A company wants to fix its credit policy. It is considering on three alternatives as under:-...

 

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A company wants to fix its credit policy. It is considering on three alternatives as under:- sale on 15 days credit at 5% cash discount, or sale on 1 month credit without cash discount, or 1. 2. 3. sale on 2 months credit without cash discount In (1) above additional sales would be N$100 000; in (2) N$300 000 and in (3) N$700 000. Collection charges will be in (1) 2%, (2) 5% and (3) 10% of sales. Bad debts are expected at 2%, 4%, and 10% respectively. Assuming interest on investment @ 12% per annum. Required: State which policy should be adopted. Show all your workings. (25 marks) Pep LTD has a total assets 6.4 million of which current assets. 0.4 million of the total assets is current assets. Revenue is N$20 million per annum, and operating profit (EBIT) is 12% of revenue. Due to fear of cash flow problems due strict credit policy, the company is considering high level of current assets to avoid liquidity problems. There are two proposals to be considered, the current asset level of N$1 million and N$1.6 million. Any addition to current assets would be financed by equity. Required: Calculate the following: a) Total asset turnover for current and the two considered levels of current assets (10) marks) b) Before tax return on investment on the current ant the two considered level of current assets. (5marks) c) Before tax net profit margin for the three alternatives. (10 marks) A company wants to fix its credit policy. It is considering on three alternatives as under:- sale on 15 days credit at 5% cash discount, or sale on 1 month credit without cash discount, or 1. 2. 3. sale on 2 months credit without cash discount In (1) above additional sales would be N$100 000; in (2) N$300 000 and in (3) N$700 000. Collection charges will be in (1) 2%, (2) 5% and (3) 10% of sales. Bad debts are expected at 2%, 4%, and 10% respectively. Assuming interest on investment @ 12% per annum. Required: State which policy should be adopted. Show all your workings. (25 marks) Pep LTD has a total assets 6.4 million of which current assets. 0.4 million of the total assets is current assets. Revenue is N$20 million per annum, and operating profit (EBIT) is 12% of revenue. Due to fear of cash flow problems due strict credit policy, the company is considering high level of current assets to avoid liquidity problems. There are two proposals to be considered, the current asset level of N$1 million and N$1.6 million. Any addition to current assets would be financed by equity. Required: Calculate the following: a) Total asset turnover for current and the two considered levels of current assets (10) marks) b) Before tax return on investment on the current ant the two considered level of current assets. (5marks) c) Before tax net profit margin for the three alternatives. (10 marks)

Answer rating: 100% (QA)

Lets analyze the credit policy alternatives and the current asset level proposals for Pep LTD 1 Credit Policy Alternatives For each alternative well calculate the Total Receivables Collection Charges ... View the full answer