Exam 21: Working Capital

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.

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

firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.

conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

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.

Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cashSales 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.

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

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.

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

maturity matching, or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs.

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

calculated cost of trade credit can be reduced by paying late.

Carter & Carter is considering setting up a regional lockbox system to speed up collectionsThe company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate The firm believes this new lockbox system would reduce receivables by 20% If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized?

company you just started has been offered credit terms of 4/30, net 90 days What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Shorter-term cash budgets--say a daily cash budget for the next month--are generally used for actual cash control while longer-term cash budgets--say monthly cash budgets for the next year--are generally used for planning purposes.

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex.