Current Asset Management Solutions 5

Current Asset Management Solutions 5 - • The firm's tax...

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Old Exam Questions - Current Asset Management - Solutions Page 5 of 21 Pages YOU ARE GIVEN THE FOLLOWING INFORMATION FOR PROBLEMS 6 - 7: Income Statement Year 0 Year 1 Sales 12,600.00 13,320.00 Variable Costs -10,080.00 Gross Profit 2,520.00 Fixed Costs -1,108.00 Bad Debt Expense: Original -252.00 -252.00 New --- EBIT 1,160.00 Interest: Original -200.00 -200.00 New --- EBT 960.00 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.
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Unformatted text preview: • 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 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?...
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