4. Your boss has asked you to take a closer look at your company’s credit polici

Question

4. Your boss has asked you to take a closer look at your company’s credit policies. You have been given the following information:

a) Your firm’s DSO is: ______________

b) Taggart Transcontinental Corp.’s CFO is unhappy with its DSO and wants to improve collections next year. Sales are expected to grow by 12% next year, and the CFO wants to lower the DSO to the industry average of 30 days. As a result, the firm should expect to carry _______________ in accounts receivable

Accounts receivable balance: $560,000 Average daily sales: $12,342 Weighted average cost of capital: 10%

Explanation / Answer

Answer:

a)DSO = (Accounts receivable balance/Annual sales)*365

        = {$560,000/(365*$12,342)}*365 = 45.37 days

b) Expected annual sales next year = $12,342*365*112% = $5,045,410

The desired DSO = 30 days, Means the desired receivable turnover = 365/30days = 12.16666 times

So the required accounts receivable = Expected annual sales/Desired receivable turnover

                                                    = $5,045,410/12.16666 = $414,691.5 (Ans)

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