4. Calculate the Z score for General Motors (GM) over the last 3 years. You can find GM's rel- evant ratios in the Excel Analytics section. What do you think has happened to its bond rating over this period?

20.1 To get the cash discount, you have to pay the bill within 10 days, that is, by May 11. With the 2% discount, the amount that needs to be paid by May 11 is $20,000 x .98 $19,600. If you forgo the cash discount, you do not have to pay your bill until May 21, but on that date, the amount due is $20,000.

20.2 The cash discount in this case is 5%, and customers who choose not to take the discount receive an extra 50 - 10 = 40 days credit. So the effective annual interest is 365/extra days credit Effective annual rate = -{1+ discount discounted price -1 365/40 -(1+ 5 -1=.597, or 59.7% In this case the customer who does not take the discount is effectively borrowing money at an annual interest rate of 59.7%. This is higher than the rate in Example 20.1 because fewer days of credit are obtained by forfeiting the discount.

20.3 The present value of costs is still $1,000. Present value of revenues is now $1,100. The break- even probability is defined by px100-(1-p)x1,000=0 which implies that p = .909. The break-even probability is higher because the profit margin is now lower. The firm cannot afford as high a bad debt ratio as before since it is not making as much on its successful sales. We conclude that high-margin goods will be offered with more liberal credit terms.

20.4 The higher the discount rate the less important are future sales. Because the present value of repeat sales is lower, the break-even probability on the initial sale is higher. For instance, we saw that the break-even probability was 1/3 when the discount rate was 10%. When the discount rate is 20%, the present value of a perpetual flow of repeat sales falls to $200/.20 $1,000, and the break-even probability increases to 1/2: 1/2$1,000-1/2$1,000=0