Exam 16: Working Capital Management

Net operating working capital,defined as operating current assets minus the difference between current liabilities and notes payable,is equal to the current ratio minus the quick ratio.

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

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

Edison Inc.has annual sales of $41,610,000,or $114,000 a day on a 365-day basis.The firm's cost of goods sold are 75% of sales.On average,the company has $9,000,000 in inventory and $8,000,000 in accounts receivable.The firm is looking for ways to shorten its cash conversion cycle.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%,while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Do not round intermediate calculations.Round to the nearest whole day.

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.​

When 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.

The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent current assets represent a minimum level of current assets that must be financed.

Halka Company is a no-growth firm.Its sales fluctuate seasonally,causing total assets to vary from $345,000 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?

Which of the following statements is CORRECT?

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.

A lockbox plan is most beneficial to firms that

A 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.

Ingram Office Supplies,Inc. ,buys 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 $800,000 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. )Do not round intermediate calculations.

Your firm's 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?

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.

Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.

Weiss Inc.arranged a $9,000,000 revolving credit agreement with a group of banks.The firm paid an annual commitment fee of 0.5% on the unused balance of the loan commitment.On the used portion of the revolver,it paid 1.5% above prime for the funds actually borrowed on a simple interest basis.The prime rate was 9% during the year.If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year,what was the total dollar annual cost of the revolver? Do not round intermediate calculations.

Dewey Corporation 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 your answer to the nearest day. Annual sales = \ 53,000 Annual cost of goods sold = \ 37,100 Inventory = \ 4,000 Accounts receivable = \ 2,000 Accounts payable = \ 2,400 ?

The target cash balance is typically (and logically)set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.

Zervos Inc.had the following data for last year (in millions).The new CFO believes (1)that an improved inventory management system could lower the average inventory by $4,000, (2)that improvements in the credit department could reduce receivables by $2,000,and (3)that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000.Furthermore,she thinks that these changes would not affect either sales or the costs of goods sold.If these changes were made,by how many days would the cash conversion cycle be lowered? Do not round your intermediate calculations. Original Revised Annual sales: unchanged \ 117,000 \ 117,000 Cost of goods sold: unchanged \ 80,000 \ 80,000 Average inventory: lowered by \ 4,000 \ 20,000 \ 16,000 Average receivables: lowered by \ 2,000 \ 16,000 \ 14,000 Average payables: increased by \ 2,000 \ 10,000 \ 12,000 Days in year 365 365 ?