Question
Part A A firm is contemplating shortening its credit period from 40 to 30 days and believes that, as a result of this change, its
Part A A firm is contemplating shortening its credit period from 40 to 30 days and believes that, as a result of this change, its average collection period will decline from 45 to 36 days. Bad-debt expenses are expected to decrease from 3% to 2% of sales. The firm is currently selling 15,000 units but believes that as a result of the proposed change, sales will decline to 12,000 units. The sale price per unit is $66, and the variable cost per unit is $48. The firm has a required return on equal-risk investments of 25%. Evaluate this decision, and make a recommendation to the firm. (Note: Assume a 365-day year.) Part B Frozen company needs to borrow $165,000 for 9 months. Central Bank has offered to lend the funds at 11% annual rate subject to a 12% compensating balance. (Note: Frozen currently maintains $0 on deposit in Central Bank.) Legal financial institution has offered to lend the funds at 11% annual rate with discount-loan terms. The principal of both loans would be payable at maturity as a single sum. a. Calculate the effective annual rate of interest on each loan. b. What could Frozen do that would reduce the effective annual rate on the Central Bank loan?
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