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Current Asset Management Solutions 8

Current Asset Management Solutions 8 - • The firm is...

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Old Exam Questions - Current Asset Management - Solutions Page 8 of 21 Pages New TIC = $2,137.50 + $1,200.00 = $3,337.50 10. Income Statement Year 0 Year 1 Sales 3,600.00 3,960.00 Variable Costs - 2,700.00 Gross Profit 900.00 Fixed Costs - 400.00 Bad Debt Expense: Original - 72.00 -72.00 New --- EBIT 428.00 Interest: Original - 100.00 -100.00 New --- EBT 328.00 Taxes (40%) - 131.20 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.
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Unformatted text preview: • 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 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?...
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