procurement cards c. Imaging services d. Fraud prevention in disbursements Firm A has annual revenues of $1.6 billion and can reduce its float by four days using a lockbox system. Due to A’s significant risk, A has a high cost of capital of 22%. Firm B has annual revenues of $850 million and can ...Firm MGST is reviewing its 1-year line of credit, currently with an interest rate of 9.15%. The credit line is for $1 million, but the firm intends to use only half of it throughout the year. The commitment fee is 42 basis ...
Post your question