Deck 29: Credit Management

Question 1

The Torval Company made a credit sale of $15,000. The invoice was sent today with the terms, 3/15 net 60. This customer normally pays at the net date. If your opportunity cost of funds is 9% the expected payment is worth how much today?

A) $13,761.47
B) $14,789.00
C) $15,000.00
D) $15,214.47

Answer 1

$14,789.00

Question 2

If a firm grants credit with terms of 2/10 net 45, September 1 dating the creditor:

A) must pay a penalty of 2% when payment is made later than September 1^st.
B) must pay a penalty of 10% when payment is made later than 2 days after September 1^st.
C) receives a discount of 2% when payment is made at least 10 days before September 1^st.
D) receives a discount of 2% when payment is made before September 1^stand pays a penalty of 10% if payment is made after September 1^st.
E) receives a discount of 2% when payment is made within 10 days after the effective invoice date of September 1^st.

Answer 2

receives a discount of 2% when payment is made within 10 days after the effective invoice date of September 1^st.

Question 3

Delta PDA Distributors has an investment in accounts receivable of $2,750,000. Daily credit sales are $118,280. If 30% of Delta's credit customers receive a discount by paying within 10 days and the remainder of Delta's customers pay in 40 days, what is the Average collection period that Delta maintains?

A) 31 days
B) 40 days
C) 37 days
D) 19 days

Answer 3

31 days

Question 4

Selling goods and services on credit is:

A) an investment in a customer.
B) necessary because customers cannot pay for the goods.
C) a decision independent of customers.
D) permissible if your bank lends the money.

Question 5

Which of the following is not true concerning considerations in setting a credit policy?

A) A firm that supplies a perishable product will tend to offer restrictive credit terms.
B) A firm whose customers are in a high-risk business will tend to offer restrictive credit terms.
C) Lengthening the credit period effectively reduces the price paid by the customer.
D) Small accounts, associated with firms that find it difficult to acquire a line of credit, tend to receive longer credit periods.

Question 6

Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 20% of their customers with an average loss of $300. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $12 on each of the 1,000 customers. The opportunity cost is 2.0% for the credit period. Should they pursue the credit check?

A) No, because the $24,000 cost is too high.
B) No, because a $300 loss is minor.
C) Yes, because the net gain is $30,000.
D) Yes, because the net gain is $48,000.
E) Yes, because the net gain is $60,000.

Question 7

Which of the following statements is not true?

A) Commercial drafts represent a way to obtain a credit commitment from a customer before the goods are delivered.
B) When a trade acceptance is discounted in the secondary market it becomes a market acceptance.
C) Sight drafts require immediate payment.
D) Trade acceptances arise when a bank guarantees payment on a commercial draft.

Question 8

When credit is offered with only the invoice as a formal instrument of credit, the credit procedure is called:

A) invoice account.
B) open account.
C) unsecured account.
D) unsecured note.

Question 9

Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $200. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $7 on each of the 1000 customers. The opportunity cost is 1.5% for the credit period. Should they pursue the credit check?

A) No, because the $7000 cost is too high.
B) No, because a $200 loss is minor.
C) Yes, because the net gain is $30,000.
D) Yes, because the net gain is $23,000.
E) Yes, because the net gain is $193,000.

Question 10

Which of the following is not one of the "five Cs of Credit" for credit scoring?

A) Capability
B) Capacity
C) Capital
D) Character
E) Conditions

Question 11

Edgeworth Heating is selling a commercial heating unit at the price of $100,000 per unit. The variable cost of producing this unit is $75,000. Edgeworth is considering offering credit terms to their customers, which would allow payment to be delayed one month. Edgeworth predicts that offering these terms will increase monthly sales from 50 units to 60 units. Edgeworth does not expect the increased production to change variable cost and Edgeworth does not expect to charge a higher price. The default rate on credit customers is predicted to be 2.25%. Which of the following statements is true?

A) At a monthly interest rate of 1%, Edgeworth is indifferent between extending credit and continuing current policies. At higher interest rates Edgeworth would prefer granting credit.
B) At a monthly interest rate of 1%, Edgeworth is indifferent between extending credit and continuing current policies. At lower interest rates Edgeworth would prefer granting credit.
C) At a monthly interest rate of 2%, Edgeworth is indifferent between extending credit and continuing current policies. At higher interest rates Edgeworth would prefer granting credit.
D) At a monthly interest rate of 2%, Edgeworth is indifferent between extending credit and continuing current policies. At lower interest rates Edgeworth would prefer granting credit.
E) At a monthly interest rate of 3%, Edgeworth is indifferent between extending credit and continuing current policies. At lower or higher interest rates Edgeworth would prefer granting credit.

Question 12

The carrying value of its account receivable is $700,000 and the average collection period is 45 days. The firm's credit sales per day are:

A) $15,555.56.
B) $23,333.33.
C) $4,666,666.67.
D) $700,000.00.

Question 13

Which of the following statements is true?

A) Customers in high tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit.
B) Customers in high tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit.
C) Customers in low tax brackets would be more likely to take cash discounts and corporations in high tax brackets would be more likely to offer credit.
D) Customers in low tax brackets would be more likely to take cash discounts and corporations in low tax brackets would be more likely to offer credit.
E) Taxes have an effect on the propensity to grant credit, but no effect on the propensity to use credit.

