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CONFIDENTIAL Page 6 of 13 FIN4801 MAY/JUNE 2022 QUESTION 3 Question 3.1 [20 MARKS] (8 Marks) Highstreet Ltd sells apparel and accessories in retail outlets, with all their clients utilising store annum with a gross profit margin of 50%, while offering favourable repayment terms of 120 credit due to the favourable terms offered. Currently, the company has sales of R90m per days to make payment with no interest charged. Bad debts currently amount to 8% of sales, leading to a current days sales outstanding (DSO or ACP) of 150 days. The financial manager of the company wants to change the terms to 10/30 net 60, which she expects will drive the DSO down to 70 days but increase bad debts to 9% of sales. It is also expected that the discount on offer for early payment will lead to sales increasing to R100m and will be taken up by half of all customers if the terms were adopted. The company can invest excess funds in short-term securities at a rate of 10% per annum. Assume a 365-day year. Required: Determine the effect of the change in credit terms and advise Highstreet Ltd on the feasibility of the new terms.