1 million with net proceeds of 88 million which

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The commercial paper would be issued quarterly in increments of $9.1 million with net proceeds of $8.8 million. Which option should the firm select? a. The trade discount, because it provides the lowest cost of funds. b. Bank borrowing, because it provides the lowest cost of funds. c. Commercial paper, because it provides the lowest cost of funds. d. The costs are so similar that the decision is a matter of convenience. 119. CSO: 2B4d LOS: 2B4q Clauson Inc. grants credit terms of 1/15, net 30 and projects gross sales for the year of $2,000,000. The credit manager estimates that 40% of customers pay on the 15th day, 40% of the 30th day and 20% on the 45th day. Assuming uniform sales and a 360-day year, what is the projected amount of overdue receivables? a. $50,000. b. $83,333. c. $116,676. d. $400,000.
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190 120. CSO: 2B4d LOS: 2B4t Northville Products is changing its credit terms from net 30 to 2/10, net 30. The least likely effect of this change would be a(n) a. increase in sales. b. shortening of the cash conversion cycle. c. increase in short-term borrowings. d. lower number of days sales outstanding. 121. CSO: 2B4d LOS: 2B4t Snug-fit, a maker of bowling gloves, is investigating the possibility of liberalizing its credit policy. Currently, payment is made on a cash-on-delivery basis. Under a new program, sales would increase by $80,000. The company has a gross profit margin of 40%. The estimated bad debt loss rate on the incremental sales would be 6%. Ignoring the cost of money, what would be the return on sales before taxes for the new sales? a. 34.0%. b. 36.2%. c. 40.0%. d. 42.5%. 122. CSO: 2B4d LOS:2B4r A credit manager considering whether to grant trade credit to a new customer is most likely to place primary emphasis on a. profitability ratios. b. valuation ratios. c. growth ratios. d. liquidity ratios.
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191 123. CSO: 2B4d LOS: 2B4gg Foster Products is reviewing its trade credit policy with respect to the small retailers to which it sells. Four plans have been studied and the results are as follows. Annual Bad Collection Accounts Plan Revenue Debt Costs Receivable Inventory A $200,000 $ 1,000 $1,000 $20,000 $40,000 B 250,000 3,000 2,000 40,000 50,000 C 300,000 6,000 5,000 60,000 60,000 D 350,000 12,000 8,000 80,000 70,000 The information shows how various annual expenses such as bad debts and the cost of collections change as sales change. The average balance of accounts receivable and inventory have also been projected. The cost of the product to Foster is 80% of the selling price, after-tax cost of capital is 15%, and Foster’s effective income tax rate is 30%. What is the optimal plan for Foster to implement? a. Plan A. b. Plan B. c. Plan C. d. Plan D. 124. CSO: 2B4d LOS: 2B4t Consider the following factors affecting a company as it is reviewing its trade credit policy. I. Operating at full capacity. II. Low cost of borrowing. III. Opportunity for repeat sales. IV. Low gross margin per unit. Which of the above factors would indicate that the company should liberalize its credit policy? a. I and II only. b. I, II and III only.
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