QUESTION 4 [25 MARKS] (a) F Ltd would like to determine if it is worthwhile to loosen its credit policy to become more liberal. This will increase sales on credit by $8 million on which bad debts will be 5%. The variable cost / sales ratio (V) for the firm is 70% whilst the average collection period (ACP) is 38 days. The post-tax cost of funds (k) is 102/5% and the tax rate is 2543%. You are required to use the following formula : RI=[S(1V)Sbn][1t]kI where I=ACPVS/365, to perform the necessary computations so as to advise management whether it is worthwhile to change the credit policy or not. [9 marks] (b) Explain how the Profitability Index resolves Capital Rationing in Investment Appraisal. [6 marks] (c) Distinguish between each of the following pairs of theories, highlighting with reasons, which one is more appropriate to a corporate entity of your choice: (i) Trade-off and Pecking Order Theories of Capital Structure. [5 marks] (ii) Bird-in-the-hand and Tax Preference Theories of Dividends. [5 marks]