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Chapter 3: 1BP_b (page 249)
Compute the cost of not taking the following cash discounts
b. 2/15, net 30.
The cost of not taking the cash discount is 48.96%.
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Henderson Office Supply is considering a more liberal credit policy to increase sales, but expects that 9 percent of the new accounts will be uncollectible. Collection costs are 6 percent of new sales, production and selling costs are 74 percent, and accounts receivable turnover is four times. Assume income taxes of 20 percent and an increase in sales of $65,000. No other asset build-up will be required to service the new accounts.
e. Given the income determined in part b and the investment determined in part d, should Henderson extend more liberal credit terms?
Antivirus Inc. expects its sales next year to be \(2,500,000. Inventory and accounts receivable will increase \)480,000 to accommodate this sales level. The company has a steady profit margin of 15 percent with a 35 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing
In Problem 18, what long-term interest rate would represent a break-even point between using short-term financing as described in part a and long-term financing? (Hint: Divide the interest payments in 18a by the amount of total funds provided for the six months and multiply by 12.)
Carmen鈥檚 Beauty Salon has estimated monthly financing requirements for the next six months as follows:
January | \(8,500 |
February | \)2,500 |
March | \(3,500 |
April | \)8,500 |
May | \(9,500 |
June | \)4,500 |
Short-term financing will be utilized for the next six months.
January | 9% |
February | 10% |
March | 13% |
April | 16% |
May | 12% |
June | 12% |
Here are the projected annual interest rates:
a. Compute total dollar interest payments for the six months. To convert an annual rate to a monthly rate, divide by 12. Then multiply this value times the monthly balance. To get your answer, add up the monthly interest payments.
b. If long-term financing at 12 percent had been utilized throughout the six months, would the total-dollar interest payments be larger or smaller? Compute the interest owed over the six months and compare your answer to that in part a.
What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?
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