Question 1

Not 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.

Accepted Answer

A) True 
 B)False

Question 2

Helena Furnishings wants to reduce its cash conversion cycle.Which of the following actions should it take?

Accepted Answer

A)  Increases average inventory without increasing sales. 
B)  Take steps to reduce the DSO. 
C)  Start paying its bills sooner,which would reduce the average accounts payable but not affect sales. 
D)  Sell common stock to retire long-term bonds. 
E)  Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock. 
A)  Increases average inventory without increasing sales. 
B)  Take steps to reduce the DSO. 
C)  Start paying its bills sooner,which would reduce the average accounts payable but not affect sales. 
D)  Sell common stock to retire long-term bonds. 
E)  Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.

Question 3

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

Accepted Answer

A) True 
 B)False

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

Soenen Inc.had the following data for last year (in millions).The new CFO believes that the company could improve its working capital management sufficiently to bring its net working capital and cash conversion cycle up to the benchmark companies' level without affecting either sales or the costs of goods sold.Soenen 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? Do not round your intermediate calculations. $\begin{array}{lr}&\text { Original Data}&\text { Related CCC}&\text { Benchmarks' CCC }\
\text { Sales } & \$ 99,000 \
\text { Cost of goods sold } & \$ 80,000 \
\text { Inventory (ICP) } & \$ 20,000 &91.25&38.00\
\text { Receivables (DSO) } & \$ 16,000&58.99&20.00 \
\text { Payables (PDP) } & \$ 5,000&22.81&30.00\&&127.43&28.00
\end{array}$
?

Accepted Answer

A)  $1,467 
B)  $1,906 
C)  $1,810 
D)  $2,058 
E)  $1,849 
A)  $1,467 
B)  $1,906 
C)  $1,810 
D)  $2,058 
E)  $1,849

Question 6

A 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.

Accepted Answer

A) True 
 B)False

Question 7

Exhibit 15.1 
Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $4,400,000, 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 40%. 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 Exhibit 15.1 in the text .Assume now that the company believes that if it adopts a restricted policy,its sales will fall by 15% and EBIT will fall by 10%,but its total assets turnover,debt ratio,interest rate,and tax rate will all remain the same.In this situation,what's the difference between the projected ROEs under the restricted and relaxed policies? Do not round intermediate calculations.

Accepted Answer

A)  1.83% 
B)  1.88% 
C)  2.21% 
D)  1.55% 
E)  2.12% 
A)  1.83% 
B)  1.88% 
C)  2.21% 
D)  1.55% 
E)  2.12%

Question 8

Other things held constant,which of the following would tend to reduce the cash conversion cycle?

Accepted Answer

A)  Carry a constant amount of receivables as sales decline. 
B)  Place larger orders for raw materials to take advantage of price breaks. 
C)  Take all discounts that are offered. 
D)  Continue to take all discounts that are offered and pay on the net date. 
E)  Offer longer payment terms to customers. 
A)  Carry a constant amount of receivables as sales decline. 
B)  Place larger orders for raw materials to take advantage of price breaks. 
C)  Take all discounts that are offered. 
D)  Continue to take all discounts that are offered and pay on the net date. 
E)  Offer longer payment terms to customers.

Question 9

Which of the following is NOT commonly regarded as being a credit policy variable?

Accepted Answer

A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  Payments deferral period. 
A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  Payments deferral period.

Question 10

Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10,net 38 days,and the firm pays on time.The new CFO is considering borrowing from its bank,using short-term notes payable,and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11,760 per day,using a 365-day year.The interest rate on the notes payable is 10%,and the tax rate is 40%.If the firm implements the plan,what is the expected change in net income? Do not round intermediate calculations.

Accepted Answer

A)  $32,803 
B)  $36,084 
C)  $33,787 
D)  $32,147 
E)  $38,052 
A)  $32,803 
B)  $36,084 
C)  $33,787 
D)  $32,147 
E)  $38,052

Question 11

A firm constructing a new manufacturing plant and financing it with short-term loans,which are scheduled to be converted to first mortgage bonds when the plant is completed,would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

Accepted Answer

A) True 
 B)False

Question 12

If 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.

Accepted Answer

A) True 
 B)False

Question 13

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 55.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year. )

Accepted Answer

A)  24.49% 
B)  20.24% 
C)  19.03% 
D)  18.62% 
E)  17.00% 
A)  24.49% 
B)  20.24% 
C)  19.03% 
D)  18.62% 
E)  17.00%

Question 14

Which of the following statements is CORRECT?

