Question 1

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.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales,profits,and cash flows during the coming year.
B)   Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
C)   The cash budget is useful to help estimate future financing needs,especially the need for short-term working capital loans.
D)   If a firm wants to generate more cash flow from operations in the next month or two,it could change its credit policy from 2/10,net 30 to net 60.
E)   Managing working capital is important because it influences financing decisions and the firm's profitability.F) A) and B)
G) A) and E)

Question 3

A lockbox plan is most beneficial to firms that

Accepted Answer

A)   have suppliers who operate in many different parts of the country.
B)   have widely dispersed manufacturing facilities.
C)   have a large marketable securities portfolio,and cash,to protect.
D)   receive payments in the form of currency,such as fast food restaurants,rather than in the form of checks.
E)   have customers who operate in many different parts of the country.F) C) and D)
G) B) and C)

Question 4

The cash conversion cycle (CCC)combines three factors: The inventory conversion period,the receivables collection period,and the payables deferral period,and its purpose is to show how long a firm must finance its working capital.Other things held constant,the shorter the CCC,the more effective the firm's working capital management.

Accepted Answer

A) True 
 B)False

Question 5

Edwards Enterprises follows a moderate current asset investment policy,but it is now considering a change,perhaps to a restricted or maybe to a relaxed policy.The firm's annual sales are $400,000;its fixed assets are $100,000;its target capital structure calls for 50% debt and 50% equity;its EBIT is $38,000;the interest rate on its debt is 10%;and its tax rate is 40%.With a restricted policy,current assets will be 15% of sales,while under a relaxed policy they will be 25% of sales.What is the difference in the projected ROEs between the restricted and relaxed policies? Do not round intermediate calculations.

Accepted Answer

A)   4.85%
B)   5.59%
C)   5.70%
D)   6.27%
E)   4.79%F) A) and E)
G) B) and C)

Question 6

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.​

Accepted Answer

A) True 
 B)False

Question 7

Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10,net 48 days,and the firm pays on time.The new CFO is considering borrowing from its bank,using short-term notes payable,and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11,760 per day,using a 365-day year.The interest rate on the notes payable is 10%,and the tax rate is 40%.If the firm implements the plan,what is the expected change in net income? Do not round intermediate calculations.

Accepted Answer

A)   $25,747
B)   $31,927
C)   $31,669
D)   $22,143
E)   $22,915F) All of the above
G) B) and E)

Question 8

Singal Inc.is preparing its cash budget.It expects to have sales of $30,000 in January,$35,000 in February,and $22,500 in March.If 20% of sales are for cash,40% are credit sales paid in the month after the sale,and another 40% are credit sales paid 2 months after the sale,what are the expected cash receipts for March?

Accepted Answer

A)   $31,415
B)   $33,855
C)   $30,500
D)   $26,840
E)   $22,875F) A) and D)
G) B) and D)

Question 9

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 10

Desai Inc.has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Do not round intermediate calculations.Round to the nearest whole day. ​

Accepted Answer

A)   44 days
B)   40 days
C)   55 days
D)   45 days
E)   54 daysF) C) and D)
G) None of the above

Question 11

If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Accepted Answer

A) True 
 B)False

Question 12

Weiss Inc.arranged a $10,000,000 revolving credit agreement with a group of banks.The firm paid an annual commitment fee of 0.5% on the unused balance of the loan commitment.On the used portion of the revolver,it paid 1.5% above prime for the funds actually borrowed on a simple interest basis.The prime rate was 9% during the year.If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year,what was the total dollar annual cost of the revolver? Do not round intermediate calculations.

Accepted Answer

A)   $780,000
B)   $734,500
C)   $650,000
D)   $643,500
E)   $767,000F) None of the above
G) B) and C)

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

Your firm's cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

Accepted Answer

A)   15.2 days
B)   15.5 days
C)   13.8 days
D)   16.3 days
E)   12.8 daysF) A) and B)
G) A) and C)

Question 15

Data on Shick Inc.for last year 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.Do not round your intermediate calculations. ​

Accepted Answer

A)   $11,538
B)   $7,726
C)   $12,053
D)   $10,301
E)   $10,507F) A) and B)
G) A) and C)

Question 16

The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Accepted Answer

A) True 
 B)False

Question 17

Accruals arise automatically from a firm's operations and are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Accepted Answer

A) True 
 B)False

Question 18

Halka Company is a no-growth firm.Its sales fluctuate seasonally,causing total assets to vary from $295,000 to $410,000,but fixed assets remain constant at $260,000.If the firm follows a maturity matching (or moderate) working capital financing policy,what is the most likely total of long-term debt plus equity capital?

Accepted Answer

A)   $295,000
B)   $330,400
C)   $362,850
D)   $227,150
E)   $274,350F) D) and E)
G) A) and D)

Question 19

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.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A)   Increases average inventory without increasing sales.
B)   Take steps to reduce the DSO.
C)   Start paying its bills sooner,which would reduce the average accounts payable but not affect sales.
D)   Sell common stock to retire long-term bonds.
E)   Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.F) A) and D)
G) C) and D)

Exam 16: Working Capital Management

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

Correct Answer
verified

If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Correct Answer
verified

Your firm's cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

Correct Answer
verified

The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Correct Answer
verified

Correct Answer
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Which of the following statements is NOT CORRECT?

Correct Answer
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Correct Answer
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Correct Answer
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Desai Inc.has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Do not round intermediate calculations.Round to the nearest whole day.

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Accruals arise automatically from a firm's operations and are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Correct Answer
verified

A lockbox plan is most beneficial to firms that

Correct Answer
verified

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.

Correct Answer
verified

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.

Correct Answer
verified

Exam 16: Working Capital Management

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Correct AnswerverifiedShow Answer

Your firm's cost of goods sold (COGS) average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

Correct AnswerverifiedShow Answer

The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Desai Inc.has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Do not round intermediate calculations.Round to the nearest whole day. ​

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Accruals arise automatically from a firm's operations and are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Correct AnswerverifiedShow Answer

A lockbox plan is most beneficial to firms that

Correct AnswerverifiedShow Answer

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.​

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Desai Inc.has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Do not round intermediate calculations.Round to the nearest whole day.

Correct Answer
verified

Correct Answer
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Correct Answer
verified

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
verified

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.

Correct Answer
verified

Correct Answer
verified