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Exam 16: Supply chains and working capital management

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Question 71

True/False

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The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

A) True
B) False

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Question 72

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Tierney Enterprises is constructing its cash budget.Its budgeted monthly sales are $5, 000, and they are constant from month to month.40% of its customers pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount.The firm has no bad debts.Purchases for next month's sales are constant at 50% of projected sales for the next month."Other payments, " which include wages, rent, and taxes, are 25% of sales for the current month.Construct a cash budget for a typical month and calculate the average net cash flow during the month.

A) $1, 092
B) $1, 150
C) $1, 210
D) $1, 271
E) $1, 334

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

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Question 73

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A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

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 tells us that the credit department is functioning efficiently and there are no past-due accounts.

The facts (1)that no explicit interest is paid on accruals and (2)that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.

Because money has time value, a cash sale is always more profitable than a credit sale.

Data on Mertz Co.for the most recent year 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.

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Which of the following statements is NOT CORRECT?

The maturity matching, or "self-liquidating, " approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates.When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs.

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

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.

Which of the following statements is CORRECT?

Which of the following is NOT commonly regarded as being a credit policy variable?

Net operating working capital is defined as operating current assets minus operating current liabilities..

For a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is essential.