Exam 16: Supply Chains and Working Capital Management

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

The cash conversion cycle (CCC)combines three factors: The inventory conversion period,the average collection period,and the payables deferral period,and its purpose is to show how long a firm must finance its working capital.Other things held constant,the shorter the CCC,the more effective the firm's working capital management.

The concept of permanent current operating 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 operating assets represent a minimum level of current assets that must be financed.

Which of the following statements is most consistent with efficient inventory management? The firm has a

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?

On average,a firm collects checks totaling $250,000 per day.It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm.Assume that (1)a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2)the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs $25,000 annually.

The cash budget and the capital budget are handled separately,and although they are both important,they are developed completely independently of one another.

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

Buchholz Corporation follows a moderate current asset investment policy,but it is now considering a change,perhaps to a restricted or maybe to a relaxed policy.The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%.With a restricted policy,current assets will be 15% of sales,while under a relaxed policy they will be 25% of sales.What is the difference in the projected ROEs between the restricted and relaxed policies?

Marshall Inc.recently hired your consulting firm to improve the company's performance.It has been highly profitable but has been experiencing cash shortages due to its high growth rate.As one part of your analysis,you want to determine the firm's cash conversion cycle.Using the following information and a 365-day year,what is the firm's present cash conversion cycle? Average inventary = \ 75,000 Annual sales = \ 600,000 Annual cost af godis sold = \ 360,000 Average accounts receivable = \ 160,000 Average accounts payable = \ 25,000

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

An increase in any current asset must be accompanied by an equal increase in some current liability.

Data on Liu Inc.for the most recent year are shown below,along with the inventory conversion period (ICP)of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average.If this were done,by how much would inventories decline? Use a 365-day year. Cost of goods sold = $\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$ $\quad$ $\$ 85,000$ Inventory = $\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$$\quad$ $\$ 20,000$ Inventory conversion period $(\mathrm{ICP})=$ $\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$$\quad$ $85.88$ Benchmark inventory conversion period $(\mathrm{ICP})=$ $\quad$$\quad$$\quad$ $38.00$

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

Albrecht Inc.is a no-growth firm whose sales fluctuate seasonally,causing total assets to vary from $320,000 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?