Blueroot Inc.is considering a change in its financing policy.Currently, it uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time.The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11,760 per day, using a 365-day year.The interest rate on the notes payable is 10%, and the tax rate is 25%.If the firm implements the plan, what is the expected change in net income?
A) $41,202
B) $43,370
C) $45,657
D) $48,060
E) $50,463

Question

Quizplus · Accepted Answer

The expected change in net income can be calculated by first determining the savings from taking the discounts, then subtracting the cost of borrowing to take those discounts, and finally adjusting for the effect of taxes. Savings from discounts: $11,760 * 0.02 * 365 = $85,584. Cost of borrowing: $11,760 * 0.98 * 365 * 0.10 = $42,524. Pre-tax income increase: $85,584 - $42,524 = $43,060. After-tax income increase: $43,060 * (1 - 0.25) = $32,295. The correct answer is not directly listed because the calculation provided leads to a different result than the options given, indicating a possible mistake in the calculation steps or misunderstanding of the question's requirements. The correct approach involves calculating the daily savings from taking discounts, the annual cost of borrowing to finance these discounts, and then adjusting for taxes to find the net change in income.