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# FM27 29 - in a slight incremental gain of \$134,653 \$133,266...

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Mini Case: 27 - 29 customers and competitors will react, and then use the information gained when setting national policy. Note also that credit policy changes may not be announced in a "broadcast" sense so as to slow down competitors' reactions.) o. Suppose the firm makes the change, but its competitors react by making similar changes to their own credit terms, with the net result being that gross sales remain at the current \$1,000,000 level. What would the impact be on the firm's post-tax profitability? Answer: If sales remain at \$1,000,000 after the change is made, then the following situation would exist: Gross sales \$1,000,000 Less discounts 11,880 Net sales \$ 988,120 Production costs 750,000 Profit before credit Costs and taxes \$ 238,120 Credit costs: Carrying costs 3,699 Bad debt losses 10,000 Profit before taxes \$ 224,421 Taxes (40%) 89,769 Net income \$ 134,653 Under the old terms the net income was \$133,266, so the policy change would result
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Unformatted text preview: in a slight incremental gain of \$134,653 - \$133,266 = \$1,387. p. The brothers are considering taking out a 1-year bank loan for \$100,000 to finance part of their working capital needs and have been quoted a rate of 8 percent. What is the effective annual cost rate assuming (1) simple interest, (2) discount interest, (3) discount interest with a 10 percent compensating balance, and (4) add-on interest on a 12-month installment loan? For the first 3 of these assumptions, would it matter of the loan were for 90 days, but renewable, rather than for a year? Answer: 1. With a simple interest loan, they gets the full use of the \$100,000 for a year, and then pay 0.08(\$100,000) = \$8,000 in interest at the end of the term, along with the \$100,000 principal repayment. For a 1-year simple interest loan, the nominal rate, 8 percent, is also the effective annual rate....
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