Question
TLC Ltd at present only sells on a cash basis and it averages $50,000 of sales per month, with associated (variable) expenses of $40,000. It
TLC Ltd at present only sells on a cash basis and it averages $50,000 of sales per
month, with associated (variable) expenses of $40,000. It is thought that all customers
would accept an offer of 90 day (three month) free credit terms and that the company's
monthly sales would increase to $55,000 and its associated expenses to $44,000. TLC
Ltd's required rate of return is 1% per month.
a. Assuming that there are no costs associated with providing credit, will TLC Ltd
benefit from offering such credit terms?
b. If expenses remain at 80% of sales, what would the increase in sales need to be in
order to justify the provision of these credit terms?
Comment on the following statements: i. 'If after all your calculations you tell me that there is a high probability that the share's price will vary between $4.50 and $9.60, I can make a fortune by buying the share at $4.50 and selling when it reaches $9.60.' ii. 'I don't care how high the price may go, all that worries me is whether or not I will make a loss.' iii. 'Expected return and standard deviation are of no interest to me, all I want to know is what my investment will be worth one year from now.'
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