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Exam 16: Working Capital Management

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Question 41

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Which of the following items should a company report directly in its monthly cash budget?

A) Its monthly depreciation expense.
B) Cash proceeds from selling one of its divisions.
C) Accrued interest on zero coupon bonds that it issued.
D) New shares issued in a stock split.
E) New shares issued in a stock dividend.

F) A) and E)
G) B) and E)

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Question 42

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Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

A) Payment lags.
B) Payment for plant construction.
C) Cumulative cash.
D) Repurchases of common stock.
E) Writing off bad debts.

F) A) and B)
G) B) and D)

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Question 43

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Which of the following statements is CORRECT?

An increase in any current asset must be accompanied by an equal increase in some current liability.

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

If a firm sells on terms of 2/10,net 30 days,and its DSO is 28 days,then the fact that the 28-day DSO is less than the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts.​

Suppose the credit terms offered to your firm by its suppliers are 2/10,net 30 days.Your firm is not taking discounts,but is paying after 22 days instead of Day 30.You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%.But since your firm is neither taking discounts nor paying on the due date,what is the effective annual percentage cost (not the nominal cost) of its costly trade credit,using a 365-day year?

Zarruk Construction's DSO is 50 days (on a 365-day basis) ,accounts receivable are $100 million,and its balance sheet shows inventory of $170 million.What is the inventory turnover ratio?

A lockbox plan is

Synchronization of cash flows is an important cash management technique,as proper synchronization can reduce the required cash balance and increase a firm's profitability.​

Margetis Inc.carries an average inventory of $750,000.Its annual sales are $10 million,its cost of goods sold are 75% of annual sales,and its receivables collection period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days,and it pays on time.Its new CFO wants to decrease the cash conversion cycle by 18 days,based on a 365-day year.He believes he can reduce the average inventory to $605,885 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of its cash conversion cycle? Do not round your intermediate calculations.

The prime rate charged by big money center banks at any one time is likely to vary greatly (for example,as much as 2 to 4 percentage points)across banks due to banks' ability to differentiate themselves and because different banks operate in different parts of the country.

Net working capital is defined as current assets divided by current liabilities.

Which of the following actions would be likely to shorten the cash conversion cycle?

Long-term loan agreements always contain provisions,or covenants,that constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interest of the lender.

For a zero-growth firm,it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level,provided the firm can shorten the length of its collection period sufficiently.

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

The longer its customers normally hold inventory,the longer the credit period supplier firms normally offer.Still,suppliers have some flexibility in the credit terms they offer.If a supplier lengthens the credit period offered,this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Whitmer Inc.sells to customers all over the U.S. ,and all receipts come in to its headquarters in New York City.The firm's average accounts receivable balance is $2.5 million,and they are financed by a bank loan at an 6.75% annual interest rate.The firm is considering setting up a regional lockbox system to speed up collections,and it believes this would reduce receivables by 20%.If the annual cost of the system is $15,000,what pre-tax net annual savings would be realized?

If a firm buys on terms of 2/10,net 30,it should pay as early as possible during the discount period to lower its cost of trade credit.