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Chapters 6 & 7 practice problems Chapter 7 - Credit policy decision-receivables and inventory Henderson Office Supply is considering a more mbaral credit policy to increase sales but expects that 8 percent of the new accounts will be uncollectible. Collection costs are 5 percent of new sales, production and selling costs are 76 percent, and accounts receivable turnover is five times. Assume income taxes of 35 percent and an increase in sales of $64,000. No other asser buildup will be required to service the new accounts: a. What additional investment in accounts receivable is needed to support this sales expansion? Incremental accounts recevable = Incremental sales / Accounts receivables tumover b. What would be Henderson's incremental aftertax retum on investment? (Input your answer as a percent rounded to 2 decimal places.) Added sales Uncollectible accounts Incremental revenue Collection costs Production and selling costs Incremental income before taxes Taxes Incremental income after taxes Return on incremental investment = Incremental income / Incremental accounts receivable c. Should Henderson liberalize credit if a 19 percent aftertox retum on investmont is required? Why or why not? Assume that Honderson also needs to increase its level of inventory to support new sales and that the inventory turnover is five times d. What would be the total incremental investment in accounts receivable and inventory needed to support a 564,000 increase in sales? Incremental inventory Incremental sales / Inventory turnover = Incremental accounts receivable + Incremental inventory Total incremental investment Chapters 6 & 7 practice problems Chapter 6 - Alternative financing plans Lear Inc has $1,050,000 in current assets. $475,000 of which are considered pormanent current assets. In addition, the firm has $850,000 invested in fixed assots Lear wishes to finance all fixed assets and half of its permanent current assets with fong-term financing costing 8 percent. The balance will be financed with short-term financing which currently costs 4 percent lours earnings before interest and taxes are $450,000 Determine Lear's earnings after taxes under this financing plan. The tax rate is 40 percent Explanation Total current assets Permanent current assets Temporary current assets Amount Financed Anna interest Long-term interest expense Short-term interest expense Total interest expense Earnings before interest and taxes Interest expense Earnings before taxes Taxes Earnings after taxes