FIn 491 UOP Week 4

Text Problems (5 points).

Prepare a response to the following assignments from the text Principles of Managerial Finance.

·         Problems 14.9 and 14.16 in Ch. 14

14.9

Accounts receivable changes with bad debts 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, sales are forecast to increase to 60,000 units.

a. What are bad debts in dollars currently and under the proposed change?

b. Calculate the cost of the marginal bad debts to the firm.

c. Ignoring the additional profit contribution from increased sales, if the proposed

change saves $3,500 and causes no change in the average investment in accounts receivable, would you recommend it? Explain.

d. Considering all changes in costs and benefits, would you recommend the proposed

change? Explain.

e. Compare and discuss your answers in parts c and d.

Problem 2

Zero-balance account Union Company is considering establishment of a zerobalance

account. The firm currently maintains an average balance of $420,000 in

its disbursement account. As compensation to the bank for maintaining the zerobalance

account, the firm will have to pay a monthly fee of $1,000 and maintain a

$300,000 non–interest-earning deposit in the bank. The firm currently has no other

deposits in the bank. Evaluate the proposed zero-balance account, and make a recommendatio to the firm, assuming that it has a 12% opportunity cost.

Problem 15.9 in Ch. 15

Cost of bank loan Data Back-Up Systems has obtained a $10,000, 90-day bank

loan at an annual interest rate of 15%, payable at maturity. (Note: Assume a

365-day year.)

a. How much interest (in dollars) will the firm pay on the 90-day loan?

b. Find the effective 90-day rate on the loan.

c. Annualize your result in part b to find the effective annual rate for this loan,

assuming that it is rolled over every 90 days throughout the year under the same

terms and circumstances.