Exam 16: Working Capital

a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Which of the following statements is CORRECT?

Singal Inc.is preparing its cash budget.It expects to have sales of $30,000 in January, $35,000 in February, and $35,000 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?

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

Suppose the credit terms offered to your firm by its suppliers are 2/10 net 30 days.Your firm is not taking discounts, but is paying after 25 days instead of waiting until Day 30.You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%.But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost (not the nominal cost) of its costly trade credit, using a 365-day year?

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

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.

Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same.In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?

Development buys on terms of 2/15, net 60 days.It does not take discounts, and it typically pays on time, 60 days after the invoice date.Net purchases amount to $550,000 per year.On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

What's the difference in the projected ROEs under the restricted and relaxed policies?

Firms generally choose to finance temporary current operating assets with short-term debt because

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.

twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.

Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars):

Aggarwal Inc.buys on terms of 2/10 net 30, and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? Assume a 365-day year.

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.

Changes in a firm's collection policy can affect sales, working capital, and profits.

Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cash.Sales are expected to grow at a stable, steady rate of 10% annually in the future.Dimon's accounts receivable balance will remain constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant.

Den Borsh Corp.has annual sales of $50,735,000, an average inventory level of $15,012,000, and average accounts receivable of $10,008,000.The firm's cost of goods sold is 85% of sales.The company makes all purchases on credit and has always paid on the 30th day.However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000.What will be the net change in the cash conversion cycle, assuming a 365-day year?

Which of the following items should a company report directly in its monthly cash budget?