1. Price Corp. is considering selling to a group of new customers and creating n

Question

1. Price Corp. is considering selling to a group of new customers and creating new annual sales of $50,000. It is estimated that 5% of these new sales will be uncollectible. The collection cost on these accounts is 3.5%, the cost of producing and selling is 80% of sales, and the firm is in the 30% tax bracket. If the only new investment will be an increase in accounts receivable and the company has a receivables turnover of 4, what can Price Corp. expect as an incremental return on investment? Select one: A. 60.37% B. 46.44% C. 32.20% D. 11.52%

2. Von Hayek's Kayaks can borrow $10,000 for 60 days at a cost of $200 interest. What is the effective rate of interest?

Select one:

A. 9.90%

B. 10.50%

C. 11.50%

D. 12.00%

Explanation / Answer

1.

gross profit =50000-50000*80%=10000

ubtract bad debts and collection costs from gross profit=10000-50000*(5%+3.5%)=5750

net income after tax from these sales=5750-5750*30%=4025

increase in receivables=50000/4=12500

incremental return on investment=4025/12500=32.20%

so answer is 32.20%

the above is the answer

2.

interest rate for 60 days=200/10000=2%

What is the effective rate of interest=(1+2%)^(365/60)-1=12.80%

so the answer will be 12.00% as it is the nearest .

the above are the answers

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