978-1259709685 Chapter 28 Case

subject Type Homework Help
subject Pages 4
subject Words 642
subject Authors Jeffrey Jaffe, Randolph Westerfield, Stephen Ross

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CHAPTER 28 CASE C-1
CHAPTER 28
CREDIT POLICY AT BRAAM
INDUSTRIES
To decide on the optimal credit policy, we need to calculate the NPV of each policy. We will begin with
the calculation of the NPV of the current policy.
Current Policy
First, we need to calculate the average daily sales which are:
Now, we need to calculate the daily interest rate:
Next, we need the average daily costs. We will begin with the average daily variable costs, which are 45
percent of sales. So, the average daily variable costs are:
Under the current policy, the default rate is 2.1 percent, so the average daily defaults will be:
The current policy has administrative costs equal to 1.6 percent of sales, so the average daily
administrative costs are:
We also need the appropriate interest rate for the collection period. With a .01597 percent daily interest
rate, the periodic rate for the 38 day collection period is:
Since the credit policy will exist into perpetuity, the NPV is:
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CHAPTER 28 CASE C-2
Option 1
Under Option 1, the average daily sales are:
Under the Option 1, the default rate is 2.6 percent, so the average daily defaults will be:
Option 1 has administrative costs equal to 2.4 percent of sales, so the average daily administrative costs
are:
We also need the appropriate interest rate for the collection period. With a .01597 percent daily interest
rate, the periodic rate for the 41 day collection period is:
Since the credit policy will exist into perpetuity, the NPV is:
Option 2
Under Option 2, the average daily sales are:
Under the Option 2, the default rate is 2.2 percent, so the average daily defaults will be:
Average daily defaults = .022($129,000,000/365)
Average daily defaults = $7,775.34
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CHAPTER 28 CASE C-3
Option 2 has administrative costs equal to 1.9 percent of sales, so the average daily administrative costs
are:
Since the credit policy will exist into perpetuity, the NPV is:
Option 3
Under Option 3, the average daily sales are:
The average daily variable costs will be:
Under the Option 3, the default rate is 2.5 percent, so the average daily defaults will be:
Option 3 has administrative costs equal to 2.1 percent of sales, so the average daily administrative costs
are:
We also need the appropriate interest rate for the collection period. With a .01597 percent daily interest
rate, the periodic rate for the 49 day collection period is:
Since the credit policy will exist into perpetuity, the NPV is:
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CHAPTER 28 CASE C-4
The company should choose Option 1 since it has the highest NPV.
The default rate and administrative costs of Option 2 are below those of Option 3. This is plausible.
Option 2 extends the credit period, while Option 3 extends the credit period and relaxes the credit policy.

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