Explore BrainMass
Share

Credit Policy

This content was STOLEN from BrainMass.com - View the original, and get the already-completed solution here!

Credit Policy. A firm currently makes only cash sales. It estimates that allowing trade credit on terms of net 30 would increase monthly sales from 200 to 220 units per
month. The price per unit is $101 and the cost (in present value terms) is $80. The interest rate is 1 percent per month.

a. Should the firm change its credit policy?

b. Would your answer to (a) change if 5 percent of all customers will fail to pay their bills under the new Fundamentals of Corporate Finance 512 credit policy?

c. What if 5 percent of only the new customers fail to pay their bills? The current customers take advantage of the 30 days of free credit but remain safe credit risks.

© BrainMass Inc. brainmass.com October 24, 2018, 5:49 pm ad1c9bdddf
https://brainmass.com/business/dividends-stock-repurchase-and-policy/credit-policy-22169

Attachments

Solution Preview

Credit Policy. A firm currently makes only cash sales. It estimates that allowing trade credit on terms of net 30 would increase monthly sales from 200 to 220 units per month. The price per unit is $101 and the cost (in present value terms) is $80. The interest rate is 1 percent per month.

a. Should the firm change its credit policy?

b. Would your answer to (a) change if 5 percent of all customers will fail to pay their bills under the new credit policy?

c. What if 5 percent of only the new customers fail to pay their bills? The current customers take advantage of the 30 days of free credit but remain safe credit risks.

a. ...

Solution Summary

The solution evaluates the effect of a change in credit policy on profits of the firm

$2.19
See Also This Related BrainMass Solution

Working Capital Management

A) Dan plans to use the preceding ratios as the starting point for discussions with SKI's operating executives. He wants everyone to think about the pros and cons of changing each type of current asset and how changes would interact to affect profits and EVA. Based on the data in the table, does SKI seem to be following a relaxed, moderate, or restricted working capital policy?

b) How can one distinguish between a relaxed but rational working capital policy and a situation where a firm simply has a lot of current asset because it is inefficient? Does SKI's working capital policy seem appropriate?

c) Calculate SKI's cash conversion cycle, assuming all calculations use a 360-day year.

d) What might SKI do to reduce its cash and securities without harming operation?

Q 23-3 What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

Q 23-4 From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?

Q 23-5 If long-term credit exposes a borrower to less risk, why would people or firms ever borrow on a short-term basis?

Q 23-9 The availability of bank credit is often more important to a small firm than to a large one. Why?

Mini Case !

a) B&B tries to match the maturity of its assets and liabilities. Describe how B&B could adopt either a more aggressive or more conservative financing policy.

b) What are the advantages and disadvantages of using short-term credit as a source of financing?

View Full Posting Details