Question 1

If a firm decided to speed up its collection from its customers by reducing the receivables period and kept the inventory period and payable period the same, then:

Accepted Answer

A) Cash conversion cycle will increase 
B) Cash conversion cycle will decrease 
C) The firm's investment in working capital will be minimized 
D) Investment in working capital will be maximized 
A) Cash conversion cycle will increase 
B) Cash conversion cycle will decrease 
C) The firm's investment in working capital will be minimized 
D) Investment in working capital will be maximized

Question 2

A line of credit would be considered:

Accepted Answer

A) An agreement to borrow up to a specific total amount on demand from a bank 
B) A short-term unsecured loan with minimum interest expense 
C) A secured loan to be amortized over three to five years 
D) A long-term, permanent source of funding 
A) An agreement to borrow up to a specific total amount on demand from a bank 
B) A short-term unsecured loan with minimum interest expense 
C) A secured loan to be amortized over three to five years 
D) A long-term, permanent source of funding

Question 3

Which of the following would not be considered a use of cash?

Accepted Answer

A) Dividends 
B) Decreased accounts payable 
C) Depreciation 
D) Increased accounts receivable 
A) Dividends 
B) Decreased accounts payable 
C) Depreciation 
D) Increased accounts receivable

Question 4

A firm faces a liquidity crunch and must decide between borrowing from a bank at 12% interest and stretching its payables for one quarter.If it stretches the payables it will forgo a 2% discount for timely payment.Based solely on cash flows, which would you suggest?

Accepted Answer

A) Stretching saves the firm approximately 8% per year 
B) Use the bank loan; forgoing a cash discount is costly 
C) Stretch the payables and finance at a savings of approximately 3.75% annually 
D) Use the bank loan because it represents simple interest 
A) Stretching saves the firm approximately 8% per year 
B) Use the bank loan; forgoing a cash discount is costly 
C) Stretch the payables and finance at a savings of approximately 3.75% annually 
D) Use the bank loan because it represents simple interest

Question 5

Ignoring the risk of theft, cash balances cannot spoil, yet managers are concerned with carrying costs.Why?

Accepted Answer

A) The federal government may devalue the currency 
B) Higher balances require additional supervisors 
C) Cash balances are idle and face an opportunity cost 
D) Embezzlement is a real risk in most firms 
A) The federal government may devalue the currency 
B) Higher balances require additional supervisors 
C) Cash balances are idle and face an opportunity cost 
D) Embezzlement is a real risk in most firms

Question 6

What was the sales volume in the current quarter if beginning accounts receivable, at $5,000, was $1,000 higher than ending, and $20,000 was collected?

Accepted Answer

A) $19,000 
B) $20,000 
C) $21,000 
D) $24,000 Ending accounts receivable = Beginning accounts receivable + sales - collections
$4,000 = $5,000 + sales - $20,000 
A) $19,000 
B) $20,000 
C) $21,000 
D) $24,000 Ending accounts receivable = Beginning accounts receivable + sales - collections
$4,000 = $5,000 + sales - $20,000

Question 7

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

Accepted Answer

A) True 
 B)False

Question 8

Calculate the accounts receivable period for a firm with annual sales of $10 million and average accounts receivable of $2 million.

Accepted Answer

A) 18.25 days 
B) 20.00 days 
C) 51.00 days 
D) 73.00 days Accounts receivable period = 
A) 18.25 days 
B) 20.00 days 
C) 51.00 days 
D) 73.00 days Accounts receivable period =

Question 9

What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 45 days, and an annual cost of goods sold of $18 million?

Accepted Answer

A) 14.59 days 
B) 46.25 days 
C) 75.41 days 
D) 136.25 days Cash conversion cycle = inventory period + receivables period - accounts payable period
= 
A) 14.59 days 
B) 46.25 days 
C) 75.41 days 
D) 136.25 days Cash conversion cycle = inventory period + receivables period - accounts payable period
=

Question 10

Company which sees a customer pay a $2,500 bill resulting from a previous sale will see no change in its net working capital.

Accepted Answer

A) True 
 B)False

Question 11

When a loan is secured by receivables, the firm assigns the receivables to the bank.If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.The risk of default on the receivables is now borne by the bank.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following would not be included as a source of short-term financing?

Accepted Answer

A) Line of credit 
B) Increase in the minimum operating cash balance 
C) Sale of marketable securities 
D) Stretching accounts payable 
A) Line of credit 
B) Increase in the minimum operating cash balance 
C) Sale of marketable securities 
D) Stretching accounts payable

Question 13

A firm sells its accounts receivable to a factor at a 5% discount.If the average collection period is 1 month, determine the effective annual rate of interest on the factoring.

