The cost of the additional cash discounts taken

Assignment Help Financial Management

Reference no: EM13722765

In an effort to speed up the collection of receivables, Hill Publishing Company is considering increasing the size of its cash discount by changing its credit terms from “1/10, net 30” to “2/10, net 30”. Currently, the company’s collection period averages 43 days. Under the new credit terms, it is expected to decline to 28 days. Also, the percentage of customers who will take advantage of the cash discount is expected to increase from the current 50 percent to 70 percent with the new credit terms. Bad debt losses currently average 4 percent of sales and are not expected to change significantly if Hill changes its credit policy. Annual credit sales are $3.5 million, the variable cost ratio is 60 percent and the required pre-tax rate of return (i.e. the opportunity cost) on receivables investment is 14 percent. The company does not expect its inventory level to change as a result of its proposed change in credit terms. Assuming that Hill does decide to increase the size of its cash discount, determine the following:

The earnings on the funds released by the change in credit terms

The cost of the additional cash discounts taken

The net effect on Hill’s pre-tax profits

Reference no: EM13722765

Questions Cloud

Interest on margin : You purchased 100 shares of IBM common stock on margin at $70 per share. Assume the initial margin is 50% and the maintenance margin is 30%. Below what stock price level would you get a margin call? Assume the stock pays no dividend; ignore interest ..

Considering introducing a new toaster into the market : General Electric is considering introducing a new toaster into the market. The toaster is targeted towards interior decorators as opposed to end consumers. As such, there are 3,000 decorators that are relevant to this project. On average, each decora..

What are the annual taxes owed on the interest : Molly Matters Inc. issues a split-coupon $1,000 bond that matures in seven years. Interest payments are $70 a year (7 percent) and start after three years have lapsed. The bond initially sells for a discounted price of $816.3. You are in the 30 perce..

Evaluating a project for a small manufacturing firm : You are evaluating a project for a small manufacturing firm. The firm has provided the following information: the initial cost of the project is $2,500 for equipment purchase; the CCA rate is 10 percent; tax rate is 25 percent; and the pre-tax cash f..

The cost of the additional cash discounts taken : In an effort to speed up the collection of receivables, Hill Publishing Company is considering increasing the size of its cash discount by changing its credit terms from “1/10, net 30” to “2/10, net 30”.

What is the firms weighted cost of capital : The H2O-Chemical Company is considering a new production facility on a plot of land that it already owns and it is located near a residential area. The land has a current market value of $1 million and was acquired 4 years ago for $600,000. If this p..

What is the company''s eva and what does the eva represent : Smith's Shoe Shop had $4,000,000 in operating income last year, after-tax cost of capital of 7%, and a tax rate of 35%. The company has $14,000,000 in stockholder's equity, $17,000,000 in long-term bonds, and $1,500,000 in preferred stock.

What is the net income for firm : Lifeline, Inc., has sales of $590,000, costs of $268,000, depreciation expense of $68,500, interest expense of $35,500, and a tax rate of 40 percent. Required: What is the net income for this firm?

Interest rates between corporate and treasury bonds : Assume that k* = 1.5; the maturity risk premium is found as MRP=0.09(t-1) where t= years to maturity; the default risk premium for Corporate bonds is found as DRP= 0.11% (t-1); the liquidity premium is 0.8; and inflation is expected to be 2% in years..

User Account

All Pages