Question 1

Which of the following statements is most correct?

Accepted Answer

A)  A cash management system which minimizes collections float and maximizes disbursement float is better than one with higher collections float and lower disbursement float. 
B)  A cash management system which maximizes collections float and minimizes disbursement float is better than one with lower collections float and higher disbursement float. 
C)  The use of a lockbox is designed to minimize cash theft losses. If the cost of the lockbox is less than theft losses saved, then the lockbox should be installed. 
D)  Other things held constant, a firm will need an identical line of credit if it can arrange to pay its bills by the 5th of each month than if its bills come due uniformly during the month. 
E)  The statements above are all false. 
A)  A cash management system which minimizes collections float and maximizes disbursement float is better than one with higher collections float and lower disbursement float. 
B)  A cash management system which maximizes collections float and minimizes disbursement float is better than one with lower collections float and higher disbursement float. 
C)  The use of a lockbox is designed to minimize cash theft losses. If the cost of the lockbox is less than theft losses saved, then the lockbox should be installed. 
D)  Other things held constant, a firm will need an identical line of credit if it can arrange to pay its bills by the 5th of each month than if its bills come due uniformly during the month. 
E)  The statements above are all false.

Question 2

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e., runs out of an inventory item).

Accepted Answer

A) True 
 B)False

Question 3

A promissory note is the document signed when a bank loan is executed and it specifies financial aspects of the loan. The separate indenture note will specify items such as collateral and other terms and conditions.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  All of the statements above are credit policy variables. 
A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  All of the statements above are credit policy variables.

Question 5

Determination of a firm's investment in net operating working capital and how that investment is financed are elements of working capital policy.

Accepted Answer

A) True 
 B)False

Question 6

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm pays in 40 days than if it pays in 30 days.

Accepted Answer

A) True 
 B)False

Question 7

In part because money has time value, cash sales are always more profitable and more valuable than credit sales.

Accepted Answer

A) True 
 B)False

Question 8

Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit? (Assume a 365-day year.)

Accepted Answer

A)  17.2% 
B)  23.6% 
C)  26.1% 
D)  37.2% 
E)  50.6% 
A)  17.2% 
B)  23.6% 
C)  26.1% 
D)  37.2% 
E)  50.6%

Question 9

If a firm's terms are 2/10, net 30 days, and its DSO is 28 days, we can be certain that the credit department is functioning efficiently and the percentage of past due accounts is minimal.

Accepted Answer

A) True 
 B)False

Question 10

Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm's debt is 10 percent, and the firm's tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?

Accepted Answer

A)  0.0% 
B)  6.2% 
C)  5.4% 
D)  1.6% 
E)  3.8% 
A)  0.0% 
B)  6.2% 
C)  5.4% 
D)  1.6% 
E)  3.8%

Question 11

A lockbox plan is

Accepted Answer

A)  A method for safe-keeping of marketable securities. 
B)  Used to identify inventory safety stocks. 
C)  A system for slowing down the collection of checks written by a firm. 
D)  A system for speeding up a firm's collections of checks received. 
E)  Not described by any of the statements above. 
A)  A method for safe-keeping of marketable securities. 
B)  Used to identify inventory safety stocks. 
C)  A system for slowing down the collection of checks written by a firm. 
D)  A system for speeding up a firm's collections of checks received. 
E)  Not described by any of the statements above.

Question 12

The prime rate charged by big money center banks can vary greatly (for example, as much as 2 to 4 percentage points) across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles, such as mainly making loans to small firms.

Accepted Answer

A) True 
 B)False

Question 13

One of the disadvantages of not taking trade credit discounts when offered is that the firm's investment in accounts payable rises.

Accepted Answer

A) True 
 B)False

Question 14

The calculated cost of trade credit is reduced by paying late.

Accepted Answer

A) True 
 B)False

Question 15

Phranklin Pharms Inc. purchases merchandise from a company that gives sales terms of 2/15, net 40 days. Phranklin Pharms has gross purchases of $819,388 per year. What is the maximum amount of costly trade credit Phranklin could get, assuming it abides by the supplier's credit terms? (Assume a 365-day year.)

