FIN 200
Axia College of University of Phoenix (UoP)
Foundations of Financial Management
Block Hirt Danielsen
Introduction to Finance: Harvesting the Money Tree
Fin 200 Week Solution
Chapter 7
18. Curtis Toy Manufacturing Company is evaluating the extension of credit to a new group of customers. Although these customers will provide $240,000 in additional credit sales, 12% are likely to be uncollectible. The company will also incur $21,000 in additional collection expense. Production and marketing costs represent 72% of sales. The company is in a 30% tax bracket and has a receivables turnover of six times. No other asset buildup will be required to service the new customers. The firm has a 10% desired return on investment. a) Should Curtis extend credit to these customers? b) Should credit be extended if 14% of the new sales prove uncollectible? c) Should credit be extended if the receivables turnover drops to 1.5 and 12% of the accounts are uncollectible (as was the case in par a)?
19. Reconsider problem 18. Assume the average collection period is 120 days. All other factors are the same (including 12% uncollectible). Should credit be extended?
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