Text Problems (5 Points): Prepare A Response To The Followin

Text Problems (5 points). Prepare a response to the following assignments from the text Principles of Managerial Finance

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. .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 recommendation 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.

Paper For Above instruction

Implementing effective financial management strategies is crucial for firms aiming to optimize their operations, manage risks, and maximize profitability. The problems from "Principles of Managerial Finance" provide valuable insights into practical financial decision-making including managing accounts receivable, establishing zero-balance accounts, and understanding the costs associated with short-term borrowing. This paper thoroughly analyzes each problem, emphasizing the financial implications and strategic recommendations essential for managerial success.

Analysis of Accounts Receivable Changes and Bad Debts

The first problem examines how an increase in the bad debts percentage impacts the company's financial health and decision-making. Currently, the firm sells 50,000 units at $20 per unit with variable costs of $15 per unit, resulting in total sales of $1,000,000. With a 2% bad debt rate, the bad debts are $20,000 (2% of sales). If the bad debt rate increases to 4%, bad debts would double to $40,000. The proposed sales increase to 60,000 units elevates sales to $1,200,000, and with 4% bad debts, the new bad debt expense would be $48,000. This increase signifies an additional $28,000 in bad debts due to the higher rate and increased sales.

The marginal cost of bad debts—those expenses incurred due to additional bad debts resulting from increased sales—can be computed by examining the change from the original to the proposed scenario. The incremental bad debts amount to $28,000. Since bad debts are essentially a cost of credit extension, accounting for their impact is crucial to assessing the true profitability of increased sales. The company must evaluate whether the additional revenue from increased sales surpasses the higher bad debt expense.

When considering the decision to implement the change, ignoring the profit contribution from increased sales and only focusing on costs and savings, the firm saves $3,500 in operational costs and experiences no change in the average receivable investment. At face value, since the additional bad debt costs exceed the savings, the change might seem unfavorable. However, if the increase in sales results in sufficient gross profit, it could offset the bad debt expense. The critical factor here is whether the total cost of bad debts and other associated costs outweigh the benefits gained from the sales increase.

From a comprehensive perspective, considering all costs and benefits—including increased bad debts, sales gains, and operational savings—the firm must analyze whether the net benefit justifies the change. If the additional sales generate enough contribution margin to cover the higher bad debt costs and operational savings, the change could be advisable. Conversely, if the increased bad debts erode profitability, implementing the change would be detrimental.

Zero-Balance Account Evaluation

The second problem involves analyzing the proposal to establish a zero-balance account (ZBA) in place of the current disbursement account with an average balance of $420,000. The firm will pay a monthly fee of $1,000 and maintain a $300,000 non-interest-earning deposit in the bank. The opportunity cost of maintaining funds in the deposit at a 12% annual rate must be considered, as these funds could otherwise generate returns elsewhere.

The key advantage of a ZBA is operational efficiency—ensuring funds are automatically transferred to meet disbursement needs while minimizing idle balances. The monthly fee adds a predictable cost, while the deposit balance represents a tied-up capital cost—an opportunity cost based on the 12% interest rate. Since the average balance in the current account is higher than the deposit in the ZBA, the firm must evaluate whether the operational savings outweigh the opportunity costs.

Calculating the annual opportunity cost of $300,000 at 12% yields $36,000 per year in foregone interest income. The monthly fee of $1,000 amounts to $12,000 annually, adding to the firm's costs. When combined, the total annual cost of the ZBA system is approximately $48,000, which must be analyzed against potential efficiency gains and cash management improvements. If the ZBA system reduces administrative costs significantly, it may justify the expense; otherwise, maintaining the current account could be more economical.

Cost of Short-term Bank Loan

The third problem explores the finances involved in a $10,000, 90-day bank loan at a 15% annual interest rate. The interest paid will be calculated based on the actual number of days, considering a 365-day year. The interest expense equals principal multiplied by the annual interest rate and the fraction of the year: ($10,000) × (0.15) × (90/365) ≈ $369.86. This cost directly impacts the company's short-term financing expenses and must be evaluated when planning liquidity and cash flow management.

The effective 90-day interest rate can be computed by dividing the interest paid by the principal: $369.86 / $10,000 ≈ 3.7%. This figure reflects the actual cost of borrowing over the short period and provides a basis for comparison with other financing options.

Annualizing this rate involves considering the loan roll-over scenario—repeating the same borrowing pattern every 90 days. Assuming continuous renewal, the effective annual interest rate is calculated as (1 + 0.037)^4 - 1 ≈ 0.1599 or approximately 16%. This rate indicates the true annual cost of short-term borrowing when factoring in the compounding effect of repeated 90-day loans at the same interest rate.

Conclusion

These problems demonstrate critical aspects of financial decision-making, including evaluating the impact of credit risk, optimizing cash management through zero-balance accounts, and understanding the cost implications of short-term borrowing. Proper analysis of bad debts informs credit policies, while evaluation of banking arrangements ensures efficient cash utilization. Moreover, understanding the true cost of loans enables firms to choose financing options aligned with their strategic objectives. Overall, these financial strategies are essential for improving operational efficiency and maximizing shareholder value.

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