Exam 15: Working-Capital Management

The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used.

Commercial paper is an example of spontaneous financing because it is generated by the day-to-day operations of a company.

The cost of trade credit varies directly with the size of the cash discount and inversely with the length of time between the end of the discount period and the final due date.

MovieTone,Inc.is a producer and distributor of specialty DVDs.It sells directly to large retail firms on terms of net 60 and has average monthly sales of $350,000.It has recently decided to pledge all of its accounts receivable to its bank.The bank advances up to 80 percent of the face value of these receivables at a rate of 4 percent over the prime rate,while charging 2.5 percent on all receivables pledged for processing to cover billing and collection services.Prior to this arrangement MovieTone was spending $50,000 a year on its credit department.The prime rate is 6 percent. a.What is the average level of accounts receivable? b.What is the effective cost of using this short-term credit for one year?

In the context of managing working capital,the hedging principle refers to which of the following?

Hyper Retail Outlets sell goods on terms of net 40.The store's average monthly sales (all on credit)are $70,000.Hyper pledges all of its receivables to the bank,which advances 80% of the face value of the receivables at a rate of 2.5% above prime.The bank also charges a 1% processing fee on all receivables pledged.Hyper borrows the full amount possible,and the current prime rate is 5%.What is the annual percentage rate (APR)of using this source of financing for one full year?

List and describe at least three advantages accrue to the user of commercial paper.

Which of the following is NOT a source of unsecured short-term credit?

Which of the following is most likely to be a temporary source of financing?

Symco Corp.needs $500,000 for 90 days to get through a period of unexpectedly high oil prices.Symco's line of credit with the bank allows the company to borrow at 6% per year with a compensating balance of 10% of the amount borrowed.Currently,Symco has no money on deposit with the bank. a.Calculate the amount Symco must borrow to meets its needs plus the compensating balance. b.What is the annual percentage rate for this financing? c.If the bank requires discount interest,what is the annual percentage rate for this financing?

In general,interest rates on short-term debt are higher than interest rates on long-term debt because the borrower has less time to repay the loans,and hence the risk to the lender is higher.

Which of the following is an advantage of the use of current liabilities to finance assets?

Minimum levels of inventory and accounts receivable that will be maintained throughout the year are current assets,and therefore considered temporary investments.

One way to improve a company's cash conversion cycle is to increase its days sales outstanding.

The effective interest rate on short-term loans from Bank A is 12.5 percent per year.Bank B claims that their interest rate is only 11 percent per year.However,Bank B charges interest on a discount basis.Which bank is charging the lowest effective rate of interest on a one-year loan?

Higher liquidity (holding larger cash and marketable securities balances)generally results in a lower return on equity.

Which of the following statements regarding a line of credit is true?

Achieving a lower inventory balance through working capital management can result in savings from both carrying costs and losses associated with obsolete inventory.

A bank is legally obligated to provide credit under a revolving credit agreement,but not under a line of credit.

Total assets must always equal the sum of temporary,permanent,and spontaneous sources of financing.