Advanced financial management revision question and answer

Advanced Financial Management Block Revision Mock Exams

The new credit manager of Kay‟s Departmental Store plans to liberalise the firm‟s credit policy. The firm currently generates credit sales of Sh.575,000,000 annually. The more lenient credit policy is expected to produce credit sales of Sh.750,000,000. the bad debt losses on additional sales are projected to be 5 per cent despite an additional Sh.15,000,000 collection expenditure. The new credit manager anticipates production and selling costs other than additional bad debt and collection expenses will remain at the 85 per cent level. The firm is paying tax at 30% tax bracket, after deductible allowances.

Required:
If the firm maintains a debtors turnover of 10 times, how much will the debtors balance increase?

What would be the firm‟s incremental return on investment?

Assuming additional stocks of Sh.35,000,000 are required to support the additional sales, compute the after tax return on investment.
ANSWER

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