Q1. Snug-fit, a maker of bowling gloves, is investigating the possibility of liberalizing its credit policy. Currently, payment is made on a cash-on-delivery basis. Under a new program, sales would increase by $80,000. The company has a gross profit margin of 40%. The estimated bad debt loss rate on the incremental sales would be 6%. Ignoring the cost of money, what would be the return on sales before taxes for the new sales?
a. 34.0%.
b. 36.2%.
c. 40.0%.
d. 42.5%.
Q2. Burke Industries has a revolving credit arrangement with its bank which specifies that Burke can borrow up to $5 million at an annual interest rate of 9% payable monthly. In addition, Burke must pay a commitment fee of 0.25% per month on the unused portion of the line, payable monthly. Burke expects to have a $2 million cash balance and no borrowings against this line of credit on April 1, net cash inflows of $2 million in April, net outflows of $7 million in May, and net inflows of $4 million in June. If all cash-flows occur at the end of the month, approximately how much will Burke pay to the bank during the second quarter related to this revolving credit arrangement?
a. $47,700.
b. $52,600.
c. $60,200.
d. $62,500.
Q3. The Duoplan Company is determining the most appropriate source of short-term funding. Trade credit terms from suppliers are 2/30, net 90. The rate for borrowing at the bank is 12%. The company has also been approached by an investment banker offering to issue Duoplan’s commercial paper. The commercial paper would be issued quarterly in increments of $9.1 million with net proceeds of $8.8 million. Which option should the firm select?
a. The trade discount, because it provides the lowest cost of funds.
b. Bank borrowing, because it provides the lowest cost of funds.
c. Commercial paper, because it provides the lowest cost of funds.
d. The costs are so similar that the decision is a matter of convenience.
Q4. Clauson Inc. grants credit terms of 1/15, net 30 and projects gross sales for the year of $2,000,000. The credit manager estimates that 40% of customers pay on the 15th day, 40% of the 30th day and 20% on the 45th day. Assuming uniform sales and a 360-day year, what is the projected amount of overdue receivables?
a. $50,000.
b. $83,333.
c. $116,676.
d. $400,000.