The United Shoe Company (USC) Does Not Extend Credit to Any

question 4

Multiple Choice

The United Shoe Company (USC) does not extend credit to any retail shoe store with a "Fair" or "Limited" Dun and Bradstreet credit rating. Because of this policy, the company loses $36,500,000 in sales each year. Based on prior experience with these types of customers, USC estimates that the average collection period would be 120 days and the bad-debt loss ratio would be 10%. The firm's variable cost ratio is 0.75. USC's required pretax return on receivables investments is 18%. Determine the net change in pretax profits of extending credit to these retail shoe stores. (Assume 365 days per year in any calculations.)

• A) $9,125,000
• B) $3,315,000
• C) -$1,095,000
• D) $2,160,000

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