Current Asset Management Solutions 17

Current Asset Management Solutions 17 - -$46,000.00 Bad...

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Old Exam Questions - Current Asset Management - Solutions Page 17 of 21 Pages The tax rate does not matter, since the operating expense and the interest expense are both on a pre-tax basis. If you use this system, you will reduce your average accounts receivable balance by: Reduction in AR = ($2,320,000)*(0.25) = $580,000 This will save you annual interest expense of: Annual Interest Savings = ($580,000)*(0.06) = $34,800 And this is the maximum that you would be willing to pay for the system. 20. Your company is contemplating a change in its accounts receivable policy. Its current income statement (Year 0) is below: Income Statement Year 0 Year 1 Sales $730,000.00 Variable Costs -$584,000.00 Gross Profit $146,000.00 Fixed Costs
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Unformatted text preview: -$46,000.00 Bad Debt Expense: Original -$14,600.00 New --- EBIT $85,400.00 Interest: Original -$15,400.00 New --- EBT $70,000.00 Taxes (40%) -$28,000.00 Net Income $42,000.00 Now make the following assumptions: • Assume a 365-day year • Current sales are $2,000 per day (all on credit) • Variable costs are equal to 80 percent of sales • Fixed costs are equal to $46,000 • Current days sales outstanding are 30 days, giving an average accounts receivable balance of $60,000 • Current bad debt expense is equal to 2 percent of sales • Current interest expense is equal to $15,400 • 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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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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