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A firm's manager is faced with a problem with the firm's current trade credit policy which has not been scrutinized for very many years while
A firm's manager is faced with a problem with the firm's current trade credit policy which has not been scrutinized for very many years while the industry and customer base have developed different preferences. Current Proposed Credit sales, p.d. Contribution margin as a % of sales $5,000,000 20% $6,000,000 Stay the same 40 for AS Stay the same net 90 Inventory days Accounts payable days Trade credit terms Late payment penalty Average invoice size Aging schedule 45 45 net 60 not applicable not applicable not applicable not applicable not applicable not applicable Firm's cost of capital, p.a. Days in a year 15.000% 365 15.000% See note 1 365 See note 2 Notes: 1. The periodic rate should be calculated by the simple division. 2. The year has 365 days, just like the textbook's. Questions 1. Calculate the operating and cash cycles for the current and proposed policies. 2. Calculate the net working capital for the current and proposed policies. 3. Calculate the turnover ratios (Inventory, Accounts Receivable, Accounts Payable) for the current and proposed policies. 4. Calculate the cash flows for the current and proposed policies. 5. Should the firm change its credit policy? Show with calculations
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