Accepted Answer

A) 90.06% 
B) 85.06% 
C) 80.06% 
D) 75.06% 
A) 90.06% 
B) 85.06% 
C) 80.06% 
D) 75.06%

Question 14

If a firm's current ratio exceeds 1.0, what happens as a result of paying cash to reduce accounts payable?

Accepted Answer

A) Net working capital increases 
B) Net working capital decreases 
C) Current ratio increases 
D) Current ratio decreases 
A) Net working capital increases 
B) Net working capital decreases 
C) Current ratio increases 
D) Current ratio decreases

Question 15

What motivation is provided for managers not to follow the relaxed strategy of long- versus short-term financing?

Accepted Answer

A) Transaction costs are required to continually obtain financing 
B) Short-term investment income is often unattractive 
C) Investment opportunities must frequently be ignored 
D) Long-term financing has burdensome tax consequences 
A) Transaction costs are required to continually obtain financing 
B) Short-term investment income is often unattractive 
C) Investment opportunities must frequently be ignored 
D) Long-term financing has burdensome tax consequences

Question 16

Issuing additional long-term debt of $5 million and buying new long-term assets worth $5 million will result in a net cash flow of:

Accepted Answer

A) $5 million 
B) $10 million 
C) Zero 
D) $15 million 
A) $5 million 
B) $10 million 
C) Zero 
D) $15 million

Question 17

An increase in long-term assets is a source of cash.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following is least likely to be correct for a firm that repeatedly stretches its payables?

Accepted Answer

A) The firm may receive more favourable status from suppliers due to its volume of purchases 
B) The firm may reduce its explicit short-term interest expense 
C) The cost of forgone discounts may exceed the cost of bank credit 
D) The firm may be labeled as a credit risk 
A) The firm may receive more favourable status from suppliers due to its volume of purchases 
B) The firm may reduce its explicit short-term interest expense 
C) The cost of forgone discounts may exceed the cost of bank credit 
D) The firm may be labeled as a credit risk

Question 19

Calculate the Cash Conversion and Operating cycle, given the following information:

Accepted Answer

A) 9.39 days and 82.39 days 
B) 15.45 days and 101.52 days 
C) 17.67 days and 111.56 days 
D) 20.25 days and 115.50 days 
A) 9.39 days and 82.39 days 
B) 15.45 days and 101.52 days 
C) 17.67 days and 111.56 days 
D) 20.25 days and 115.50 days

Question 20

A firm's inventory period can be estimated by the ratio of average inventory to daily output.

Accepted Answer

A) True 
 B)False

Exam 20: Working Capital Management

If a firm decided to speed up its collection from its customers by reducing the receivables period and kept the inventory period and payable period the same, then:

A line of credit would be considered:

Which of the following would not be considered a use of cash?

A firm faces a liquidity crunch and must decide between borrowing from a bank at 12% interest and stretching its payables for one quarter.If it stretches the payables it will forgo a 2% discount for timely payment.Based solely on cash flows, which would you suggest?

Ignoring the risk of theft, cash balances cannot spoil, yet managers are concerned with carrying costs.Why?

What was the sales volume in the current quarter if beginning accounts receivable, at $5,000, was $1,000 higher than ending, and $20,000 was collected?

If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.

Calculate the accounts receivable period for a firm with annual sales of $10 million and average accounts receivable of $2 million.

What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 45 days, and an annual cost of goods sold of $18 million?

Company which sees a customer pay a $2,500 bill resulting from a previous sale will see no change in its net working capital.

When a loan is secured by receivables, the firm assigns the receivables to the bank.If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.The risk of default on the receivables is now borne by the bank.

Which of the following would not be included as a source of short-term financing?

A firm sells its accounts receivable to a factor at a 5% discount.If the average collection period is 1 month, determine the effective annual rate of interest on the factoring.

If a firm's current ratio exceeds 1.0, what happens as a result of paying cash to reduce accounts payable?

What motivation is provided for managers not to follow the relaxed strategy of long- versus short-term financing?

Issuing additional long-term debt of $5 million and buying new long-term assets worth $5 million will result in a net cash flow of:

An increase in long-term assets is a source of cash.

Which of the following is least likely to be correct for a firm that repeatedly stretches its payables?

Calculate the Cash Conversion and Operating cycle, given the following information:

A firm's inventory period can be estimated by the ratio of average inventory to daily output.

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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