Exam 22: Credit Management and Collection

A firm is considering a one-time sale of $100,000 to a customer.The cost of goods sold for this sale is $90,000.If the probability of the customer paying is 0.8, what is the expected profit from this transaction?

Chan is contemplating an extension of its credit period from net 15 to net 60.Currently, the Chan sells 500,000 units annually at a price of $1.20 per unit.The average cost per unit is $0.85.The credit period extension is expected to increase sales by 60,000 units, and increase bad-debt losses by $10,500 per year.The marginal cost per unit for the decreased number of units to be produced is $0.75.If Chan's tax rate is 45%, and the interest rate on short-term bank loans is 10%, should the firm increase its credit period? What underlying assumptions are important in our analysis?

What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?

Chan manufacturing is considering an alternate to its credit policy.At present, the firm sells its product at $42 per unit with monthly sales of 61,000 units.Fifteen% of all sales are for cash; the remainder sold on terms of net 30.The present average cost per unit is $13, and the marginal cost for the next 6,000 units is $20 per unit.Sales are expected to increase by 4,000 units per month if credit terms are altered to 3/15, 1/30, net 60.Cash sales are expected to remain at 15% of total sales.It is expected that 25% of future credit sales will be paid after 15 days, 35% after 30 days, and the remainder after 60 days.The company's tax rate is 45%, and its required after-tax rate of return on investments in receivables is 5% after tax.Should the firm alter its credit terms as indicated?

How do firms decide whether to grant credit to a customer?

Determine the break-even probability of collection for the following seller: $2,000 average invoice, 64% costs, 1% per month opportunity cost of capital.Assume that production costs were just paid and that receivables are outstanding an average of two months.Given these characteristics of credit, what is the expected profit from a customer that is perceived to offer an 85% probability of collection?

What information can the financial manager obtain from an aging schedule of accounts receivable?

A breakdown of accounts receivable according to the length of time outstanding is known as a(n):

Which of the following credit decisions appears correct for a customer that intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?

It may be possible for firms to reduce the time and expense necessary to collect delinquent debts under a(n):

Select the earliest date below which does not deserve a cash discount if the terms of a January 1 sale are 2/10, EOM, net 60?

What credit decision is appropriate for a potential customer that offers an 80% chance of paying on a $10,000 (present value) sale that has an 80% (present value) cost?

Bond ratings are an inexpensive source of credit information on publicly traded companies.

Universal Corporation is concerned about their current bad debt ratio of 6%.The CFO believes imposing a more stringent credit policy may reduce sales by 5% and reduce the bad debt ratio to 4%.If the cost of goods sold is 80% of the selling price, determine if the new policy should be undertaken.

Which of the following would not be included in the five C's of credit?

You are buying goods worth $75,000 from a firm that offers the credit terms of 2/10, net 30.What will be the actual payment if you paid within 10 days?

Saxon Corporation sells a product for $48 with costs of $33 per unit.Saxon uses a 9% rate of return for all its calculations.The CFO estimates that there is a 20% probability of a prospective new customers seeking credit will go bankrupt within the next 6 months.Customer wishes to place an order for 1,000 units of the product.

An accepted time draft is quite similar to:

What are the usual steps in credit management?

Ajax predicts that if a customer pays on the first sale, it is assured that it is a reliable customer.As such, it expects that customer to generate a net profit of $350 per year for 12 years.Ajax calculates present value with a 15% rate of return.There is a 90% probability that Ajax will secure a reliable customer.However, if the customer defaults, Ajax will have to incur a loss of $500.Determine the expected benefit if credit is granted.