Exam 15: Working-Capital Management

What are some examples of unsecured and secured sources of short-term credit?

Richenstein Enterprises is in the business of selling dishwashers.The firm needs $192,000 to finance an anticipated expansion in receivables due to increased sales.Richenstein's credit terms are net 40,and its average monthly credit sales are $180,000.In general,the firm's customers pay within the credit period; thus,the firm's average accounts receivable balance is $240,000. The comptroller of Richenstein Enterprises,Mr.Gee,approached their bank for the needed capital,pledging the accounts receivable as collateral.The bank offered to make the loan at a rate of 2 percent over prime plus a 1 percent processing charge on all receivables pledged.The bank agreed to loan up to 80 percent of the face value of the receivables pledged. a.Estimate the cost of the receivables loan to Richenstein where the firm borrows the $192,000.The prime rate is currently 13%. b.Gee also requested a line of credit for $192,000 from the bank.The bank agreed to grant the necessary line of credit at a rate of 4% over prime and required a 12% compensating balance Gee currently maintains an average demand deposit of $40,000.Estimate the cost of the line of credit to Richenstein. c.Which source of credit should Richenstein Enterprises select?

Credit terms of 1/10 net 30 means that the buyer may take a 10% discount (1/10)if the bill in paid within 30 days.

Which of the following actions would improve a firm's liquidity?

The hedging principle implies that permanent asset investments not financed by spontaneous sources should be financed with permanent sources,and temporary investments not financed by spontaneous sources should be financed with temporary sources.

Major sources of secured credit include commercial banks,finance companies,and factors.

With regard to the hedging principle,which of the following assets should be financed with current liabilities?

An inventory loan agreement in which the inventories pledged as collateral are physically separated from the firm's other inventory and placed under the control of a third-party is called

Discuss the similarities and differences between a line of credit and a revolving credit agreement.

Working capital management involves managing a firm's liquidity.

Quincy Fathows & Co.plans to issue commercial paper for the first time in its 85-year history.The firm plans to issue $400,000 in 120-day maturity notes.The paper will carry a 13% quarterly compounded rate with discounted interest and will cost Quincy Fathows $8,000 in advance to issue. a.What is the effective cost of credit to Quincy Fathows? b.What other factors should the firm consider in analyzing whether or not to issue the commercial paper?

You are working on your company's cash budget for the coming year and you believe there may be short periods of time where financing is required.Which of the following sources of short-term financing is most certain to be available when needed?

Crenshaw Inc.has a $400,000 line of credit with a local bank.The bank requires a compensating balance of 10% of the loan and extends credit to Crenshaw at 1% over the current prime rate.Crenshaw needs the use of $200,000 for the three-month period.They currently have no deposits with the lending bank. a.What will the effective annual cost of this credit be? (Assume a 360-day year and a 9% prime rate.) b.Using the above information,what would be the effective interest rate if the firm discounted the interest on the loan?

Which of the following sources of short-term financing is likely to have the highest interest rate?

If a firm relies on short-term debt or current liabilities in financing its asset investments,and all other things remain the same,what can be said about the firm's liquidity?

Short-term debt has a greater risk of illiquidity than long-term debt because it must be rolled over more frequently and its use creates more uncertainty concerning future interest rates.

The risk of illiquidity is increased if either cash and marketable securities are decreased,or if the firm relies more heavily on long-term debt.

The Native Industries,Inc.is going to issue 180-day commercial paper to raise $25 million.It anticipates a discounted interest rate of 13 percent,and dealer placement costs of approximately $60,000.What is the effective annual cost of credit to Native Industries?

The effective annual cost of not taking advantage of the 1/10,net 60 terms offered by a supplier is

The cash conversion cycle is equal to the days of sales outstanding plus the days of sales in inventory plus the days of payables outstanding.