Exam 16: Supply Chains and Working Capital Management

The 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.

During the coming year,Gold & Gold wants to increase its free cash flow by $180 million,which should result in a higher EVA and stock price.The CFO has made these projections for the upcoming year: •EBIT is projected to equal $850 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 40%. •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?

Shorter-term cash budgets-say a daily cash budget for the next month-are generally used for actual cash control while longer-term cash budgets-say monthly cash budgets for the next year-are generally used for planning purposes.

If a firm has a large percentage of accounts over 30 days old,this is proof positive that its receivables manager is not doing a good job.

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.

Noddings Inc.needs to raise more capital because its business is booming.The company purchases supplies on terms of 1/10 net 20,and it currently takes the discount.One way of getting the needed funds would be to forgo the discount,and the firm's owner believes she could delay payment to 40 days without adverse effects.What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)

Loans from commercial banks generally appear on balance sheets as notes payable.A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

The 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.

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Net operating working capital is defined as operating current assets minus operating current liabilities..

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

The company you just started has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Frosty Corporation has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Angual sales = \ 4,000 Annual cost of goads sold = \ 31,500 Inventory = \ 4,000 Accaunts recervable = \ 2,000 Accaunts payable = 2,400

If the yield curve is upward sloping,then short-term debt will be cheaper than long-term debt.Thus,if a firm's CFO expects the yield curve to continue to have an upward slope,this would tend to cause the current ratio to be relatively low,other things held constant.

If a firm busy on terms of 2/10 net 30,it should pay as early as possible during the discount period.

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

Trade credit can be separated into two components: free trade credit,which is credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.

Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year).The company carries average inventory of $750,000.Its annual sales are $10 million,its cost of goods sold is 75% of annual sales,and its average collection period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days,and it pays on time.The CFO believes he can reduce the average inventory to $647,260 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

The relative profitability of a firm that employs an aggressive current asset financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Which of the following statements is CORRECT?