Current Asset Management Solutions 13

Current Asset Management Solutions 13 - • They expect...

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Old Exam Questions - Current Asset Management - Solutions Page 13 of 21 Pages Sales 3,600.00 4,320.00 Variable Costs - 2,880.00 Gross Profit 720.00 Fixed Costs - 400.00 Bad Debt Expense: Original - 54.00 - 54.00 New --- EBIT 266.00 Interest: Original - 100.00 - 100.00 New --- EBT 166.00 Taxes (40%) - 66.40 Net Income 99.60 Assume a 360-day year. Current sales are $10 per day. Variable costs are equal to 80 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 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.
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Unformatted text preview: • 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. A. $42.66 B. $48.16 * C. $45.36 D. $51.26 E. $54.96...
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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.

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