Working Capital Management.
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(1). Indicate by a (+), (-), or (0) whether each of the following events would probably cause accounts receivable, sales, and profits to increase, decrease, or be affected in an indeterminate manner
A/R Sales Profits
The firm tightens its credit standards
The terms of trade are changed from 2/10
Net 30, to 3/10, net 30
The terms are changed from 2/10, net 30
To 3/10, net 40
The credit manager gets tough with
Past-due accounts
(2). Cost of trade and bank loan: Lamar lumber buy $8 million of materials (net of discounts) on term of 3/5, net 60, and it currently pays after 5 days and takes discounts. Lamar plans to expand, and this will require additional financing. IF Lamar decides to forego discounts, how much additional credit could it get, and what would the nominal and effective cost of that credit be? If it could get the funds from a bank rate of 10%, interest paid monthly, based on 365 day year, what would be the effective cost of the bank loan, and should Lamar use bank debt or additional trade credit? Explain.
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Solution Summary
The solution examines working capital management. The solution indicates whether each event would probably cause accounting receivable, sales and profits to increase, decrease or be affected in an indeterminate manner.
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(1). Indicate by a (+), (-), or (0) whether each of the following events would probably cause accounts receivable, sales, and profits to increase, decrease, or be affected in an indeterminate manner
A/R Sales Profits
The firm tightens its credit standards (-) (-) (0)
Credit is available to fewer customers leading to reduced sales and reduced A/R. The impact on profits is uncertain as it depends upon trade of between cost of funds, contribution margin ratio and cost of bad debts.
The terms of trade are changed from 2/10 (-) (+) (0)
Net 30, to 3/10, net 30
Credit terms are same but discount on cash payment are higher. More customers will avail discount leading to reduced A/R. The sales may ...
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