Exam 21: Working Capital

Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in business operations and as compensation to banks for providing loans and services.

Andrews Corporation buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

lockbox plan is most beneficial to firms that

Taylor Textbooks Incbuys on terms of 2/15, net 50 days It does not take discounts, and it typically pays on time, 50 days after the invoice date Net purchases amount to $450,000 per year On average, what is the dollar amount of costly trade credit (total credit - free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Albrecht Incis a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $320,000 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?

longer its customers normally hold inventory, the longer the credit period supplier firms normally offer Still, suppliers have some flexibility in the credit terms they offer If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Tierney Enterprises is constructing its cash budgetIts budgeted monthly sales are $5,000, and they are constant from month to month 40% of its customers pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount The firm has no bad debts Purchases for next month's sales are constant at 50% of projected sales for the next month "Other payments," which include wages, rent, and taxes, are 25% of sales for the current month Construct a cash budget for a typical month and calculate the average net cash flow during the month.

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.

Which of the following statements is CORRECT?

Which of the following statements is most consistent with efficient inventory management? The firm has a

taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Which of the following statements is CORRECT?

Baltimore Baking is preparing its cash budget and 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 sells on terms of 2/10 net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tells us that the credit department is functioning efficiently and there are no past-due accounts.

Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions Short-term credit agreements are just as restrictive in order to protect the interest of the lender.

risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

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

Suppose the suppliers of your firm offered you credit terms of 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?

of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

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.