Genatron Manufacturing (from problem 8) is considering changing its credit standards. Analysis shows that sales may fall
Question:
Genatron Manufacturing (from problem 8) is considering changing its credit standards. Analysis shows that sales may fall 5 percent from 2020 levels with no bad debts from the change in sales. The cost of financing the increase in current assets is 8 percent.
a) Should Genatron change its credit policy?
b) Using the information stated in the problem, at what profit margin is Genatron indifferent between changing its policy or maintaining its current standard?
c) Using the information stated in the problem, at what financing cost is Genatron indifferent between changing or maintaining the credit policy?
d) Using the information stated in the problem, by what amount can the current assets change so that Genatron is indifferent between changing or maintaining their credit policy?
Data from in Problem 8
Financial statements for the Genatron Manufacturing Corporation for the years 2019 and 2020 are listed in the text. Calculate Genatron’s operating cycle and cash conversion cycle for 2016 and 2020. Why did they change between 2016 and 2020?
Financial statements for the Genatron Manufacturing Corporation for 2020 and 2019.
Balance sheet ASSETS | 2020 | 2019 | |
Cash | $40,000 | $50,000 | |
Accts. receivable | 260,000 | 200,000 | |
Inventory | 500,000 | 450,000 | |
Total current assets | 800,000 | 700,000 | |
Fixed assets, net | 400,000 | 300,000 | |
Total assets LIABILITIES AND EQUITY | $1,200,000 | $1,000,000 | |
Accts. payable | $170,000 | $130,000 | |
Bank loan | 90,000 | 90,000 | |
Accruals | 70,000 | 50,000 | |
Total current liabilities | 330,000 | 270,000 | |
Long-term debt, 12% | 400,000 | 300,000 | |
Common stock, $10 par | 300,000 | 300,000 | |
Capital surplus | 50,000 | 50,000 | |
Retained Earnings | 120,000 | 80,000 | |
Income statement | 2020 | 2019 | |
Net sales | $1,500,000 | $1,300,000 | |
Cost of goods sold | 900,000 | 780,000 | |
Gross profit | 600,000 | 520,000 | |
Expenses: general and administrative | 150,000 | 150,000 | |
Marketing | 150,000 | 130,000 | |
Depreciation | 53,000 | 40,000 | |
Interest | 57,000 | 45,000 | |
Earnings before taxes | 190,000 | 155,000 | |
Income taxes | 76,000 | 62,000 | |
Net income | $114,000 | $93,000 |
Step by Step Answer:
Introduction To Finance Markets, Investments, And Financial Management
ISBN: 978-1119561170
17th Edition
Authors: Ronald W. Melicher, Edgar A. Norton