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Current Asset Management Solutions 18

# Current Asset Management Solutions 18 - (\$730,000.20 =...

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Old Exam Questions - Current Asset Management - Solutions Page 18 of 21 Pages They expect this change in standards will result in sales increasing by 20 percent to \$2,400 per day. The average days sales outstanding (for both new and old sales) will increase to 50 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 8 percent. Explicitly including the cost of interest on the firm's incremental investment in receivables, determine the expected change in after-tax profit (net income) if this change in credit policy is made. A. \$11,894.40 B. \$12,460.80 C. \$13,592.20 D. \$13,026.60 * E. \$11,328.00 New Sales =
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Unformatted text preview: (\$730,000)*(.20) = \$146,000 New Sales Per Day = \$146,000 / 365 = \$400 per day Investment in Receivables : Old Sales = (\$2,000)(50-30) = \$40,000 New Sales = (\$400)(50)(.80) = \$16,000 Total Investment = \$40,000 + \$16,000 = \$56,000.00 New Interest = (\$56,000)(.08) = \$4,480.00 New Bad Debt Expense = (\$146,000)(.04) = \$5,840.00 Change in Net Income = \$53,328.00 - \$42,000.00 = \$11,328.00 Income Statement Year 0 Year 1 Sales \$730,000.00 \$876,000.00 Variable Costs -\$584,000.00-\$700,800.00 Gross Profit \$146,000.00 \$175,200.00 Fixed Costs -\$46,000.00-\$46,000.00 Bad Debt Expense: Original -\$14,600.00-\$14,600.00 New --- -\$5,840.00 EBIT \$85,400.00 \$108,760.00 Interest: Original -\$15,400.00-\$15,400.00 New --- -\$4,480.00 EBT \$70,000.00 \$88,880.00 Taxes (40%) -\$28,000.00-\$35,552.00...
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