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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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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?
Thompson Wood Products has credit sales of \(2,160,000 and accounts receivable of \)288,000. Compute the value of the average collection period.
Fisk Corporation is trying to improve its inventory control system and has installed an online computer at its retail stores. Fisk anticipates sales of 49,000 units per year, an ordering cost of \(8 per order, and carrying costs of \)1.60 per unit.
d. What is the total cost of ordering and carrying inventory?
Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?
Briefly discuss three types of lender control used in inventory financing.
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