Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

Accruals are "spontaneous" funds arising automatically from a firm's operations,but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

Accepted Answer

A) True 
 B)False  True

Question 3

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.

Accepted Answer

A) True 
 B)False  True

Question 4

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

Accepted Answer

A) True 
 B)False

Question 5

A firm buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 85 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Accepted Answer

A)  17.58% 
B)  15.00% 
C)  18.55% 
D)  16.13% 
E)  13.22% 
A)  17.58% 
B)  15.00% 
C)  18.55% 
D)  16.13% 
E)  13.22%

Question 6

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.

Accepted Answer

A) True 
 B)False

Question 7

The 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.

Accepted Answer

A) True 
 B)False

Question 8

Desai Inc.has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Do not round intermediate calculations.Round to the nearest whole day. $\begin{array}{lr}
\text { Annual sales = } & \$ 45,000 \
\text { Annual cost of goods sold = } & \$ 22,500 \
\text { Inventory }= & \$ 4,500 \
\text { Accounts receivable }= & \$ 1,800 \
\text { Accounts payable = } & \$ 2,500
\end{array}$
?

Accepted Answer

A)  47 days 
B)  56 days 
C)  52 days 
D)  54 days 
E)  58 days 
A)  47 days 
B)  56 days 
C)  52 days 
D)  54 days 
E)  58 days

Question 9

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 10

The facts that (1)no explicit interest is paid on accruals and (2)the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

Accepted Answer

A) True 
 B)False

Question 11

The 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.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)  Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 - T)+ Depreciation - [Capital expenditures + ΔNOWC]),hence depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month,then a regular monthly cash budget will be misleading.The problem can be corrected by using a daily cash budget. 
C)  Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
D)  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. 
E)  If a firm sells on terms of net 90,and if its sales are highly seasonal,with 80% of its sales in September,then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365)would probably be lower in October than in August. 
A)  Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 - T)+ Depreciation - [Capital expenditures + ΔNOWC]),hence depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month,then a regular monthly cash budget will be misleading.The problem can be corrected by using a daily cash budget. 
C)  Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
D)  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. 
E)  If a firm sells on terms of net 90,and if its sales are highly seasonal,with 80% of its sales in September,then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365)would probably be lower in October than in August.

Question 13

Other things held constant,which of the following will cause an increase in net 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.

Question 14

Which of the following statement completions is CORRECT? If the yield curve is upward sloping,then the marketable securities held in a firm's portfolio,assumed to be held for emergencies,should

Accepted Answer

A)  consist mainly of long-term securities because they pay higher rates. 
B)  consist mainly of short-term securities because they pay higher rates. 
C)  consist mainly of U.S.Treasury securities to minimize interest rate risk. 
D)  consist mainly of short-term securities to minimize interest rate risk. 
E)  be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates. 
A)  consist mainly of long-term securities because they pay higher rates. 
B)  consist mainly of short-term securities because they pay higher rates. 
C)  consist mainly of U.S.Treasury securities to minimize interest rate risk. 
D)  consist mainly of short-term securities to minimize interest rate risk. 
E)  be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.

Question 15

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 than the revolving credit agreement.

Accepted Answer

A) True 
 B)False

Question 16

Other things held constant,if a firm "stretches" (i.e. ,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A) True 
 B)False

Question 17

Data on Wentz Inc.for last year are shown below,along with the payables deferral period (PDP)for the firms against which it benchmarks.The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average.If this were done,by how much would payables increase? Use a 365-day year.Do not round your intermediate calculations. $\begin{array}{lr}
\text { Cost of goods sold = } & \$ 77,000 \
\text { Payables }= & \$ 5,000 \
\text { Payables Deferral Period (PDP) }= & 23.70 \
\text { Benchmark Payables Deferral Period = } & 30.000
\end{array}$
?

Accepted Answer

A)  $1,036 
B)  $1,382 
C)  $1,342 
D)  $1,648 
E)  $1,329 
A)  $1,036 
B)  $1,382 
C)  $1,342 
D)  $1,648 
E)  $1,329

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)  A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually.Such a firm will be able to keep its accounts receivable at the current level,since the 10% cash sales can be used to finance the 10% growth rate. 
B)  In managing a firm's accounts receivable,it is possible to increase credit sales per day yet still keep accounts receivable fairly steady,provided the firm can shorten the length of its collection period (its DSO)sufficiently. 
C)  Because of the costs of granting credit,it is not possible for credit sales to be more profitable than cash sales. 
D)  Since receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio. 
E)  Other things held constant,if a firm can shorten its DSO,this will lead to a higher current ratio. 
A)  A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually.Such a firm will be able to keep its accounts receivable at the current level,since the 10% cash sales can be used to finance the 10% growth rate. 
B)  In managing a firm's accounts receivable,it is possible to increase credit sales per day yet still keep accounts receivable fairly steady,provided the firm can shorten the length of its collection period (its DSO)sufficiently. 
C)  Because of the costs of granting credit,it is not possible for credit sales to be more profitable than cash sales. 
D)  Since receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio. 
E)  Other things held constant,if a firm can shorten its DSO,this will lead to a higher current ratio.

Question 19

Which of the following statements concerning the cash budget is CORRECT?

Accepted Answer

A)  Depreciation expense is not explicitly included,but depreciation's effects are reflected in the estimated tax payments. 
B)  Cash budgets do not include financial items such as interest and dividend payments. 
C)  Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. 
D)  Changes that affect the DSO do not affect the cash budget. 
E)  Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues. 
A)  Depreciation expense is not explicitly included,but depreciation's effects are reflected in the estimated tax payments. 
B)  Cash budgets do not include financial items such as interest and dividend payments. 
C)  Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. 
D)  Changes that affect the DSO do not affect the cash budget. 
E)  Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.

Question 20

Affleck Inc.'s business is booming,and it needs to raise more capital.The company purchases supplies on terms of 1/10,net 20,and it currently takes the discount.One way of acquiring the needed funds would be to forgo the discount,and the firm's owner believes she could delay payment to 60 days without adverse effects.What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year. )

Accepted Answer

A)  9.14% 
B)  6.24% 
C)  7.61% 
D)  7.23% 
E)  8.98% 
A)  9.14% 
B)  6.24% 
C)  7.61% 
D)  7.23% 
E)  8.98%

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

Accruals are "spontaneous" funds arising automatically from a firm's operations,but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

A firm buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 85 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.

The facts that (1)no explicit interest is paid on accruals and (2)the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

Which of the following statements is CORRECT?

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

Which of the following statement completions is CORRECT? If the yield curve is upward sloping,then the marketable securities held in a firm's portfolio,assumed to be held for emergencies,should

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 than the revolving credit agreement.

Other things held constant,if a firm "stretches" (i.e. ,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

Which of the following statements is CORRECT?

Which of the following statements concerning the cash budget is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters

Exam 16: Working Capital Management

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

Accruals are "spontaneous" funds arising automatically from a firm's operations,but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

A firm buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 85 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.

The facts that (1)no explicit interest is paid on accruals and (2)the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs.

Which of the following statements is CORRECT?

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

Which of the following statement completions is CORRECT? If the yield curve is upward sloping,then the marketable securities held in a firm's portfolio,assumed to be held for emergencies,should

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 than the revolving credit agreement.

Other things held constant,if a firm "stretches" (i.e. ,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

Which of the following statements is CORRECT?

Which of the following statements concerning the cash budget is CORRECT?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements,cash Flow and Taxes

Analysis of Financial Statements

Time Value of Money

Interest Rates

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and Share Repurchases

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock,leasing,warrants,and Convertibles

Mergers and Acquisitions

Filters