2. 2. Credit policy evaluation [LO 20.2] The Barra Brui Shoes sells 2400 pairs of running shoes...
Question:
2. 2.
Credit policy evaluation [LO 20.2] The Barra Brui Shoes sells 2400 pairs of running shoes per month at a cash price of $99 per pair. The firm is considering a new policy that involves 30 days’ credit and an increase in price to $100 per pair on credit sales. The cash price will remain at $99, and the new policy is not expected to affect the quantity sold. The discount period will be 20 days. The required return is 0.75 per cent per month.
1. How would the new credit terms be quoted?
2. What investment in receivables is required under the new policy?
3. Explain why the variable cost of manufacturing the shoes is not relevant here.
4. If the default rate is anticipated to be 8 per cent, should the switch be made? What is the break-even credit price? The break-even cash discount?
Step by Step Answer:
Fundamentals Of Corporate Finance
ISBN: 9781743768051
8th Edition
Authors: Stephen A. Ross, Rowan Trayler, Charles Koh, Gerhard Hambusch, Kristoffer Glover, Randolph W. Westerfield, Bradford D. Jordan