Question

Wontaby Ltd. is extending its credit terms from 45 to 60 days. Sales are expected to increase from $4.77 million to $5.87 million as a result. Wontaby finances short-term assets at the bank at a cost of 12 percent annually. Calculate the additional annual financing cost of this change in credit terms. (Use 365 days in a year. Do not round intermediate calculations. Round the final answer to the nearest whole dollar. Enter answer in whole dollar not in million.) Annual financing cost $

Answer 1

Because of increase in the credit terms, company's accounts receivables increases where it needs additional short term funding on this resulting in additional financing cost.

Accounts receivables days=(accounts receivables/Sales)*365

45=(accounts receivables/4770000)*365

accounts receivables=45*4770000/365=$588,082

After increasing the credit terms to 60 days and sales increases to $5,870,000. Now the accounts receivables increases to=60*5870000/365=$964,932

The additional financing costs=12%*(964,932-588082)=12%*376849=$45,222