Accepted Answer

A)  Net working capital is defined as operating current assets minus the difference between current liabilities and notes payable,and any increase in the current ratio automatically indicates that net working capital has increased. 
B)  Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. 
C)  If a company follows a policy of "matching maturities",this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
D)  Net working capital is defined as operating current assets minus the difference between current liabilities and notes payable,and any decrease in the current ratio automatically indicates that net working capital has decreased. 
E)  If a company follows a policy of "matching maturities",this means that it matches its use of short-term debt with its use of long-term debt. 
A)  Net working capital is defined as operating current assets minus the difference between current liabilities and notes payable,and any increase in the current ratio automatically indicates that net working capital has increased. 
B)  Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. 
C)  If a company follows a policy of "matching maturities",this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
D)  Net working capital is defined as operating current assets minus the difference between current liabilities and notes payable,and any decrease in the current ratio automatically indicates that net working capital has decreased. 
E)  If a company follows a policy of "matching maturities",this means that it matches its use of short-term debt with its use of long-term debt.

Question 15

A firm buys on terms of 2/8,net 45 days,it does not take discounts,and it actually pays after 85 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year. )

Accepted Answer

A)  10.05% 
B)  10.55% 
C)  7.84% 
D)  8.64% 
E)  9.55% 
A)  10.05% 
B)  10.55% 
C)  7.84% 
D)  8.64% 
E)  9.55%

Question 16

A 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 receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 17

Romano Inc.has the following data.What is the firm's cash conversion cycle? $$\begin{array} { l l } 
\text { Inventory Conversion Period } = & 38 \text { days } \
\text { Receivables Collection Period } = & 19 \text { days } \
\text { Payables Deferral Period } = & 38 \text { days }
\end{array}$$
?

Accepted Answer

A)  21 days 
B)  24 days 
C)  19 days 
D)  22 days 
E)  14 days 
A)  21 days 
B)  24 days 
C)  19 days 
D)  22 days 
E)  14 days

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

Aggarwal Inc.buys on terms of 2/10,net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $350,000.What is the firm's average accounts payable balance? Assume a 365-day year.

Accepted Answer

A)  $425,250 
B)  $504,000 
C)  $525,000 
D)  $556,500 
E)  $514,500 
A)  $425,250 
B)  $504,000 
C)  $525,000 
D)  $556,500 
E)  $514,500

Question 20

Accruals arise automatically from a firm's operations and are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Accepted Answer

A) True 
 B)False

Not 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.

Helena Furnishings wants to reduce its cash conversion cycle.Which of the following actions should it take?

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

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.

A 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.

Other things held constant,which of the following would tend to reduce the cash conversion cycle?

Which of the following is NOT commonly regarded as being a credit policy variable?

If 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.

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 55.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year. )

Which of the following statements is CORRECT?

A firm buys on terms of 2/8,net 45 days,it does not take discounts,and it actually pays after 85 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year. )

A 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 receipts are concentrated at the beginning of each month.

Romano Inc.has the following data.What is the firm's cash conversion cycle? Inventory Conversion Period = 38 days Receivables Collection Period = 19 days Payables Deferral Period = 38 days ?

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.

Aggarwal Inc.buys on terms of 2/10,net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $350,000.What is the firm's average accounts payable balance? Assume a 365-day year.

Accruals arise automatically from a firm's operations and are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

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

Not 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.

Helena Furnishings wants to reduce its cash conversion cycle.Which of the following actions should it take?

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

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.

A 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.

Other things held constant,which of the following would tend to reduce the cash conversion cycle?

Which of the following is NOT commonly regarded as being a credit policy variable?

If 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.

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 55.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year. )

Which of the following statements is CORRECT?

A firm buys on terms of 2/8,net 45 days,it does not take discounts,and it actually pays after 85 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year. )

A 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 receipts are concentrated at the beginning of each month.

Romano Inc.has the following data.What is the firm's cash conversion cycle? Inventory Conversion Period = 38 days Receivables Collection Period = 19 days Payables Deferral Period = 38 days ?

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.

Aggarwal Inc.buys on terms of 2/10,net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $350,000.What is the firm's average accounts payable balance? Assume a 365-day year.

Accruals arise automatically from a firm's operations and are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

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