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Union Company, Data Back-Up Systems, Accounts Receivable

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1.) A firm is evaluating an accounts receivable change that would increase bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the selling price is $20 per unit, and the variable cost per unit is $15. As a result of the proposed change, sales are forecast to increase to 60,000 units.

A. What are bad debts in dollars currently and under the proposed change?
B. Calculate the cost of the marginal bad debts to the firm.
C. Ignoring the additional profit contribution from increased sales, if the proposed change saves $3,500 and causes no change in the average investment in accounts receivable, would you recommend it? Explain.
D. Considering all changes in costs and benefits, would you recommend the proposed change? Explain.
E. Compare and discuss your answers in parts c and d.

2.) Union Company is considering establishment of a zero-balance account. The firm currently maintains an average balance of $420,000 in its disbursement account. As compensation to the bank for maintaining the zero-balance account, the firm will have to pay a monthly fee of $1,000 and maintain a $300,000 non-interest-earning deposit in the bank. The firm currently has no other deposits in the bank. Evaluate the proposed zero-balance account, and make a recommendation to the firm, assuming that it has a 12% opportunity cost.

3.) Data Back-Up Systems has obtained a $10,000, 90-day bank loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a 365-day year.)

A. How much interest (in dollars) will the firm pay on the 90-day loan?
B. Find the effective 90-day rate on the loan.
C. Annualize your result in part b to find the effective annual rate for this loan, assuming that it is rolled over every 90 days throughout the year under the same terms and circumstances.

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Please see the attachment, as it explains how to review the ...

Solution Summary

Please see the attachment, as it explains how to review the accounts receivable policy shift, how to analyze the benefit of the freed up cash balance, and how the compounding impacts the effective interest rate.

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Compute the following liquidity ratios for each of the companies, and comment on the relative liquidity of the two competitors.

i) Current ratio.

ii) Receivables turnover.

iii) Average collection period.

Compute the following solvency ratios for each of the companies, and comment on the relative solvency of the two competitors.

i) Debt to total assets ratio.

ii) Times interest earned.

iii) Cash debt coverage ratio.

iv) Free cash flow.

iv) Inventory turnover.

v) Days in inventory.

vi) Current cash debt coverage.

Compute the following profitability ratios for each of the companies, and comment on the relative profitability of the two competitors.

i) Profit margin.

ii) Asset turnover.

iii) Return on assets.

iv) Return on common stockholders' equity.

e) Which of the two companies would you prefer to invest in? Why, and under what circumstances?

I understand that to get the current ratio you have to divide current assets by liabilities. I have found this information. I also understand many of the ways to get the information, but I am having difficulty finding the information in the financial statements. If you could please help me get the information and give me where you found it in the documents.

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