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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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