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Question: Parker Tool is considering lengthening its credit


Parker Tool is considering lengthening its credit period from 30 to 60 days. All customers will continue to pay on the net date. The firm currently bills $450,000 for sales and has $345,000 in variable costs. The change in credit terms is expected to increase sales to $510,000. Bad-debt expenses will increase from 1% to 1.5% of sales. The firm has a required rate of return on equal-risk investments of 20%. (Note: Assume a 365-day year.)
a. What additional profit contribution from sales will be realized from the proposed change?
b. What is the cost of the marginal investment in accounts receivable?
c. What is the cost of the marginal bad debts?
d. Do you recommend this change in credit terms? Why or why not?



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> A firm is evaluating an accounts receivable change that would increase bad debts from 2% to 4% of sales. Sales are currently 50,000 units, the selling price is $20 per unit, and the variable cost per unit is $15. As a result of the proposed change, sale

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>  Jimmy Johnson is interested in buying a new Jeep SUV. Two options are available, a V-6 model and a V-8 model. Whichever model he chooses, he plans to drive it for a period of 5 years and then sell it. Assume that the trade-in value of the tw

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> Charter Enterprises currently has $1 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the f

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> Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year, the average collecti

> American Products is concerned about managing cash efficiently. On average, inventories have an age of 80 days, and accounts receivable are collected in 40 days. Accounts payable are paid approximately 30 days after they arise. The firm has annual sales

> Columbia Paper has the following stockholders’ equity account. The firm’s common stock has a current market price of $30 per share. a. Show the effects on Columbia of a 5% stock dividend. b. Show the effects of (1) a

> Given the earnings per share over the period 2012– 2019 shown in the following table, determine the annual dividend per share under each of the policies set forth in parts a through d. a. Pay out 50% of earnings in all years with posi

> Over the past 10 years, a firm has had the earnings per share shown in the following table. a. If the firm’s dividend policy were based on a constant payout ratio of 40% for all years with positive earnings and 0% otherwise, what woul

> Bennett Farm Equipment Sales Inc. is in a highly cyclical business. Although the firm has a target payout ratio of 25%, its board realizes that strict adherence to that ratio would result in a fluctuating dividend and create uncertainty for the firm&acir

> A firm has $800,000 in paid-in capital, retained earnings of $40,000 (including the current year’s earnings), and 25,000 shares of common stock outstanding. In the current year, it has $29,000 of earnings available for the common stockholders. a. What is

> The Howe Company’s stockholders’ equity account follows: The earnings available for common stockholders from this period’s operations are $100,000, which have been included as part of the $1.9 milli

> As president of Young’s of California, a large clothing chain, you have just received a letter from a major stockholder. The stockholder asks about the company’s dividend policy. In fact, the stockholder has asked you to estimate the amount of the divide

> Kathy Snow wishes to purchase shares of Countdown Computing Inc. The company’s board of directors has declared a cash dividend of $0.80 to be paid to holders of record on Wednesday, May 12. a. What is the last day that Kathy can purchase the stock (trade

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> Harte Textiles Inc., a maker of custom upholstery fabrics, is concerned about preserving the wealth of its stockholders during a cyclical downturn in the home furnishings business. The company has maintained a constant dividend payout of $2.00 tied to a

> The following financial data on the Bond Recording Company are available: The firm is currently considering whether it should use $400,000 of its earnings to pay cash dividends of $1 per share or to repurchase stock at $21 per share. a. Approximately h

> The board of Wicker Home Health Care Inc. is exploring ways to expand the number of shares outstanding in an effort to reduce the market price per share to a level that the firm considers more appealing to investors. The options under consideration are a

> Mammoth Corporation is considering a 3-for-2 stock split. It currently has the stockholders’ equity position as shown. The current stock price is $120 per share. The most recent period’s earnings available for common s

> Nathan Detroit owns 400 shares of the drink company Monster Beverage Corp., which he purchased for $122 per share. Nathan read in the Wall Street Journal that the company’s board of directors had voted to split the stock 3-for-1. Just before the stock sp

> Growth Industries’ current stockholders’ equity account is as follows: a. Indicate the change, if any, expected if the firm declares a 2-for-1 stock split. b. Indicate the change, if any, expected if the firm declare

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> Sarah Warren currently holds 400 shares of Nutri-Foods. The firm has 40,000 shares outstanding. The firm most recently had earnings available for common stockholders of $80,000, and its stock has been selling for $22 per share. The firm intends to retain

> Milwaukee Tool has the following stockholders’ equity account. The firm’s common stock currently sells for $4 per share. a. Show the effects on the firm of a cash dividend of $0.01, $0.05, $0.10, and $0.20 per share.

> At the quarterly dividend meeting, Wood Shoes declared a cash dividend of $1.10 per share for holders of record on Monday, July 10. The firm has 300,000 shares of common stock outstanding and has set a payment date of July 31. Prior to the dividend decla

> Parker Investments has EBIT of $20,000, interest expense of $3,000, and preferred dividends of $4,000. If it pays taxes at a rate of 38%, what is Parker’s degree of financial leverage (DFL) at a base level of EBIT of $20,000?

> Grey Products has fixed operating costs of $380,000, variable operating costs of $16 per unit, and a selling price of $63.50 per unit. a. Calculate the operating breakeven point in units. b. Calculate the firm’s EBIT at 9,000, 10,000, and 11,000 units, r

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>  Fine Leather Enterprises sells its single product for $129.00 per unit. The firm’s fixed operating costs are $473,000 annually, and its variable operating costs are $86.00 per unit. a. Find the firm’s operating breakeven point in units. b. Label the x-a

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> Firm R has sales of 100,000 units at $2.00 per unit, variable operating costs of $1.70 per unit, and fixed operating costs of $6,000. Interest is $10,000 per year. Firm W has sales of 100,000 units at $2.50 per unit, variable operating costs of $1.00 per

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> Wells and Associates has an EBIT of $67,500. Interest costs are $22,500, and the firm has 15,000 shares of common stock outstanding. Assume a 40% tax rate. a. Use the degree of financial leverage (DFL) formula to calculate the DFL for the firm. b. Using

> Max Small has outstanding school loans that require a monthly payment of $1,000. He needs to buy a new car for work and estimates that this purchase will add $350 per month to his existing monthly obligations. Max will have $3,000 available after meeting

> Northwestern Savings and Loan has a current capital structure consisting of $250,000 of 16% (annual interest) debt and 2,000 shares of common stock. The firm pays taxes at the rate of 40%. a. Using EBIT values of $80,000 and $120,000, determine the assoc

> Southland Industries has $60,000 of 6% (annual interest) bonds outstanding, 1,500 shares of preferred stock paying an annual dividend of $5 per share, and 4,000 shares of common stock outstanding. Assuming that the firm has a 40% tax rate, compute earnin

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> Kate Rowland wishes to estimate the number of flower arrangements she must sell at $24.95 to break even. She has estimated fixed operating costs of $12,350 per year and variable operating costs of $15.45 per arrangement. How many flower arrangements must

> Country Wallpapers is considering investing in one of three mutually exclusive projects, E, F, and G. The firm’s cost of capital, r, is 15%, and the risk-free rate, RF, is 10%. The firm has gathered the basic cash flow and risk index da

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> You are interested in an investment project that costs $40,000 initially. The investment has a 5-year horizon and promises future end of-year cash inflows of $12,000, $12,500, $11,500, $9,000, and $8,500, respectively. Your current opportunity cost is 6.

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2.99

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