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Chapter 3: 11BP_b (page 250)

McGriff Dog Food Company normally takes 27 days to pay for average daily credit purchases of \(9,530. Its average daily sales are \)10,680, and it collects accounts in 32 days.

b. If the firm extends its average payment period from 27 days to 37 days (and all else remains the same), what is the firm’s new net credit position? Has it improved its cash flow?

Short Answer

Expert verified

The net credit position is -$10,850 and it has increased the cash flow of the firm.

Step by step solution

01

Information provided in the question

Average credit purchases = $9,530

Average payment period = 37 days

Average daily sales = $10,680

Average collection period = 32 days

02

Calculation of accounts receivables

The accounts receivables is $341,760.

Accountsreceivables=Averagedailycreditsales×Averagecollectionperiod=$10,680×32days=$341,760

03

Calculation of accounts payable

The accounts payable is $257,310.

Accountspayable=Averagedailycreditpurchases×Averagepaymentperiod=$9,530×37days=$352,610

04

Calculation of net credit position

The net credit position is $10,850. The firm has improved its cash flow as now it is extending less credit than it is achieving.

Netcreditposition=Accountsreceivables-Accountspayable=$341,760-$352,610=-$10,850

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Most popular questions from this chapter

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.

c. Should Henderson liberalize credit if a 16 percent after-tax return on investment is required?

Neon Light Company of Kansas City ships lamps and lighting appliances throughout the country. Ms. Neon has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by three days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Florida.

c. If the total cost of the new system is $400,000, should it be implemented?

Lear Inc. has \(840,000 in current assets, \)370,000 of which are considered permanent current assets. In addition, the firm has \(640,000 invested in fixed assets.

a. Lear wishes to finance all fixed assets and half of its permanent current assets with long-term financing costing 8 percent. The balance will be financed with short-term financing, which currently costs 7 percent. Lear’s earnings before interest and taxes are \)240,000. Determine Lear’s earnings after taxes under this financing plan. The tax rate is 30 percent.

b. As an alternative, Lear might wish to finance all fixed assets and permanent current assets plus half of its temporary current assets with long-term financing and the balance with short-term financing. The same interest rates apply as in part a. Earnings before interest and taxes will be $240,000. What will be Lear’s earnings after taxes? The tax rate is 30 percent.

c. What are some of the risks and cost considerations associated with each of these alternative financing strategies?

In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?

Guardian Inc. is trying to develop an asset financing plan. The firm has \(400,000 in temporary current assets and \)300,000 in permanent current assets. Guardian also has $500,000 in fixed assets. Assume a tax rate of 40 percent.

c. What would happen if the short- and long-term rates were reversed?
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