Current Asset Management 3

Current Asset Management 3 - the new incremental sales •...

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Old Exam Questions - Current Asset Management Page 3 of 12 Pages Taxes (40%) -384.00 Net Income 576.00 EBIT 1,160.00 EBIT(1-T) 696.00 Assume a 360-day year. Current sales are $35 per day. Variable costs are equal to 80 percent of sales. Fixed costs are equal to $1,108. Current days sales outstanding are 30 days giving an average accounts receivable balance of $1,050. Current bad debt expense is equal to 2 percent of sales. Current interest expense is equal to $200. The firm's tax rate is 40 percent. The firm is planning to loosen up its credit standard and its credit period. They expect this change in standards will result in sales increasing to $37 per day. The average days sales outstanding (for both new and old sales) will increase to 45 days. Bad debt will remain at 2 percent for the current sales, but will rise to 5 percent on
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Unformatted text preview: the new, incremental sales. • The firm can raise additional funds for investment in receivables at a nominal annual rate of 10 percent. 6. If you implicitly include the cost of interest on the firm's incremental investment in receivables, then what is the expected change in after-tax profit (net income) if this change in credit policy is made? A. $28.98 B. $34.86 C. $37.10 D. $40.32 E. $41.16 7. What would the interest rate on the incremental investment in accounts receivable have to be for this change in credit policy to produce an incremental change in after-tax profit (net income) of exactly zero? A. 16.09% B. 17.09% C. 18.09% D. 19.09% E. 10.09% YOU ARE GIVEN THE FOLLOWING INFORMATION FOR PROBLEMS 8 - 9:...
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