Old Exam Questions - Current Asset Management Page 8 of 12 Pages • 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 1.5 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 20 percent to $4,320 for the year. • The average days sales outstanding (for both new and old sales) will increase to 60 days. • Bad debt will remain at 1.5 percent for the current sales, but will rise to 4 percent on the new, incremental sales. • The firm can raise additional funds for investment in receivables at a nominal annual rate of 10 percent. Determine what the expected change in after-tax profit (net income) will be if this change in credit policy is made and you implicitly include the cost of interest on the
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.