2. Changing the credit period Aa Aa Making changes to a firm's credit policy involves trade-offs. Assuming that all other factors remain constant, which of the following are outcomes expected to result from an increase in a firm's cash discount? Check all that apply. . An increase in the creditworthiness of the firm's customers X An increase in the cost of the discounts given A decrease in the creditworthiness of the firm's customers An increase in the firm's bad-debt expenses Virginia Hydroponics Company (VHC), a wholesaler of seeds and plant nursery products, currently sells on terms of net 45 to its customers but is experiencing a days sales outstanding (DSO) of 105 days. In an effort to reduce this delay, VHC's management is considering implementing its first cash discount. The revised credit terms, 2/25 net 45, are expected to reduce its DSO to 75 days. VHC expects 20% of its customers to take the discount, but it does not expect its inventory level to change as a result of the policy change. VHC has annual sales of $5,500,000 and incurs variable costs of 65%. Sales and the level of variable costs are not expected to change with the alteration in credit policy. VHC wants to earn a pretax return of 12% on its receivables investment. Given this data, answer the following questions, and round all final dollar amounts to the nearest dollar. A. What is the expected incremental change in VHC's average receivables balance? B. How much cost savings is generated by the reduction in the receivables investment? C. How much in cash discounts will be sacrificed by VHC? D. What is the net change in VHC's pretax earnings? | E. Should the company make the change to its credit policy? | 4. Cost of a bank loan Aa Aa The Effective Annual Rate (EAR) captures the total cost of borrowing, including both interest costs and other fees associated with short-term borrowing. You are the Vice President of Finance for Virginia Hydroponics Company, and one of your duties is to negotiate terms for borrowing under your company's $3 million credit line. You need to borrow $1 million for one year to finance the receivables and inventory related to a new product line. (Note: You will need the full use of the $1 million, so any fees, interest, or balances will be in addition to the $1 million.) Calculate the EAR for each alternative offered by your bank. Option A: 7.00% annual rate on a simple-interest basis. There are no compensating balances and the interest is payable quarterly Option B: 6.80% discount interest. The face amount of the loan is repaid at the end of the year. Option C: 6.50% discount interest, with a compensating balance of $20,000 in a non-interest bearing account. The face amount of the loan is repaid at the end of the year, and the compensating balance is returned. The EAR of option A is The EAR of option B is The EAR of option C is The best alternative for Virginia Hydroponics Company is 2. Changing the credit period Aa Aa Making changes to a firm's credit policy involves trade-offs. Assuming that all other factors remain constant, which of the following are outcomes expected to result from an increase in a firm's cash discount? Check all that apply. . An increase in the creditworthiness of the firm's customers X An increase in the cost of the discounts given A decrease in the creditworthiness of the firm's customers An increase in the firm's bad-debt expenses Virginia Hydroponics Company (VHC), a wholesaler of seeds and plant nursery products, currently sells on terms of net 45 to its customers but is experiencing a days sales outstanding (DSO) of 105 days. In an effort to reduce this delay, VHC's management is considering implementing its first cash discount. The revised credit terms, 2/25 net 45, are expected to reduce its DSO to 75 days. VHC expects 20% of its customers to take the discount, but it does not expect its inventory level to change as a result of the policy change. VHC has annual sales of $5,500,000 and incurs variable costs of 65%. Sales and the level of variable costs are not expected to change with the alteration in credit policy. VHC wants to earn a pretax return of 12% on its receivables investment. Given this data, answer the following questions, and round all final dollar amounts to the nearest dollar. A. What is the expected incremental change in VHC's average receivables balance? B. How much cost savings is generated by the reduction in the receivables investment? C. How much in cash discounts will be sacrificed by VHC? D. What is the net change in VHC's pretax earnings? | E. Should the company make the change to its credit policy? | 4. Cost of a bank loan Aa Aa The Effective Annual Rate (EAR) captures the total cost of borrowing, including both interest costs and other fees associated with short-term borrowing. You are the Vice President of Finance for Virginia Hydroponics Company, and one of your duties is to negotiate terms for borrowing under your company's $3 million credit line. You need to borrow $1 million for one year to finance the receivables and inventory related to a new product line. (Note: You will need the full use of the $1 million, so any fees, interest, or balances will be in addition to the $1 million.) Calculate the EAR for each alternative offered by your bank. Option A: 7.00% annual rate on a simple-interest basis. There are no compensating balances and the interest is payable quarterly Option B: 6.80% discount interest. The face amount of the loan is repaid at the end of the year. Option C: 6.50% discount interest, with a compensating balance of $20,000 in a non-interest bearing account. The face amount of the loan is repaid at the end of the year, and the compensating balance is returned. The EAR of option A is The EAR of option B is The EAR of option C is The best alternative for Virginia Hydroponics Company is