Current Asset Management Solutions 13

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

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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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