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Exam 15: Working Capital Management

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Question 21

Multiple Choice

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Which of the following statements is CORRECT?

A) Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual cash control.
B) The cash budget and the capital budget are developed separately, and although they are both important to the firm, one does not affect the other.
C) Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.
D) The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm's operations.
E) The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts.

F) B) and C)
G) None of the above

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Question 22

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Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

A) 63 days
B) 67 days
C) 70 days
D) 74 days
E) 78 days

F) All of the above
G) D) and E)

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Question 23

Multiple Choice

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Other things held constant, which of the following will cause an increase in net working capital?

Zarruk Construction's DSO is 50 days (on a 365-day basis) , accounts receivable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio?

Madura Inc. wants to increase its free cash flow by $180 million during the coming year, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year: · EBIT is projected to equal $850 million. · Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. · The tax rate is 40%. · There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals. · What increase in net operating working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

Inventory management is largely self-contained in the sense that very little coordination among the sales, purchasing, and production personnel is required for successful inventory management.

Data on Shin Inc for 2013 are shown below, along with the inventory conversion period (ICP) of the firms against w it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year. Cost of goods sold = $85,000 Inventory = $20,000 Inventory conversion period (ICP) = 85) 88 Benchmark inventory conversion period (ICP) = 38) 00

A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

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.

Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

Which of the following statements is NOT CORRECT?

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.

Data on Wentz Inc. for 2013 are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks. The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average. If this were done, by how much would payables increase? Use a 365-day year. $\begin{array}{lr}\text { Cost of goods sold = } & \$ 75,000 \\\text { Payables = } & \$ 5,000 \\\text { Payables deferral period (PDP) = } & 24.33 \\\text { Benchmark payables deferral period = } & 30.00\end{array}$

Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?

Shorter-term cash budgets (such as a daily cash budget for the next month) are generally used for actual cash control while longer-term cash budgets (such as a monthly cash budgets for the next year) are generally used for planning purposes.

The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.

Data on Shick Inc. for 2013 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. Sales $110,000 Accounts receivable $16,000 Days sales outstanding (DSO) 53) 09 Benchmarks' days sales outstanding (DSO) 20) 00

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