bre44380_ch30_787-812.indd 808 10/06/15 10:57 AM
808 Part Nine Financial Planning and Working Capital Management
- Credit policy How should your willingness to grant credit be affected by differences in
(a) the profit margin, (b) the interest rate, (c) the probability of repeat orders? In each case
illustrate your answer with a simple example. - Cash management Complete the passage that follows by choosing the appropriate terms
from the following list: lockbox banking, Fedwire, CHIPS, concentration banking.
Firms can increase their cash resources by speeding up collections. One way to do this
is to arrange for payments to be made to regional offices that pay the checks into local banks.
This is known as . Surplus funds are then transferred from the local bank to one of the
company’s main banks. Transfers can be made electronically by the or systems.
Another technique is to arrange for a local bank to collect the checks directly from a post
office box. This is known as . - Calculating yields In October 2008, six-month (182-day) Treasury bills were issued at a
discount of 1.4%. What was the annual yield? - Short-term securities For each item below, choose the investment that best fits the accom-
panying description:
a. Maturity often overnight (repurchase agreements/bankers’ acceptances)
b. Maturity never more than 270 days (tax-exempts/commercial paper)
c. Issued by the U.S. Treasury (tax-exempts/three-month bills)
d. Quoted on a discount basis (certificates of deposit/Treasury bills)
e. Sold by auction (tax-exempts/Treasury bills) - Short-term securities Consider three securities:
a. A floating-rate bond
b. A preferred share paying a fixed dividend
c. A floating-rate preferred
If you were responsible for short-term investment of your firm’s excess cash, which security
would you probably prefer to hold? Could your answer depend on your firm’s tax rate?
Explain briefly.
INTERMEDIATE- Credit terms Listed below are some common terms of sale. Can you explain what each
means?
a. 2/30, net 60
b. 2/5, EOM, net 30
c. COD - Cash discounts Some of the items in the previous problem involve a cash discount. For
each of these, calculate the rate of interest paid by customers who pay on the due date instead
of taking the cash discount. - Credit terms Phoenix Lambert currently sells its goods cash-on-delivery. However, the
financial manager believes that by offering credit terms of 2/10 net 30 the company can
increase sales by 4%, without significant additional costs. If the interest rate is 6% and the
profit margin is 5%, would you recommend offering credit? Assume first that all customers
take the cash discount. Then assume that they all pay on day 30. - Credit policy As treasurer of the Universal Bed Corporation, Aristotle Procrustes is worried
about his bad debt ratio, which is currently running at 6%. He believes that imposing a more
stringent credit policy might reduce sales by 5% and reduce the bad debt ratio to 4%. If the cost
of goods sold is 80% of the selling price, should Mr. Procrustes adopt the more stringent policy?