Question 1

What are the usual steps in credit management?

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Question 2

List three factors that affect a company's desired minimum cash balance.

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Question 3

How do firms decide whether it makes sense to grant credit to a customer?

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Question 4

Why will sellers be less reluctant to grant credit under terms of a banker's acceptance? How do the acceptances work, in general?

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Question 5

Chan manufacturing is considering an alternate to its credit policy.At present, the firm sells its product at $42 per unit with monthly sales of 61,000 units.Fifteen% of all sales are for cash; the remainder sold on terms of net 30.The present average cost per unit is $13, and the marginal cost for the next 6,000 units is $20 per unit.Sales are expected to increase by 4,000 units per month if credit terms are altered to 3/15, 1/30, net 60.Cash sales are expected to remain at 15% of total sales.It is expected that 25% of future credit sales will be paid after 15 days, 35% after 30 days, and the remainder after 60 days.The company's tax rate is 45%, and its required after-tax rate of return on investments in receivables is 5% after tax.Should the firm alter its credit terms as indicated?

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Question 6

How do firms decide whether to grant credit to a customer?

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Question 7

Chan is contemplating an extension of its credit period from net 15 to net 60.Currently, the Chan sells 500,000 units annually at a price of $1.20 per unit.The average cost per unit is $0.85.The credit period extension is expected to increase sales by 60,000 units, and increase bad-debt losses by $10,500 per year.The marginal cost per unit for the decreased number of units to be produced is $0.75.If Chan's tax rate is 45%, and the interest rate on short-term bank loans is 10%, should the firm increase its credit period? What underlying assumptions are important in our analysis?

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Question 8

How do firms assess the probability that a customer will pay?

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Question 9

Determine the break-even probability of collection for the following seller: $2,000 average invoice, 64% costs, 1% per month opportunity cost of capital.Assume that production costs were just paid and that receivables are outstanding an average of two months.

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Question 10

Consider a firm with the following financial ratios:
EBIT/total assets = .12
Sales/total assets = 1.4
Market equity/book debt = .9
Retained earnings/total assets = .4
Working capital/total assets = .12
What is the firm Z scorer?

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Question 11

A firm that makes only cash sales has the luxury of no uncollectible receivables at the expense of forgone sales.Does it make financial sense to allow credit sales if doing so would increase sales from 1,000 units monthly to 1,150, at a sales price of $50, and a present value of costs of $39 per unit? Assume that all sales will now be made on credit and that 6% of sales will end up being uncollectible after the 30-day payment period.The opportunity cost of capital is 1% per month.

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Question 12

Smith Corp.produces a product that generates repeat orders on an annual basis.Their product has a current price of $2,500 and a current cost of $2,100.They use a 15% opportunity cost of capital.Due to the product's high cost, there is a 17% chance that each new customer will default on payment.What is the expected profit and break-even probability from granting credit under these conditions?

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Question 13

How do firms assess the probability that a customer will pay?

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Question 14

Discuss the premise behind the validity of a numerical credit scoring system.

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Question 15

Suppose Chan Inc.sells goods on terms 2/10 net 20.On January 1 you would buy goods from Chan with invoice value of $40,000.How much would you need to pay if you took the cash discount? What is the latest date on which the cash discount is available? By what date should you pay for your purchase if you decide not to take the cash discount?

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Question 16

Determine the break-even probability of collection for the following seller: $2,000 average invoice, 64% costs, 1% per month opportunity cost of capital.Assume that production costs were just paid and that receivables are outstanding an average of two months.Given these characteristics of credit, what is the expected profit from a customer that is perceived to offer an 85% probability of collection?

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Question 17

What is the break-even probability of collection if the present value of the revenues from the sale is $2,200 rather than $2,400? Why does the break-even probability increase? Use your answer to decide whether firms that sell high-profit margin or low-margin goods should be more willing to issue credit.

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Question 18

What information can the financial manager obtain from an aging schedule of accounts receivable?

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Question 19

When does it make sense to ask customers for formal IOUs?

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Quiz 22: Credit Management and Collection

What are the usual steps in credit management?

List three factors that affect a company's desired minimum cash balance.

How do firms decide whether it makes sense to grant credit to a customer?

Why will sellers be less reluctant to grant credit under terms of a banker's acceptance? How do the acceptances work, in general?

How do firms decide whether to grant credit to a customer?

How do firms assess the probability that a customer will pay?

Determine the break-even probability of collection for the following seller: $2,000 average invoice, 64% costs, 1% per month opportunity cost of capital.Assume that production costs were just paid and that receivables are outstanding an average of two months.

Consider a firm with the following financial ratios: EBIT/total assets = .12 Sales/total assets = 1.4 Market equity/book debt = .9 Retained earnings/total assets = .4 Working capital/total assets = .12 What is the firm Z scorer?

How do firms assess the probability that a customer will pay?

Discuss the premise behind the validity of a numerical credit scoring system.

What information can the financial manager obtain from an aging schedule of accounts receivable?

When does it make sense to ask customers for formal IOUs?