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variable costs ratio is 85%, corporate tax is 35% and after tax required rate of
return is 20%. Is the new credit policy desirable?
5. Collection Period Impact
An analysis of ABCs credit policy reveals it is very loose as a result the firms
collection period is very long and bad losses are building up. The firm is therefore
considering tightening up its credit standards by shortening credit period from 45
days to 30 days. The expected result is sales would reduce from Rs.6,00,000 to
Rs.5,00,000 and bad debt losses ratio from 4% to 2% and collection expenses from
2% to 1% of total sales. The firms variable cost ratio is 80%, tax rate is 40% and
after tax cost of funds is 12%. Should the firm introduce the change?
6. Cash Discount
ABC is considering introducing a cash discount. Credit terms are net 40 and
would like to change them to 1/15 net 40. The current average collection period is
60 days and is expected to decrease to 30 days with the new credit terms. It is
expected 50% of customers will take advantage of changed credit terms. ABCs
annual sales are Rs.60,00,000 and required return is 15%. Are the new terms
beneficial to firm?