Question 14

Risk is incorporated into the decision to grant credit by:

A) decreasing the discount rate.
B) altering the credit period.
C) decreasing the cash inflows, or the numerator of the NPV formula.
D) increasing the cash inflows, or the numerator of the NPV formula.
E) increasing costs per unit.

Question 15

When credit is granted to another firm this gives rise to a(n):

A) accounts receivable and is called a consumer credit.
B) credit due and is called an installment note.
C) accounts receivable and is called trade credit.
D) trade receivable and is called an installment note.

Question 16

The credit decision usually includes riskier customers. The credit decision should adjust for this by:

A) determining the probability that customers will pay, reducing the expected cash flow.
B) discounting the net cash flows at a higher discount rate.
C) discounting the cash inflow at a higher discount rate.
D) delaying collections on these customers.
E) speeding up deliveries to riskier customers.

Question 17

The three components of credit policy are:

A) collection policy, credit analysis, and interest rate determination.
B) collection policy, credit analysis, and terms of the sale.
C) collection policy, interest rate determination, and repayment analysis.
D) credit analysis, repayment analysis, and terms of the sale.
E) interest rate determination, repayment analysis and terms of sale.

Question 18

If a firm refuses to offer credit the NPV of the transaction is:

A) the cash revenues received minus the cost paid in time period 0.
B) the discounted value of the revenues from time period 0.
C) the net cash flow from the future payments to be received.
D) determined by all of these factors.

Question 19

Lengthening the credit period _____ the price paid by the customer. Generally, this acts to _____ sales.

A) increases; increase
B) increases; decrease
C) decreases; decrease
D) decreases; increase
E) increases; have no effect on

Question 20

When analyzing the decision to change the cash discount policy, the firm should:

A) choose the policy with the highest order size.
B) choose the policy with the lowest variable cost.
C) choose the policy with the lowest NPV.
D) choose the policy with the highest NPV.
E) choose the policy offering the lowest cash discount.

Question 21

Ali Storage Company projects 800 customers next year. Of these, 600 have been profitable and have never defaulted on past obligations, while 200 have not been profitable. All of the unprofitable accounts are expected to default if given credit. Ali can pay $0.40 to an agency that will tell them whether a customer has been profitable. If Ali's price per unit is $10, and its cost per unit is $6, should they allow the credit check to be performed? Assume a discount rate of 1%.

Question 22

Delta PDA Distributors has an investment in accounts receivable of $2,750,000. Costs of goods sold represent 75% of the sales price. Daily credit sales are $118,280. If 30% of Delta's credit customers receive a discount by paying within 10 days. The firms terms are net 30. How is the other 70% of customers paying; are they meeting the terms

Question 23

The Rapid Roller Co. offers terms of 3/15 net 45. The aging schedule for their customers is as follows:
Total credit sales are $2,500,000. How does the aging schedule provide more information to Rapid Roller's management on credit behavior?

Question 24

The net credit period for a company with terms of 3/10 net 60 is:

A) 50 days
B) 60 days
C) 10 days
D) 57 days

Question 25

Delta PDA Distributors has an investment in accounts receivable of $2,750,000. Daily credit sales are $118,280. Delta's cost of goods sold represent 75% of the sales price. What is the level of accounts receivable?

A) $2,750,00
B) $3,666,667
C) $2,062,500
D) $1,925,000

Question 26

Frank's Formals rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $400. Frank's wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $15 on each of the 1,000 customers. The opportunity cost is 2.0% for the credit period. Should they pursue the credit check?

Question 27

Factoring refers to:

A) determining the aging schedule of the firm's accounts receivable.
B) the sale of a firm's accounts receivable to a financial institution.
C) the determination of the average collection period.
D) scoring a customer based on the 5 C's of credit.

Question 28

Robinson Rollingpin Corporation has variable cost per unit of $.35 per $1 of sales. The firm offers a 2% discount for orders paid within 15 days if the customer increases their order size by 5%. A customer normally orders $75,000, and is considering the discount. Normally, the customer pays within 30 days with no discount. Robinson's cost of debt capital is 12%. Would Robinson be wise to offer the discount? Calculate the NPV of the decision.

Question 29

Robinson Rollingpin Corporation has been asked by its customers to please grant them a 2% discount if they pay their bill within 15 days. The purchase size of each order is $75,000. Normally, the customer pays within 30 days with no discount. Robinson's cost of debt capital is 12%. Should the request be granted?

Question 30

Which of the following statements is not true?

A) An aging schedule shows only overdue accounts.
B) An aging schedule shows the probability that a 67-day account will be unpaid when it is a 68-day account.
C) Average collection period data is somewhat flawed if sales are seasonal.
D) Collection efforts may involve legal action.
E) Investments in accounts receivable equal average daily sales times average collection period.

Question 31

Edgeworth Heating is selling a commercial heating unit at the price of $100,000 per unit. The variable cost of producing this unit is $75,000. Edgeworth is considering offering credit terms to their customers, which would allow payment to be delayed one month. Edgeworth predicts that offering these terms will increase monthly sales from 50 units to 60 units. Edgeworth does not expect the increased production to change variable cost and Edgeworth does not expect to charge a higher price. The appropriate discount rate is 1% a month. Determine the probability of payment that would make Edgeworth indifferent between granting credit and the present policy.
B. b = .968