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IFM10 Ch22 Lecture(1)

IFM10 Ch22 Lecture(1) - Chapter 22 Providing and Obtaining...

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Chapter 22 Providing and Obtaining Credit 1
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Topics in Chapter Receivables management Credit policy Days sales outstanding (DSO) Aging schedules Payments pattern approach Cost of bank loans 2
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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. 3 (More…)
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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. 4
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Receivables Monitoring January     $100 April         $300 February      200 May            200 March          300 June           100 5 Terms of sale: Net 30. Assume the following sales estimates:
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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. 6
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What is the firm’s expected DSO and average daily sales (ADS)? 7 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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What is the expected average accounts receivable level? How much of this amount must be financed if the profit margin is 25%? 8 A/R = (DSO)(ADS) = 37($4,931.51) = $182,466 0 .75($182,466) = $136,849.
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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 9
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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. 10
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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. 11
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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. The higher the cost of financing, the higher the dollar cost. 12
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What would the receivables level be at the end of each month? A/R = 0.7(Sales in that month) + 0.2(Sales in  previous month).
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