Exam 15: Working-Capital Management

Issuers of commercial paper usually maintain lines of credit with banks to back up their short-term financing needs.

If a company's inventory turnover increases from 8 to 10,then its cash conversion cycle will also increase,i.e.,get longer.

Net working capital refers to which of the following?

What three actions can a firm take to minimize its net working capital?

Your company buys supplies on credit terms of 2/10 net 45.Suppose the company makes a purchase of $20,000 today.Which of the following payment options makes the most sense as a general rule?

All of the following are potential disadvantages of short-term debt EXCEPT

The Boyles Ceramics,Inc.established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent.A compensating balance averaging 25 percent of the amount borrowed is required.Prior to the agreement,Boyles had no deposit with the bank.Shortly after signing the agreement,Boyles needed $240,000 to pay off a note that was due.Boyles decides to borrow an amount sufficient to pay the $240,000 note and also to cover the compensating balance.What is the effective annual cost of credit if the loan is made on a discount basis?

Brown Inc.needs to borrow $250,000 for the next 6 months.The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance.Currently,Brown Inc.has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs.What is the annual percentage rate for this financing assuming discounted interest?

The terminal warehouse agreement differs from the field warehouse agreement in that

Floating lien agreements are the least secure form of inventory collateral.

A company decreases the risk of insolvency by financing long-term assets with short-term debt.

Dazzly Diamond Corp.called for credit at the Home Alone Bank of Paris,TX.The terms included a $35,000 maximum loan with interest of 1 percent over prime,and the agreement also requires a 15% compensating balance throughout the year.The prime rate is currently 12 percent. a.If Dazzly Diamond Corp.maintains a balance in its account of $5,250 to $6,000,what is the effective cost of credit through the line-of-credit agreement where the maximum amount of the loan is used? b.Recompute the effective cost of credit to Dazzly Diamond if it will have to borrow the compensating balance and the maximum amount possible under the agreement.

Trade credit is a source of spontaneous financing.

Idaho Mining,Inc.borrows at prime plus 1.5% on its line of credit.The line requires a 15% compensating balance.If the prime rate is 9% and Idaho Mining plans on borrowing for a period of one year,what is the nominal APR of the line of credit?

AJAX Corp.needs $100,000 for the next 30 days.The company has $100,000 in cash it was expecting to use to pay off accounts payable in order to take advantage of the 2/10 net 40 credit terms.Another source of financing is a short-term bank loan with an interest rate of 20%.Would you recommend AJAX borrow the $100,000 it needs from the bank and use the cash it already has to pay its accounts payable and take the cash discount,or would you recommend the company forgo the cash discount and use the $100,000 it has for its financing needs?

The Smith Corporation is a maker of fine stereo components and presently has finished goods inventories of $800,000.They need a short-term bank loan of $400,000 for three months.The bank has proposed two different financing arrangements.The first is a floating lien arrangement at a rate of 22 percent.The second proposal is for a terminal warehouse arrangement at 11 percent.Under the latter proposal,Smith will pay $1,000 a month plus round trip shipping expense of $6,000.Which source of credit should be selected by the Smith Corporation? Explain.

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

A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with

Blastdale Corp.is considering borrowing $15,000 for a 60-day period.The firm will repay the $15,000 principal amount plus $200 in interest.What is the effective annual rate of interest? Use a 360-day year.

A floating lien,chattel mortgage,or terminal warehouse receipt have which of the following in common?