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

This preview shows page 1. Sign up to view the full content.

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
This is the end of the preview. Sign up to access the rest of the document.

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....
View Full Document

## 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.

Ask a homework question - tutors are online