Question B3. Reed plc is considering how to improve its debtor collection policy....
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Finance
Question B3.
Reed plc is considering how to improve its debtor collection policy. The following information is available.
Current Credit Sales 912,000
Average debtor collection period (days) 94 days
Wishing to introduce a new policy of payment within (days) 60 days
Anticipated reduction in sales per year 40,000
Increased collection costs per year 2,000
Short-term cost of borrowing (%) 30%
Sales contribution to profit 20%
Required
What will be the net benefit if Reed successfully enforces the new policy?
(10 Marks)
When a corporation raises finance, there are two options: long-term debt finance (bank loan or corporate bonds) and equity finance (ordinary shares). The two approaches have fundamental consequences to the corporation. What are the main differences between the two approaches? (5 marks)
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