(Question 1). Indicate by a (+), (-), or (0) whether each of the following events would probably cause accounts receivable, sales, and profits to increase, decrease, or be affected in an indeterminate manner
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A/R |
Sales |
Profits |
| The firm tightens its credit standards |
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| The terms of trade are changed from 2/10 |
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| Net 30, to 3/10, net 30 |
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| The terms are changed from 2/10, net 30 |
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| To 3/10, net 40 |
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| The credit manager gets tough with |
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| Past-due accounts |
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(Question 2). Cost of trade and bank loan: Lamar lumber buy $8 million of materials (net of discounts) on term of 3/5, net 60, and it currently pays after 5 days and takes discounts. Lamar plans to expand, and this will require additional financing. IF Lamar decides to forego discounts, how much additional credit could it get, and what would the nominal and effective cost of that credit be? If it could get the funds from a bank rate of 10%, interest paid monthly, based on 365 day year, what would be the effective cost of the bank loan, and should Lamar use bank debt or additional trade credit? Explain.