{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

Module04Week2Tutorial - August 2003 FIN2101 BUSINESS...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
August 2003 FIN2101 BUSINESS FINANCE II MODULE 4 – WORKING CAPITAL MANAGEMENT (Week 2) QUESTION 1 Undercounter Wholesalers Ltd currently sells entirely on a cash basis. Undercounter's management is considering introducing credit sales with discounts to attract new customers. The company is considering two alternative options. The first is offering discount terms of 2.5/30, n/60. It is estimated this would increase sales by $500 000 and 30% of these would take advantage of the discount. The second option is discount terms of 10/30, n/60, a policy which would increase sales by $600 000 with 50% of these customers taking the discount. The variable cost of sales is 75% of sales. The company's required rate of return on all accounts receivable is 1% per month. Undercounter's existing customers will not seek the credit terms . Using the NPV approach, advise Undercounter as to which discount policy it should adopt. QUESTION 2 Starlight Industries Ltd has to date been a "cash only" company. Management is concerned, however, that sales are slipping and is contemplating a move to offer credit in an effort to boost sales. At the moment sales are $1 500 000 per annum and it is anticipated that sales will increase to $2 250 000 per annum if credit is offered. The firm's accountant has prepared the following schedule for the payment of accounts by all customers (new and existing): - 1 month from the time of sale - 35% - 2 months from the time of sale - 25% - 3 months from the time of sale - 35% The remaining 5% of sales will result in bad debts which will not be collected. The variable cost of sales is 75% of sales and these costs are paid at the same time that sales are made. Starlight's cost of capital is 1.25% per month. Using the NPV approach, advise management whether the company should proceed with the proposal to offer credit terms.
Image of page 1

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
August 2003 QUESTION 3 In order to increase sales from their present annual level of $240 000, the Heap Corporation is considering a more liberal credit policy.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern