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Current Asset Management 8

Current Asset Management 8 - Fixed costs are equal to $400...

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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 firm's incremental investment in receivables.
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