Moonlight Enterprises is in the business of manufacturing of LED lights. It offers 1/10 net 40...
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Moonlight Enterprises is in the business of manufacturing of LED lights. It offers "1/10 net 40" credit terms to its customers. The current level of sales is Rs. 50 million per annum and its variable cost ratio is 85%. Presently 30% of the customers avail cash discount and the average collection period is 31 days. Moonlight is thinking of changing its credit terms to "2/10 net 40" that would increase sales by Rs. 5 million per annum. With higher discount offered, 70% of the customer is expected to avail the discount and the average collection period is expected to come down to 19 days. The tax rate faced by Moonlight is 30% and the post-tax cost of capital for the firm 15%. You are hired by Moonlight enterprises as consultant. Show the net impact of such decision on shareholders profit and give your recommendation regarding the proposed policy change. 3 marks Moonlight Enterprises is in the business of manufacturing of LED lights. It offers "1/10 net 40" credit terms to its customers. The current level of sales is Rs. 50 million per annum and its variable cost ratio is 85%. Presently 30% of the customers avail cash discount and the average collection period is 31 days. Moonlight is thinking of changing its credit terms to "2/10 net 40" that would increase sales by Rs. 5 million per annum. With higher discount offered, 70% of the customer is expected to avail the discount and the average collection period is expected to come down to 19 days. The tax rate faced by Moonlight is 30% and the post-tax cost of capital for the firm 15%. You are hired by Moonlight enterprises as consultant. Show the net impact of such decision on shareholders profit and give your recommendation regarding the proposed policy change. 3 marks
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The question asks to calculate the net impact of a change in credit policy on shareholder profit and to provide a recommendation regarding the propose... View the full answer
Related Book For
Principles Of Managerial Finance
ISBN: 978-0136119463
13th Edition
Authors: Lawrence J. Gitman, Chad J. Zutter
Posted Date:
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