Accepted Answer

A)  $88,000 
B)  $33,000 
C)  $55,000 
D)  $50,000 
E)  $44,000 
A)  $88,000 
B)  $33,000 
C)  $55,000 
D)  $50,000 
E)  $44,000

Question 16

On average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to one-half of its monthly sales on hand at all times. If the firm analyzes its accounts using a 365-day year, what is the firm's inventory conversion period?

Accepted Answer

A)  365.0 days 
B)  182.5 days 
C)  30.3 days 
D)  15.2 days 
E)  10.5 days 
A)  365.0 days 
B)  182.5 days 
C)  30.3 days 
D)  15.2 days 
E)  10.5 days

Question 17

Quickbow Company currently uses maximum trade credit by not taking discounts on its purchases. Quickbow is considering borrowing from its bank, using notes payable, in order to take trade discounts. The firm wants to determine the effect of this policy change on its net income. The standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and Quickbow pays in 30 days. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10 percent and the firm's tax rate is 40 percent. If the firm implements the plan, what is the expected change in Quickbow's net income?

Accepted Answer

A)  -$23,520 
B)  -$31,440 
C)  +$23,520 
D)  +$38,448 
E)  +$69,888 
A)  -$23,520 
B)  -$31,440 
C)  +$23,520 
D)  +$38,448 
E)  +$69,888

Question 18

If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm's receivables management needs to be reviewed and improved.

Accepted Answer

A) True 
 B)False

Question 19

The fact that no explicit interest cost is paid on accruals, and that the firm can exercise considerable control over their level, makes accruals an attractive source of additional funding.

Accepted Answer

A) True 
 B)False

Question 20

Other things held constant, which of the following will cause an increase in working capital?

Accepted Answer

A)  Cash is used to buy marketable securities. 
B)  A cash dividend is declared and paid. 
C)  Merchandise is sold at a profit, but the sale is on credit. 
D)  Long-term bonds are retired with the proceeds of a preferred stock issue. 
E)  Missing inventory is written off against retained earnings. 
A)  Cash is used to buy marketable securities. 
B)  A cash dividend is declared and paid. 
C)  Merchandise is sold at a profit, but the sale is on credit. 
D)  Long-term bonds are retired with the proceeds of a preferred stock issue. 
E)  Missing inventory is written off against retained earnings.

Exam 21: Working Capital Management

Which of the following statements is most correct?

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e., runs out of an inventory item).

A promissory note is the document signed when a bank loan is executed and it specifies financial aspects of the loan. The separate indenture note will specify items such as collateral and other terms and conditions.

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

Determination of a firm's investment in net operating working capital and how that investment is financed are elements of working capital policy.

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm pays in 40 days than if it pays in 30 days.

In part because money has time value, cash sales are always more profitable and more valuable than credit sales.

Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit? (Assume a 365-day year.)

If a firm's terms are 2/10, net 30 days, and its DSO is 28 days, we can be certain that the credit department is functioning efficiently and the percentage of past due accounts is minimal.

A lockbox plan is

The prime rate charged by big money center banks can vary greatly (for example, as much as 2 to 4 percentage points) across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles, such as mainly making loans to small firms.

One of the disadvantages of not taking trade credit discounts when offered is that the firm's investment in accounts payable rises.

The calculated cost of trade credit is reduced by paying late.

On average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to one-half of its monthly sales on hand at all times. If the firm analyzes its accounts using a 365-day year, what is the firm's inventory conversion period?

If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm's receivables management needs to be reviewed and improved.

The fact that no explicit interest cost is paid on accruals, and that the firm can exercise considerable control over their level, makes accruals an attractive source of additional funding.

Other things held constant, which of the following will cause an increase in working capital?

An Overview of Financial Management

Risk and Return: Part I

Risk and Return: Part II

Bond Valuation

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Corporate Valuation and Value-Based Management

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Capital Structure Decisions: Part II

Distributions to Shareholders

Ipos, Investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

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