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IFM10 Ch22 Lecture(1)

IFM10 Ch22 Lecture(1) - Chapter22 1 TopicsinChapter...

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1 Chapter 22 Providing and Obtaining Credit
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2 Topics in Chapter Receivables management Credit policy Days sales outstanding (DSO) Aging schedules Payments pattern approach Cost of bank loans
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3 Elements of Credit Policy Cash Discounts:  Lowers price.  Attracts  new customers and reduces DSO. Credit Period:  How long to pay?   Shorter period reduces DSO and  average A/R, but it may discourage  sales. (More…)
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4 Credit Policy  (Continued) Credit Standards:  Tighter standards  reduce bad debt losses, but may reduce  sales.  Fewer bad debts reduces DSO. Collection Policy:  Tougher policy will  reduce DSO, but may damage  customer relationships.
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5 Receivables Monitoring January     $100 April         $300 February      200 May            200 March          300 June           100 Terms of sale: Net 30. Assume the following sales estimates:
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6 Expected Collections 30% pay on Day 10 (month of sale). 50% pay on Day 40 (month after sale). 20% pay on Day 70 (2 months after  sale). Annual sales = 18,000 units @  $100/unit. 365-day year.
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7 What is the firm’s expected DSO  and average daily sales (ADS)? DSO= 0.30(10) + 0.50(40) + 0.20(70)=  37days. How does this compare with the firm’s  credit period? ADS= 18,000($100) 365 =$4,931.51 per day.
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8 A/R = (DSO)(ADS) = 37($4,931.51) = $182,466 0 .75($182,466) = $136,849. What is the expected  average accounts  receivable level?  How much of this amount  must be financed if the profit margin is 25%?
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9 If notes payable are used to finance the A/ R investment, what does the firm’s  balance sheet look like? Assets Liabilities & Equity A/R $182,466 Notes payable    $136,849 Retained  earnings 45,617                                    $182,466
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10 If bank loans cost 12 percent, what is the  annual dollar cost of carrying the  receivables? Cost of carrying receivables = 0.12($136,849) = $16,422. In addition, there is an opportunity cost  of not having the use of the profit com- ponent of the receivables.
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11 What are some factors which influence a firm’s receivables level? Receivables are a function of average  daily sales and days sales outstanding. State of the economy, competition  within the industry, and the firm’s credit  policy all influence a firm’s receivables  level.
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12 What are some factors which influence  the dollar cost of carrying receivables The lower the profit margin, the higher  the cost of carrying receivables,  because a greater portion of each sales  dollar must be financed.
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