Finance Question - Treasury Management

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6.1.Carbondale Company has the following credit policy 2/10, net 30. Carbondale also charges 1% per month interest on all accounts after 30 days. The following table shows the collection schedule of all sales:

 

Collection within

10 days

30 days

60 days

90 days

Percentage

10%

30%

40%

20%

 

To improve the collection rate, Carbondale is thinking of imposing a higher interest rate, 1.5% per month, on all accounts paid after 30 days. Carbondale believes that the new policy will change the collection schedule as follows:

 

Collection within

10 days

30 days

60 days

90 days

Percentage

10%

50%

30%

10%

 

There will be no change in the total sales as a result of this new policy. The cost of capital for Carbondale is 12%. Should it try the new policy?

NPV(old) = .9899, NPV(new) = .9921, yes.

 

6.2. Dickson City Company has annual sales of $5 million, while the cost of goods sold is $3.2  million. All sales are made on a cash basis. The owner of Dickson has come up with the plan of giving credit to the customers. He believes that this will increase the sales by 25% without increasing any of the fixed costs. He thinks that 20% of the customers will pay within 30 days, 40% within 60 days, 37% within 90 days, and 3% of the customers will default on the sales. The cost of capital to Dickson is 12%.

 

(A) Should Dickson City introduce the policy of credit sales?

NPV(cash) = $1.8 million, NPV(credit) = 1.941 million, yes.

 

(B) The manager of the firm doubts whether the sales will actually increase by 25% as a result of this strategy. Find the minimum increase in sales to justify introduction of the new credit policy.

15.92%

 

6.3. Ashley Company is considering the credit application of a retail customer who is expected to buy $1000 worth of merchandise every month. The cost of these goods will be $800. The customer is expected to pay after 30 days every month. However, there is a 10% probability of default each month. In case of default, the company will recover 50% of the unpaid bill after 3 months. The cost of capital to the company is 15% per annum. Should Ashley extend credit to the customer?

NPV = 1234, yes

 

6.4. First National Bank of Jermyn has a portfolio of 10,000 credit card accounts. The bank charges $25 annual fee on these cards. There is a 25 day grace period on the accounts, and after that the cardholders pay interest at the rate of 1.25% per month on the unpaid balance. Half of the cardholders pay their balance in full every month, and their monthly bill is $800. The remaining cardholders carry an average balance of $1200 continuously. The operating expenses for the credit card portfolio, including defaults, are $100,000 annually. The cost of capital to the bank is 8%. Mellon Bank has offered to buy Jermyn's credit card portfolio for $5 million, plus the outstanding balance. Should Jermyn accept the offer?

 

NPV = $3.971 million, yes

    • 8 years ago
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