FIN200 Credit Policy Decisions - StudentOfFortune.com

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Due on Mar. 31, 2009
Asked on Mar. 31, 2009 at 11:56:03AM

Q:
Check Point: Credit Policy Decisions
Problem 17 on p. 220
Chapter 7 Block Danielsen: Foundations of Financial Management, 13th Edition

17. Collins Office Supplies is considering a more liberal credit policy to increase
sales, but expects that 9 percent of the new accounts will be uncollectible. Collection
costs are 5 percent of new sales, production and selling costs are 78 percent, and accounts receivable turnover is five times.
Assume income taxes of 30 percent and an increase in sales of $80,000. No other asset buildup will be required to service the new accounts.

a. What is the level of accounts receivable needed to support this sales
expansion?

b. What would be Collins Ã‚Â’s incremental after-tax return on investment?

c. Should Collins liberalize credit if a 15 percent after-tax return on investment
is required?

Assume Collins also needs to increase its level of inventory to support
new sales and that inventory turnover is four times.

d. What would be the total incremental investment in accounts receivable and
inventory to support an $80,000 increase in sales?

e. Given the income determined in part b and the investment determined in
part d, should Collins extend more liberal credit terms?

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Posted on Mar 31, 2009 at 12:03:36PM

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Preview: ... ales) – 4,000 Production and selling costs (78% of new sales) – 62,400 Annual income before taxes $ 6,400 Taxes (30%) – 1,920 Incremental incom ...

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$3.00 FIN 200 Credit Policy Decisions (Collins Office Supplies - Solution)

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Posted on Mar 31, 2009 at 12:05:05PM

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Preview: ... on investment is required? Assume Collins also needs to increase its level of inventory to support new sales and that inventory turnover is four times. d. What would be the total incremental investment in accounts receivable and inventory to suppor ...

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Posted on Mar 31, 2009 at 12:07:34PM

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Preview: ... ? Assume that Collins also needs to increase its level of inventory to support new sales and that inventory turnover is four times. d. What would be the total incremental investment in accounts receivable and inventory to su ...

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Posted on May 23, 2009 at 02:01:43PM

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Preview: ... tal income after taxes . . . . . . . . . . . . . . . . . $ 4,480 b) What would be Collins’s incremental after-tax return on investment? $4,480/16,000 = 28% c) Should Collins liberalize credit if a 15 percent after-tax return on investment is required? Assume Collins also needs to increase its level of inventory to support new sales and that inventory turnover is four times. Yes, because the requir ...

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