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Check My Work (2 remaining) Working Capital Management: Accounts Receivable, Trade Credit and Bank Loans Accounts receivable are funds due from a customer and a firm's credit policy has a direct impact on the level of receivables held by a firm. The credit policy is a set of rules that consists of four variables: credit period, discounts, credit standards, and collection policy. The credit perlod is the length of time customers have to pay for purchases; discounts are price reductions given for early payments; cre dit standards reflect the financial strength of customers that must be exhibited to qualify for credit; and the collection policy is the degree of toughness in enforcing the credit terms. Credit policy is important t three major reasons: (1) It has a major effect on sales. (2) It influences the amount of funds tied up in receivables. (3) It affects bad debt losses. The total amount of accounts recelvable outstanding at any given time is determined I the volume of credit sales and the average length of time between sales and collections. This equation can e written as: Receivables Average daily sales x Days' sales outstanding Firms generally make purchases from other firms on credit and they record the debt as an account pavable. This pavable is also known as trade credit, which is defined as the debt arising from credit sales and recorded as an account receivable I account pavable by the buver, Trade credit has a portion that is -Select if the payment occurs during the discount period. the seller and t take the discount then the trade credit is -Select f the firm does The nominal annual cost f trade credit is as calculated as Nominal annual cost of trade credit estis ia Sutat ading-Diecunt period X these loans vary and can be calculated in a number of different ways. A(n) -Select- interest loan Bank loans are another important source of short-term financing for businesses and individuals. Thee costs where interest only is paid monthly on The -Select- interest rate per day is the nominal interest rate divided by the number of days in the year. The interest charge for the month is calculated follows: Monthly interest Rate per day x Amount of loan x Days in month Another type of loan is an add-on interest loan, Here interest is calculated and added t the funds received to determine t face amount an installment loan. The approximate annual rate of an add-on loan is calculated as follows: Irteret paid Approximate annual rateAdd-onTAual csved /2 Costly trade credit ca n be very expenslve, so often a firm will choose. borrow from a bank and pay trade discounts rather than paying after the discount perlod. Firms will choose the lowest-cost source. Quantitative Problem: Adams Manufacturing Inc. buys $8.1 millian of materials (net of discounts) on terms of 2/10, net 60; and it currently pays after 10 days and takes the discounts. Adams plans to expand, which will require additional financing. If Adams decides to forgo discounts, how much additional credit could it obtain? Round your answer to the nearest cent. Do not round your intermediate calculations. Use 365 day in a year t would be the nomin effective cost of such a credit? Round your answer to 2 decimal places. Do not roun intermediate calculations, Use 365 day in a vear Effective cost: If the company could receive the funds from a bank at a rate of 7.5 % , interest paid monthly, based on a 365-day vear, what would be the effective cost of the bank loan? Round your answer to 2 decimal places. Do not round intermediate calculations. should Adams use bank debt or additional trade credit? -Select Check My Work (2 remaining) Working Capital Management: Accounts Receivable, Trade Credit and Bank Loans Accounts receivable are funds due from a customer and a firm's credit policy has a direct impact on the level of receivables held by a firm. The credit policy is a set of rules that consists of four variables: credit period, discounts, credit standards, and collection policy. The credit perlod is the length of time customers have to pay for purchases; discounts are price reductions given for early payments; cre dit standards reflect the financial strength of customers that must be exhibited to qualify for credit; and the collection policy is the degree of toughness in enforcing the credit terms. Credit policy is important t three major reasons: (1) It has a major effect on sales. (2) It influences the amount of funds tied up in receivables. (3) It affects bad debt losses. The total amount of accounts recelvable outstanding at any given time is determined I the volume of credit sales and the average length of time between sales and collections. This equation can e written as: Receivables Average daily sales x Days' sales outstanding Firms generally make purchases from other firms on credit and they record the debt as an account pavable. This pavable is also known as trade credit, which is defined as the debt arising from credit sales and recorded as an account receivable I account pavable by the buver, Trade credit has a portion that is -Select if the payment occurs during the discount period. the seller and t take the discount then the trade credit is -Select f the firm does The nominal annual cost f trade credit is as calculated as Nominal annual cost of trade credit estis ia Sutat ading-Diecunt period X these loans vary and can be calculated in a number of different ways. A(n) -Select- interest loan Bank loans are another important source of short-term financing for businesses and individuals. Thee costs where interest only is paid monthly on The -Select- interest rate per day is the nominal interest rate divided by the number of days in the year. The interest charge for the month is calculated follows: Monthly interest Rate per day x Amount of loan x Days in month Another type of loan is an add-on interest loan, Here interest is calculated and added t the funds received to determine t face amount an installment loan. The approximate annual rate of an add-on loan is calculated as follows: Irteret paid Approximate annual rateAdd-onTAual csved /2 Costly trade credit ca n be very expenslve, so often a firm will choose. borrow from a bank and pay trade discounts rather than paying after the discount perlod. Firms will choose the lowest-cost source. Quantitative Problem: Adams Manufacturing Inc. buys $8.1 millian of materials (net of discounts) on terms of 2/10, net 60; and it currently pays after 10 days and takes the discounts. Adams plans to expand, which will require additional financing. If Adams decides to forgo discounts, how much additional credit could it obtain? Round your answer to the nearest cent. Do not round your intermediate calculations. Use 365 day in a year t would be the nomin effective cost of such a credit? Round your answer to 2 decimal places. Do not roun intermediate calculations, Use 365 day in a vear Effective cost: If the company could receive the funds from a bank at a rate of 7.5 % , interest paid monthly, based on a 365-day vear, what would be the effective cost of the bank loan? Round your answer to 2 decimal places. Do not round intermediate calculations. should Adams use bank debt or additional trade credit? -Select

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