Question: International Enterprises has annual credit sales of $ 1 56,000 and a tax rate of 40 percent. The firm sells on terms of net 30, but owing to a lax collection policy, the firm's receivables turnover ratio has been around 4.9.
(a) How much does the firm have invested in receivables?
(b) If the firm finances its receivables through a bank loan at an interest rate of 12 percent, what would be the effect on net profits if receivables were reduced to a level that corresponds to the firm's trade terms of net 30? Assume that all other things remain equal.