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Case 19 Stanley Products

Essay by   •  July 12, 2019  •  Case Study  •  909 Words (4 Pages)  •  597 Views

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Given Terms:

2/10, net 30

70% will pay using discount--10 day

25% will pay without discount, but on time--30 days

5% will pay late--50 days

Bad Debt is .5%

Increase in sales is 10%

Variable Cost is 70%

Cost of Capital is 5%

R is ???

Q1. SP’s bad debt is pretty high compared to average bad debt expense of other companies. Stanley Products need to tighten their credit terms, which will get rid of customers who are unable to pay without a discount and/or on time, and keep existing clients who can pay for purchases almost right away. This will reduce bad debt expenses.

Q2.

A)T+1Sales: $987 x 1.10 = $1,085.7

A/S: $361.4/$987 = $.366

L/S: ($45.6 + $39.7)/$987 = $.086

N= A/S - L/S⇒ $.366 - $.086 = $.28

Change in Sales: $1,400.2 - $987 = $413.2

NI/Sales: 34.3/987 = .035 = 3.5% Net Profit Margin

EFR = .28(413.2) - .035(1,400.2)

EFR = 115.70 - 49.00

EFR = $66.7 need to finance

T+2 Sales: $1,400.2 x 1.10 = $1,540.22

Inventory and Receivables increased by 12%:

(123.4 x 12%) + (109.7 x 12%) + 361.4 = 389.37 new total assets

A/S: $389.37/$1,400.2 = $.278

L/S: ($45.6 + $39.7)/$1,400.2 = $.061

N= A/S - L/S⇒ $.278 - $.061 = $.217

Change in Sales: $1,778.3 - $1,400.2 = $378.1

Sales

$1,400.20

Bad Debt Expense

$7.00 ($1,400.2 x .005)

Net Sales

$1,393.20

Variable Cost

$980.14 ($1,400.2 x .70)

Fixed Cost

$176.70

Earnings before taxes

$236.36

Taxes (40%)

$95.54

Net Income

$141.82

NI/Sales: 141.82/1,400.2 = .1013 = 10.13% Net Profit Margin

EFR = .217(378.1) - .1013(1,778.3)

EFR = 82.05- 180.14

EFR = 98.09

T+3 Sales: $1,778.3 x 1.10 = $1,956.13

Inventory and Receivables increased by 12%:

(138.21 x 12%) +( 122.86 x 12% ) + 389.37 = 420.70

A/S: $420.70/$1,956.13 = $.2151

L/S: ($45.6 + $39.7)/$1,956.13 = $.044

N= A/S - L/S⇒ $.2151 - $.044 = $.1711

Change in Sales: $2,294.1 - $1,778.3 = $515.8

Sales

$1,778.3

Bad Debt Expense

$8.89 ($1,778.3 x .005)

Net Sales

$1,769.41

Variable Cost

$1,244.81($1,778.3 x .70)

Fixed Cost

$176.70

Earnings before taxes

$347.9

Taxes (40%)

$139.16

Net Income

$208.74

NI/Sales: 208.74/1,778.3 = .1174 = 11.74% Net Profit Margin

EFR = .1711(515.8)- .1174(2,294.1)

EFR = 88.25 - 269.33

EFR = 181.08

B) g = (.035)(1.00)/(.28-.035)

g= .035/.245

g= 14.30%

C)

No Growth

T=0

T=1

T=2

T=3

$987.0

$1,400.2

$1,778.3

$2,294.1

Internal financing

T=0

T=1

T=2

T=3

$987.0

$1,128.1

$1,289.4

$1,473.8

(987 x 1.143)

(1,128.14 x 1.143)

(1,289.4 x 1.143)

Q3.

Part A

1/10 net 20

Cost of Credit = Discount %/ (100-Discount %) x (360/Allowed payment days – Discount days)

Cost of Credit = 1%/ (100-1%)*(360/20-10) = 36.36%

Part B

2/10 net 30

Cost of Credit = 2%/ (100-2%)*(360/30-10) = 36.73%

Part C

3/10 net 45

Cost of Credit = 3%/ (100-3%)*(360/45-10) = 31.81%

Q4.

Part A

The average collection period = 70%*10+25%*30+5%*50 = 17 Days

Part B

EXHIBIT 3

Worksheet to Calculate Incremental Asset Requirements and Capital Cost of Credit Changes for 1997 (Year t + 1) ($000s)

 

No Credit Changes

With changes

Differences

Investment in receivables

116.7

17 x (1540.22/360)= 72.73 x .70= 50.91

-65.79

Inventory needed

175.1

192.56

17.46

Total

291.8

243.47

-48.33

Capital Cost

35.0

12.17

-22.83

Assuming the proposed credit changes are made. Sp’s has outstanding day sales and an average collection period.

Q5.

EXHIBIT 4

No Changes

With Changes

Difference

Sales

1400.2

1540.22

+140.02

Bad Debt Expense

18.2

7.70

-10.5

Discounts taken

0

32.34

+32.34

Net Sales

1382.0

1500.18

+118.18

Variable Cost

1050.2

1078.15

+27.95

Fixed Cost

252.0

252.0

0

EBT

79.8

170.03

+90.23

Taxes (40%)

31.9

68.01

+36.11

Net Income

47.9

102.02

+54.12

Capital Cost

35.0

12.17

-22.83

Gain (loss)

12.9

89.85

+76.95

...

...

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