FM27 17 - a. Discuss, in general, what it means for the...

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MINI CASE Rich Jackson, a recent finance graduate, is planning to go into the wholesale building supply business with his brother, Jim, who majored in building construction. The firm would sell primarily to general contractors, and it would start operating next January. Sales would be slow during the cold months, rise during the spring, and then fall off again in the summer, when new construction in the area slows. Sales estimates for the first 6 months are as follows (in thousands of dollars): Jan $100 Feb 200 Mar 300 Apr 300 May 200 Jun 100 The terms of sale are net 30, but because of special incentives, the brothers expect 30 percent of the customers (by dollar value) to pay on the 10th day following the sale, 50 percent to pay on the 40th day, and the remaining 20 percent to pay on the 70th day. No bad debt losses are expected, because Jim, the building construction expert, knows which contractors are having financial problems.
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Unformatted text preview: a. Discuss, in general, what it means for the brothers to set a credit and collections policy. Answer: When a firm sets its credit and collections policy it determines four things: 1. The credit period, which is the length of time buyers are given to pay for their purchases 2. The discounts that are given for early payment. 3. The credit standards, which are the financial strength requirements for customers to purchase on credit from the firm. 4. The collection policy, which is how hard the company will work to collect slow-paying accounts. These policies determine the level of sales and also the level of accounts receivable. Note that although sales contribute to profitability, additional accounts receivable require the investment of funds, so a firm must take both the profits from additional sales and the additional capital required to fund accounts receivable when it determines a credit policy. Mini Case: 27 - 17...
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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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