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BUS 420 Chapter_22_v2

BUS 420 Chapter_22_v2 - Chapter 22 Chapter 22 Providing and...

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Unformatted text preview: Chapter 22 Chapter 22 Providing and Obtaining Credit 1 Focus Areas Focus Areas Receivables management ◦ Credit policy ◦ Days sales outstanding (DSO) ◦ Aging schedules ◦ Payments pattern approach Cost of bank loans 2 Elements of Credit Policy (a) Elements of Credit Policy (a) 1. Cash Discounts 2. Credit Period 3. Credit Standards 4. Collection Policy 3 What is the firm’s expected DSO What is the firm’s expected DSO and average daily sales (ADS)? (b1 and average daily sales (ADS)? (b1 & b2) & b2) 4 DSO = 0.30(10) + 0.50(40) + 0.20(70)= 37days. ADS = 18,000($100) 365 =$4,931.51 per day. What is the expected average accounts What is the expected average accounts receivable level? How much of this amount receivable level? How much of this amount must be financed if the profit margin is 25%? must be financed if the profit margin is 25%? (b3/b4) (b3/b4) 5 A/R = (DSO)(ADS) = 37($4,931.51) = $182,466 0 .75($182,466) = $136,849. If notes payable are used to finance the A/R If notes payable are used to finance the A/R investment, what does the firm’s balance investment, what does the firm’s balance sheet look like? (b4) sheet look like? (b4) Assets Liabilities & Equity A/R $182,466 Notes payable $136,849 Retained earnings 45,617 $182,466 6 If bank loans cost 12 percent, what is the If bank loans cost 12 percent, what is the annual dollar cost of carrying the annual dollar cost of carrying the receivables? (b5) receivables? (b5) 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. 7 What are some factors which What are some factors which influence a firm’s receivables level? influence a firm’s receivables level? The dollar cost of carrying receivables The dollar cost of carrying receivables ? ? (c) (c) 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. The lower the profit margin, the higher the cost of carrying receivables, because a greater portion of each sales dollar must be financed. The higher the cost of financing, the higher the dollar cost. 8 What would the receivables level What would the receivables level be at the end of each month? (d) be at the end of each month? (d) A/R = 0.7(Sales in that month) + 0.2(Sales in previous month). Month Sales A/R January $100 $ 70 February 200 160 March 300 250 April 300 270 May 200 200 June 100 110 9 What is the firm’s forecasted average daily sales What is the firm’s forecasted average daily sales...
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BUS 420 Chapter_22_v2 - Chapter 22 Chapter 22 Providing and...

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