Case 19 Stanley Products
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Given Terms:2/10, net 3070% will pay using discount–10 day25% will pay without discount, but on time–30 days5% will pay late–50 daysBad 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 = $1,085.7A/S: $361.4/$987 = $.366L/S: ($45.6 + $39.7)/$987 = $.086N= A/S – L/S⇒ $.366 – $.086 = $.28Change in Sales: $1,400.2 – $987 = $413.2NI/Sales: 34.3/987 = .035 = 3.5% Net Profit MarginEFR = .28(413.2) – .035(1,400.2)EFR = 115.70 – 49.00EFR = $66.7 need to financeT+2 Sales: $1,400.2 x 1.10 = $1,540.22Inventory and Receivables increased by 12%:(123.4 x 12%) + (109.7 x 12%) + 361.4 = 389.37 new total assetsA/S: $389.37/$1,400.2 = $.278L/S: ($45.6 + $39.7)/$1,400.2 = $.061N= A/S – L/S⇒ $.278 – $.061 = $.217Change in Sales: $1,778.3 – $1,400.2 = $378.1Sales$1,400.20Bad Debt Expense$7.00 ($1,400.2 x .005)Net Sales$1,393.20Variable Cost$980.14 ($1,400.2 x .70)Fixed Cost$176.70Earnings before taxes$236.36Taxes (40%)$95.54Net Income$141.82NI/Sales: 141.82/1,400.2 = .1013 = 10.13% Net Profit MarginEFR = .217(378.1) – .1013(1,778.3)EFR = 82.05- 180.14EFR = 98.09T+3 Sales: $1,778.3 x 1.10 = $1,956.13Inventory and Receivables increased by 12%:(138.21 x 12%) +( 122.86 x 12% ) + 389.37 = 420.70A/S: $420.70/$1,956.13 = $.2151L/S: ($45.6 + $39.7)/$1,956.13 = $.044N= A/S – L/S⇒ $.2151 – $.044 = $.1711Change in Sales: $2,294.1 – $1,778.3 = $515.8Sales$1,778.3Bad Debt Expense$8.89 ($1,778.3 x .005)Net Sales$1,769.41Variable Cost$1,244.81($1,778.3 x .70)Fixed Cost$176.70Earnings before taxes$347.9Taxes (40%)$139.16Net Income$208.74NI/Sales: 208.74/1,778.3 = .1174 = 11.74% Net Profit MarginEFR = .1711(515.8)- .1174(2,294.1)EFR = 88.25 – 269.33EFR = 181.08B) g = (.035)(1.00)/(.28-.035)g= .035/.245
g= 14.30%C) No GrowthT=0T=1T=2T=3$987.0$1,400.2$1,778.3$2,294.1Internal financingT=0T=1T=2T=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 A1/10 net 20Cost of Credit = Discount %/ (100-Discount %) x (360/Allowed payment days – Discount days)Cost of Credit = 1%/ (100-1%)*(360/20-10) = 36.36%Part B2/10 net 30Cost of Credit = 2%/ (100-2%)*(360/30-10) = 36.73%Part C3/10 net 45Cost of Credit = 3%/ (100-3%)*(360/45-10) = 31.81%Q4.Part AThe average collection period = 70%*10+25%*30+5%*50 = 17 DaysPart BEXHIBIT 3Worksheet to Calculate Incremental Asset Requirements and Capital Cost of Credit Changes for 1997 (Year t + 1) ($000s) No Credit Changes With changesDifferencesInvestment in receivables116.717 x (1540.22/360)= 72.73 x .70= 50.91-65.79Inventory needed175.1192.5617.46Total291.8243.47-48.33Capital Cost35.012.17 -22.83Assuming the proposed credit changes are made. Sp’s has outstanding day sales and an average collection period.Q5.EXHIBIT 4No ChangesWith ChangesDifferenceSales1400.21540.22+140.02Bad Debt Expense18.27.70-10.5Discounts taken032.34+32.34Net Sales1382.01500.18+118.18Variable Cost1050.21078.15+27.95Fixed Cost252.0252.00EBT79.8170.03+90.23Taxes (40%)31.968.01+36.11Net Income47.9102.02+54.12Capital Cost35.012.17-22.83Gain (loss)12.989.85+76.95