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Chapter 3: 4BP (page 249)
Your bank will lend you \(4,000 for 45 days at a cost of \)50 interest. What is your effective rate of interest?
The effective interest rate is 10%.
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Under what circumstances would it be advisable to borrow money to take a cash discount?
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.
b. What would be Henderson’s incremental after-tax return on investment?
Eastern Auto Parts Inc. has 15 percent of its sales paid for in cash and 85 percent on credit. All credit accounts are collected in the following month. Assume the following sales:
January | \(65,000 |
February | \)55,000 |
March | \(100,000 |
April | \)45,000 |
Sales in December of the prior year were $75,000. Prepare a cash receipts schedule for January through April.
Route Canal Shipping Company has the following schedule for aging of accounts receivable:
d. Disregarding your answer to part c and considering the aging schedule for accounts receivable, should the company be satisfied?
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?
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