Current Asset Management 5

Current Asset Management 5 - the new incremental sales •...

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Old Exam Questions - Current Asset Management Page 5 of 12 Pages Net Income 196.80 Assume a 360-day year. Current sales are $10 per day. Variable costs are equal to 75 percent of sales. Fixed costs are equal to $400. Current days sales outstanding are 30 days giving an average accounts receivable balance of $300. Current bad debt expense is equal to 2 percent of sales. Current interest expense is equal to $100. 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 by 10 percent to $3,960 for the year. The average days sales outstanding (for both new and old sales) will increase to 60 days. Bad debt will remain at 2 percent for the current sales, but will rise to 4 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. 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. $22.66 B. $18.66 C. $24.66 D. $20.66 E. $16.66 11. Assume that for your company the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a 365-day year, determine the length of the firm’s cash conversion cycle. A. 87 days B. 90 days C. 65 days D. 48 days E. 66 days...
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