3. The Swink Company expects to have sales of $20million this year under the current policies....
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3. The Swink Company expects to have sales of $20million this year under the current policies. Its variable cost ratio is 80% and its cost of funds for receivables is 8%. Currently, the firm's credit policy is net 25. However, its average collection period is 30 days, indicating that some customers are paying late, and its bad debt losses are 3% of sales. There are two alternative credit policies: Policy1: Lenghten the credit period to net 40. If this were done, it is estimated that sales would increase to $20 500 000, ACP to 45 days and the bad debt losses on the incremental sales would be 5%. Policy2: Shorten the credit period to net 20. Under these terms, sales would be expected to decrease to $18 million, ACP to 22 days and bad debt losses to 1% of the new sales level. Please evaluate each proposal as their net effect on after tax profits. Which alternative is to be adopted? 3. The Swink Company expects to have sales of $20million this year under the current policies. Its variable cost ratio is 80% and its cost of funds for receivables is 8%. Currently, the firm's credit policy is net 25. However, its average collection period is 30 days, indicating that some customers are paying late, and its bad debt losses are 3% of sales. There are two alternative credit policies: Policy1: Lenghten the credit period to net 40. If this were done, it is estimated that sales would increase to $20 500 000, ACP to 45 days and the bad debt losses on the incremental sales would be 5%. Policy2: Shorten the credit period to net 20. Under these terms, sales would be expected to decrease to $18 million, ACP to 22 days and bad debt losses to 1% of the new sales level. Please evaluate each proposal as their net effect on after tax profits. Which alternative is to be adopted?
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To evaluate each credit policy alternative and determine their net effect on aftertax profits we need to calculate the relevant financial metrics for ... View the full answer
Related Book For
Intermediate Financial Management
ISBN: 978-1111530266
11th edition
Authors: Eugene F. Brigham, Phillip R. Daves
Posted Date:
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