(Solved): 3.2 If Cato Traders required rate of return on equal-risk investments is 15%, should the proposed ...

3.2 If Cato Trader’s required rate of return on equal-risk investments is 15%, should the proposed increase in the discount offered (from 2% to 3.5%) be made? Show all the calculations. (8 marks) INFORMATION The credit terms of Cato Traders are currently 2/10 net 30. The selling price of the only product that it sells is R20 per unit and the variable costs are R11 per unit. The management wants to determine whether the profit will increase if the settlement discount increases from 2% to 3.5%. The following is expected to occur if the credit terms change from 2/10 net 30 to 3.5/10 net 30:  The percentage of the credit sales that the discount will apply to will increase from 50% to 70%.  The debtors collection period will drop by 7.30 days from the current 36.50 days.  Credit sales will increase from the current 30 000 units by 20%.  Bad debts will drop from 5% of credit sales to 3% of credit sales. 3.3 REQUIRED Use the information provided below to calculate the percentage return on sales (expressed to two decimal places). (5 marks) INFORMATION Selenite Limited intends entering a new market and market research has revealed that its sales would increase by 20 000 units if the product is sold on credit. The cost price of the product it intends selling to this market is R80 per unit and a profit mark-up of 40% would be applied. A provision for bad debts of 14% of the sales would be made. Collection costs on the new accounts are estimated at 5.5% of sales. The tax rate of the company is 27%.