P14–9 Relaxation of credit standards Lewis Enterprises is considering relaxing its credit standards to increase its currently sagging sales. As a result of the proposed relaxation, sales are expected to increase by 10% from 10,000 to 11,000 units during the coming year; the average collection period is expected to increase from 45 to 60 days; and bad debts are expected to increase from 1% to 3% of sales. The sale price per unit is $40, and the variable cost per unit is $31. The firm’s required return on equal-risk investments is 25%. Evaluate the proposed relaxation, and make a recommendation to the firm. (Note: Assume a 365-day year.)
P14–16 ETHICS PROBLEM Controlled disbursing is defined as an information product—that is, the bank on which the company’s checks are drawn provides an early-morning notification of the total dollar amount of checks that will clear the account that day. Based on that notification, the company may then fund the account for that amount by the close of business that afternoon. How might controlled disbursing still be viewed as a form of “remote disbursing,” and therefore be considered unethical?
P16–9 Conversion (or stock) value What is the conversion (or stock) value of each of the following convertible bonds?
a. A $1,000-par-value bond that is convertible into 25 shares of common stock.
The common stock is currently selling for $50 per share.
b. A $1,000-par-value bond that is convertible into 12.5 shares of common
stock. The common stock is currently selling for $42 per share.
c. A $1,000-par-value bond that is convertible into 100 shares of common
stock. The common stock is currently selling for $10.50 per share.
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