FM27 27 - after the proposed change Answer Current...

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Mini Case: 27 - 27 l. What would be the firm's expected dollar cost of granting discounts under the new policy? Answer: Current situation: under the current, no discount policy, the cost of discounts is $0. New situation: of the $1,100,000 gross sales expected under the new policy, 1 percent is lost to bad debts, so good sales = 0.99($1,100,000) = $1,089,000. Since 60 percent of the good sales are discount sales, discount sales = 0.6($1,089,000) = $653,400. Finally, the discount is 2 percent, so the cost of discounts is expected to be 0.02($653,400) = $13,068. m. What is the firm's current dollar cost of carrying receivables? What would it be
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Unformatted text preview: after the proposed change? Answer: Current situation: the firm's average daily sales currently amount to $1,000,000/365 = $2,739.73. The DSO is 32 days, so accounts receivable amount to 32($2,739.73) = $87,671. However, only 75 percent of this total represents cash costs--the remainder is profit--so the investment in receivables (the actual amount that must be financed) is 0.75($87,671) = $65,753. At a cost of 12 percent, the annual cost of carrying the receivables is 0.12($65,753) = $7,890. New situation: the cost of carrying the receivables balance under the new policy would be $4,068: ($1,100,000/365)(15)(0.75)(0.12) = $4,068....
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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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