Exam 22: International Financial Management

Calculate the implied cost of trade credit for firms that do not take advantage of cash discounts, based on terms of sale of: 5/15, net 60.By how much does this implied cost change if the discount is increased by 1% and the net payment period is increased to 90 days?

How do firms assess the probability that a customer will pay?

A customer who ignores the cash discount but pays within the payment period need not add interest to the invoice.

CumChan 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?

The "five C's of credit" represent a framework for analyzing credit risk.

Which of the following strategies would continue to be effective if a cash-strapped firm determines that the effective interest rate charged on trade credit is lower than the bank's interest rate?

Which of the following is correct concerning terms of trade credit of 4/10, EOM, net 90?

When sales are made without the accompaniment of a formal debt contract, the sales are said to be on:

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

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%?

Which of the following credit agreements provides the maximum protection to the seller?

What are the usual steps in credit management?

Which of the following terms of sale is the most restrictive?

What effective interest rate is charged to a purchaser receiving terms of 5/10, net 90 if the purchaser avoids the discount and pays in 90 days?

Candy Corporation sells a product for $25 with costs of $20 per unit.Candy uses a 12% rate of return for all its calculations.The CFO estimates that there is a 25% probability of a prospective new customers seeking credit will go bankrupt within the next 6 months.Customer wishes to place an order for 2,500 units of the product

Which of the following financial ratios is not used to develop Altman's Z score from multiple discriminate analysis?

Credit scoring systems can be used to:

How do firms assess the probability that a customer will pay?

A firm with ______ profit margin should extend credit to customers with a high probability of default.

When does it make sense to ask customers for formal IOUs?