Question 1

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

Accepted Answer

A) True 
 B)False

Question 2

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.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase. 
B)  If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts. 
C)  If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July. 
D)  If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO. 
E)  Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. 
A)  If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase. 
B)  If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts. 
C)  If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July. 
D)  If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO. 
E)  Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department.

Question 4

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A)  Cash proceeds from selling one of its divisions. 
B)  Accrued interest on zero coupon bonds that it issued. 
C)  New shares issued in a stock split. 
D)  New shares issued in a stock dividend. 
E)  Its monthly depreciation expense. 
A)  Cash proceeds from selling one of its divisions. 
B)  Accrued interest on zero coupon bonds that it issued. 
C)  New shares issued in a stock split. 
D)  New shares issued in a stock dividend. 
E)  Its monthly depreciation expense.

Question 6

A lockbox plan is

Accepted Answer

A)  used to identify inventory safety stocks. 
B)  used to slow down the collection of checks our firm writes. 
C)  used to speed up the collection of checks received. 
D)  used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks. 
E)  used to protect cash, i.e., to keep it from being stolen. 
A)  used to identify inventory safety stocks. 
B)  used to slow down the collection of checks our firm writes. 
C)  used to speed up the collection of checks received. 
D)  used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks. 
E)  used to protect cash, i.e., to keep it from being stolen.

Question 7

Hardwig Inc.
Hardwig Inc.is considering whether to pursue a restricted or relaxed current asset investment policy.The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets.EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 25%.If the company follows a restricted policy, its total assets turnover will be 2.5.Under a relaxed policy its total assets turnover will be 2.2.
-Refer to the data for Hardwig, Inc.What's the difference in the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)  1.50% 
B)  1.88% 
C)  2.25% 
D)  2.70% 
E)  3.24% 
A)  1.50% 
B)  1.88% 
C)  2.25% 
D)  2.70% 
E)  3.24%

Question 8

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 plans to pay in 40 days than in 30 days.

Accepted Answer

A) True 
 B)False

Question 9

Krackle Korn Inc.had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days.What was its average receivables balance, based on a 365-day year?

Accepted Answer

A)  $335,616 
B)  $352,397 
C)  $370,017 
D)  $388,518 
E)  $407,944 
A)  $335,616 
B)  $352,397 
C)  $370,017 
D)  $388,518 
E)  $407,944

Question 10

Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

A) True 
 B)False

Question 11

Thornton Universal Sales' cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year, what is its inventory conversion period?

Accepted Answer

A)  11.7 days 
B)  13.0 days 
C)  14.4 days 
D)  15.2 days 
E)  16.7 days 
A)  11.7 days 
B)  13.0 days 
C)  14.4 days 
D)  15.2 days 
E)  16.7 days

Question 12

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis.

Accepted Answer

A) True 
 B)False

Question 13

Because money has time value, a cash sale is always more profitable than a credit sale.

Accepted Answer

A) True 
 B)False

Question 14

The four primary elements in a firm's credit policy are (1) credit standards, (2) cash discounts offered, (3) credit period, and (4) collection policy.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected. 
B)  The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans. 
C)  If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60. 
D)  Managing working capital is important because it influences financing decisions and the firm's profitability. 
E)  A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year. 
A)  Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected. 
B)  The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans. 
C)  If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60. 
D)  Managing working capital is important because it influences financing decisions and the firm's profitability. 
E)  A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.

Question 17

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

Accepted Answer

A)  short-term interest rates have traditionally been more stable than long-term interest rates. 
B)  a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term. 
C)  the yield curve is normally downward sloping. 
D)  short-term debt has a higher cost than equity capital. 
E)  matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital. 
A)  short-term interest rates have traditionally been more stable than long-term interest rates. 
B)  a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term. 
C)  the yield curve is normally downward sloping. 
D)  short-term debt has a higher cost than equity capital. 
E)  matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.

Question 18

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Accepted Answer

A) True 
 B)False

Question 19

During the coming year, Gold & Gold wants to increase its free cash flow by $180 million, which should result in a higher stock price.The CFO has made these projections for the upcoming year: ∙
EBIT is projected to equal $852 million.
∙
Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million.
∙
The tax rate is 25%.
∙
There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals.
What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

Accepted Answer

A)  $175 
B)  $219 
C)  $263 
D)  $316 
E)  $379 
A)  $175 
B)  $219 
C)  $263 
D)  $316 
E)  $379

Question 20

Fontana Painting had the following data for the most recent year (in millions).The new CFO believes that the company could improve its working capital management sufficiently to bring its NWC and CCC up to the benchmark companies' level without affecting either sales or the costs of goods sold.Fontana finances its net working capital with a bank loan at an 8% annual interest rate, and it uses a 365-day year.If these changes had been made, by how much would the firm's pre-tax income have increased? $\begin{array}{lc} 
&\text { Original}&\text { Benchmark}\ 
& \underline{\text { Data} }&\underline{\text { Related } \mathrm{CCC} }& \underline{\mathrm{CCC}} \
\text { Sales } & \$ 100,000 \
\text { Cost of goods sold } & \$ 80,000 \
\text { Inventory (ICP) } & \$ 20,000 &91.25&38.00\
\text { Receivables (DSO) } & \$ 16,000&58.40&20.00 \
\text { Payables (PDP) } & \$ 5,000&22.81&30.00\
&&\underline{126.84}&\underline{28.00}
\end{array}$

Accepted Answer

A)  1,901 
B)  2,092 
C)  2,301 
D)  2,531 
E)  2,784 
A)  1,901 
B)  2,092 
C)  2,301 
D)  2,531 
E)  2,784

Exam 16: Supply Chains and Working Capital Management

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

Which of the following statements is CORRECT?

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

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

A lockbox plan is

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 plans to pay in 40 days than in 30 days.

Krackle Korn Inc.had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days.What was its average receivables balance, based on a 365-day year?

Net working capital is defined as current assets divided by current liabilities.

Thornton Universal Sales' cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year, what is its inventory conversion period?

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis.

Because money has time value, a cash sale is always more profitable than a credit sale.

The four primary elements in a firm's credit policy are (1) credit standards, (2) cash discounts offered, (3) credit period, and (4) collection policy.

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

Which of the following statements is NOT CORRECT?

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

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risk and Return

Corporate Valuation and Stock Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Corporate Valuation and Financial Planning

Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Multinational Financial Management

Public and Private Financing: Initial Offerings, Seasoned Offerings, and Investment Banks

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Dynamic Capital Structures and Corporate Valuation

Mergers and Corporate Control

Enterprise Risk Management

Bankruptcy, Reorganization, and Liquidation

Portfolio Theory and Asset Pricing Models

Real Options

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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