Exam 14: Working Capital Management and Policies

Choosing the optimal level of investment in each current asset type involves a trade-off between carrying costs and

Happy Feet would like to maintain their cash account at a minimum level of $75,000, but expects the standard deviation in net daily cash flows to be $5,000, the effective annual rate on marketable securities to be 7 percent per year, and the trading cost per sale or purchase of marketable securities to be $150 per transaction. What will be their optimal cash return point?

Which of the following is defined as costs associated with not having sufficient cash, inventory, or accounts receivable?

________ is a cheap source of funds for the lender and represent opportunity costs for borrowing firms.

If a firm has a cash cycle of 30 days and an operating cycle of 92 days, what is its average payment period?

Suppose that Farrah's Hair Care has annual sales of $100,000, cost of goods sold of $65,000, average inventories of $2,000, and average accounts receivable of $5,000. Assuming that all of Farrah's sales are on credit, what will be the firm's operating cycle?

Imagine a firm has a temporary surplus of cash meant to fund an expansion project in the next nine months. Which of the following statements is correct?

If a firm has a cash cycle of 8 days and an operating cycle of 39 days, what is its average payment period?

Would it be worth it to incur a compensating balance of $10,000 in order to get a 1-percent-lower interest rate on a 1-year, pure discount loan of $500,000?

Which of these is defined as the excess amounts of a current asset kept on hand to meet unexpected shocks in demand?

BOGO Shoes would like to maintain their cash account at a minimum level of $100,000, but expects the standard deviation in net daily cash flows to be $7,000; the effective annual rate on marketable securities to be 6.5 percent per year; and the trading cost per sale or purchase of marketable securities to be $175 per transaction. What will be their optimal cash return point?

What must the rate be less than to be worth it to incur a compensating balance of $2,000 in order to get a 2 percent lower interest rate on a one-year, pure discount loan of $50,000?

Suppose that Freddie's Fries has annual sales of $500,000, cost of goods sold of $375,000, average inventories of $9,000, average accounts receivable of $25,000, and an average accounts payable balance of $20,000. Assuming that all of Freddie's sales are on credit, what will be the firm's cash cycle?

Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000, the effective annual rate on marketable securities to be 6 percent per year, and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal cash return point?

Rose Axels faces a smooth annual demand for cash of $8 million; incurs transaction costs of $200 every time they sell marketable securities; and can earn 3.8 percent on their marketable securities. What will be their optimal cash replenishment level?

Which of the following is a money-market security, issued by large banks and medium-to-large corporations, that matures in nine months or less?

Would it be worth it to incur a compensating balance of $4,000 in order to get a 1.5-percent-lower interest rate on a 1-year, pure discount loan of $300,000?

If demand for a firm's products suddenly slows down so that inventory increases while sales decrease, how will the firm's needs for net working capital react?

BK Industries has sales of $500,000 and cost of goods sold of $230,000. The firm had a beginning inventory of $10,000 and an ending inventory of $15,000. What is the length of the days' sales in inventory?

Operating cycle is measured as