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Exam 16: Working Capital Management

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Question 41

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Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e. ,after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.

A) True
B) False

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Question 42

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If a firm takes actions that reduce its days sales outstanding (DSO),then,other things held constant,this will lengthen its cash conversion cycle (CCC)and cause a deterioration in its cash position.

A) True
B) False

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Question 43

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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.

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: ​ ​ What increase in net operating working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

When deciding whether or not to take a trade discount,the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc,which is highly profitable but has been experiencing cash shortages due to its high growth rate.As one part of your analysis,you want to determine the firm's cash conversion cycle.Using the following information and a 365-day year,what is the firm's present cash conversion cycle? Do not round intermediate calculations. ​

Cass & Company has the following data.What is the firm's cash conversion cycle? ​

Which of the following statements is CORRECT?

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.

Which of the following statements is NOT CORRECT?

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.

Soenen Inc.had the following data for last year (in millions) .The new CFO believes that the company could improve its working capital management sufficiently to bring its net working capital and cash conversion cycle up to the benchmark companies' level without affecting either sales or the costs of goods sold.Soenen finances its net working capital with a bank loan at an 8% annual interest rate,and it uses a 365-day year.If these changes had been made,by how much would the firm's pre-tax income have increased? Do not round your intermediate calculations. ​

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

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.

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

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

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 7.50% 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?

Which of the following statement completions is CORRECT? If the yield curve is upward sloping,then the marketable securities held in a firm's portfolio,assumed to be held for emergencies,should

Zarruk Construction's DSO is 50 days (on a 365-day basis) ,accounts receivable are $100 million,and its balance sheet shows inventory of $70 million.What is the inventory turnover ratio?

The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets that must be financed.