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Unformatted text preview: be sold at a loss. While this approach is valuable, it is difficult to implement. For example, Dell manufacturing plants will often have areas set aside that are for the suppliers. When parts are needed, it is a matter of going across the floor to get new parts. In fact, most computer manufacturers are trying to implement similar inventory systems. Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. a. There are 30 days until account is overdue. If you take the full period, you must remit: Remittance = 400($125) Remittance = $50,000 b. There is a 1 percent discount offered, with a 10 day discount period. If you take the discount, you will only have to remit: Remittance = (1 – .01)($50,000) Remittance = $49,500 c. The implicit interest is the difference between the two remittance amounts, or: Implicit interest = $50,000 – 49,500 Implicit interest = $500 526 The number of days’ credit offered is: Days’ credit = 30 – 10 Days’ credit = 20 days 2. The receivables turnover is: Receivables turnover = 365/Average collection period Receivables turnover = 365/36 Receivables turnover = 10.139 times And the average receivables are: Average receivables = Sales/Receivables period Average receivables = $47,000,000 / 10.139 Average receivables = $4,635,616 3. a. The average collection period is the percentage of accounts taking the discount times the discount period, plus the percentage of accounts not taking the discount times the days’ until full payment is required, so: Average collection period = .65(10 days) + .35(30 days) Average collection period = 17 days b. And the average daily balance is: Average balance = 1,300($1,700)(17)(12/365) Average balance = $1,235,178.08 4. The daily sales are: Daily sales = $19,400 / 7 Daily sales = $2,771.43 Since the average collection period is 34 days, the average accounts receivable is: Average accounts receivable = $2,771.43(34) Average accounts receivable = $94,228.57 5. The interest rate for the term of the discount is: Interest rate = .01/.99 Interest rate = .0101 or 1.01% And the interest is for: 35 – 10 = 25 days 527 So, using the EAR equation, the effective annual interest rate is: EAR = (1 + Periodic rate)m – 1 EAR = (1.0101)365/25 – 1 EAR = .1580 or 15.80% a. The periodic interest rate is: Interest rate = .02/.98 Interest rate = .0204 or 2.04% And the EAR is: EAR = (1.0204)365/25 – 1 EAR = .3431 or 34.31% b. The EAR is: EAR = (1.0101)365/50 – 1 EAR = .0761 or = 7.61% c. The EAR is: EAR = (1.0101)365/20 – 1 EAR = .2013 or 20.13% 6. The receivables turnover is: Receivables turnover = 365/Average collection period Receivables turnover = 365/39 Receivables turnover = 9.3590 times And the annual credit sales are: Annual credit sales = Receivables turnover × Average daily receivables Annual credit sales = 9.3590($47,500) Annual credit sales = $444,551.28 7. The total sales of the firm are equal to the total credit sales since all sales are on credit, so: Total credit sales = 5,600($425) Total credit sales = $2,380,000 The average collection period is the percentage of accounts taking the discount times the discount period, plus the percentage of accounts not taking the discount times the days’ until full payment is required, so: Average collection period = .60(10) + .40(40) Average collection period = 22 days 528 The receivables turnover is 365 divided by the average collection period, so: Receivables turnover = 365/22 Receivables turnover = 16.591 times And the average receivables are the credit sales divided by the receivables turnover so: Average receivables = $2,380,000/16.591 Average receivables = $143,452.05 If the firm increases the cash discount, more people will pay sooner, thus lowering the average collection period. If the ACP declines, the receivables turnover increases, which will lead to a decrease in the average receivables. 8. The average collection period is the net credit terms plus the days overdue, so: Average collection period = 30 + 8 Average collection period = 38 days The receivables turnover is 365 divided by the average collection period, so: Receivables turnover = 365/38 Receivables turnover = 9.6053 times And the average receivables are the credit sales divided by the receivables turnover so: Average receivables = $8,400,000 / 9.6053 Average receivables = $874,520.55 9. a. The cash outlay for the credit decision is the variable cost of the engine. If this is a onetime order, the cash inflow is the present value of the sales price of the engine times one minus the default probability. So, the NPV per unit is: NPV = –$1,600,000 + (1 – .005)($1,870,000)/1.029 NPV = $208,211.86 per unit The company should fill the order. b. To find the breakeven probability of default, π , we s...
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This note was uploaded on 07/10/2010 for the course FIN 6301 taught by Professor Eshmalwi during the Spring '10 term at University of TexasTyler.
 Spring '10
 eshmalwi
 Finance, Corporate Finance

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