Question 1

Create the statement of sources and uses of cash from the following entries:

Accepted Answer

The answer of Create the statement of sources and uses...

Question 2

Company which sees a customer pay a $2,500 bill resulting from a previous sale will see a $2,500 increase in cash.

Accepted Answer

A) True 
 B)False

Question 3

The text suggests that, of the three financing strategies shown, the relaxed strategy is probably the worst from the standpoint of managerial evaluation.Why is this thought to be the case, and when may it be an acceptable practice?

Accepted Answer

The relaxed strategy of funding the firm

Question 4

Which of the following is more likely for a firm practicing the "relaxed" strategy of long- versus short-term borrowing at the height of sales demand?

Accepted Answer

A) It will borrow heavily on a short-term basis 
B) It will invest heavily in marketable securities 
C) It will borrow heavily on a long-term basis 
D) Long-term financing will approximate capital requirements 
A) It will borrow heavily on a short-term basis 
B) It will invest heavily in marketable securities 
C) It will borrow heavily on a long-term basis 
D) Long-term financing will approximate capital requirements

Question 5

Carrying costs are the cost of holding inventory.

Accepted Answer

A) True 
 B)False

Question 6

Company which borrows $1 million long-term and invests the proceeds in inventory will see a $1 million increase in its net working capital.

Accepted Answer

A) True 
 B)False

Question 7

Why do firms need to invest in net working capital?

Accepted Answer

Short-term financial planning is concern

Question 8

CumChan has issued commercial paper with a face value of $250,000 that will mature in 60 days.The present market value of the paper is $242,000.Interest on the paper is, therefore:

Accepted Answer

$250,000-$242,000 = $8,000.Over the 60-d

Question 9

Which of the following would not be included among the costs of carrying inventory?

Accepted Answer

A) Obsolescence 
B) Opportunity cost of capital 
C) Raw material cost 
D) Risk of pilferage 
A) Obsolescence 
B) Opportunity cost of capital 
C) Raw material cost 
D) Risk of pilferage

Question 10

If the Statement of Sources and Uses of Cash shows a decrease in cash balance, which of the following changes might have eliminated that decrease?

Accepted Answer

A) Increase in cash dividends paid 
B) Increase in accounts payable 
C) Increase in accounts receivable 
D) Increase in inventories 
A) Increase in cash dividends paid 
B) Increase in accounts payable 
C) Increase in accounts receivable 
D) Increase in inventories

Question 11

Net working capital will decrease when a firm buys raw materials on credit.

Accepted Answer

A) True 
 B)False

Question 12

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.

Accepted Answer

A) True 
 B)False

Question 13

Calculate the change in cash given the following information:

Accepted Answer

A) $532,500 
B) $522,500 
C) $512,500 
D) $502,500 
A) $532,500 
B) $522,500 
C) $512,500 
D) $502,500

Question 14

Firms that continually invest in non-trivial amounts of marketable securities may be guilty of:

Accepted Answer

A) Excessive short-term borrowing 
B) Not matching their sources and uses of cash 
C) Incurring excessive shortage costs 
D) Not maximizing shareholder returns 
A) Excessive short-term borrowing 
B) Not matching their sources and uses of cash 
C) Incurring excessive shortage costs 
D) Not maximizing shareholder returns

Question 15

Which of the following is least likely to be correct about the factoring of receivables?

Accepted Answer

A) The selling firm bears the risk of default 
B) The higher the perceived quality of the receivables, the lower the discount rate 
C) The discount is paid by the selling firm in the form of reduced sales price 
D) Factoring may be the cheapest method of avoiding a cash flow problem 
A) The selling firm bears the risk of default 
B) The higher the perceived quality of the receivables, the lower the discount rate 
C) The discount is paid by the selling firm in the form of reduced sales price 
D) Factoring may be the cheapest method of avoiding a cash flow problem

Question 16

Customers may change firms when faced with minimal inventory selection.Sales lost in this manner illustrate the:

Accepted Answer

A) Costs of carrying inventory 
B) Lack of customer loyalty 
C) Need to maintain a high current ratio 
D) Impact of shortage costs 
A) Costs of carrying inventory 
B) Lack of customer loyalty 
C) Need to maintain a high current ratio 
D) Impact of shortage costs

Question 17

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded quarterly?

Accepted Answer

A) 12.03% 
B) 13.00% 
C) 14.05% 
D) 15.87% Effective Annual Rate with Compensating Balances = 
A) 12.03% 
B) 13.00% 
C) 14.05% 
D) 15.87% Effective Annual Rate with Compensating Balances =

Question 18

Some bank loans require the firm to maintain some amount of money on a balance at the bank which is known as:

Accepted Answer

A) Compensating balance 
B) Transactions motive 
C) Precautionary motive 
D) Simple interest balance 
A) Compensating balance 
B) Transactions motive 
C) Precautionary motive 
D) Simple interest balance

Question 19

Which of the following is not a source of cash?

Accepted Answer

A) Net income 
B) Repayment of a bank loan 
C) Reduction in accounts receivable 
D) Depreciation 
A) Net income 
B) Repayment of a bank loan 
C) Reduction in accounts receivable 
D) Depreciation

Question 20

If the effective rate of interest if 15.55% based on monthly compounding, determine the nominal rate of interest.

Accepted Answer

A) 17.54% 
B) 16.54% 
C) 15.54% 
D) 14.54% 
A) 17.54% 
B) 16.54% 
C) 15.54% 
D) 14.54%

Exam 20: Working Capital Management

Create the statement of sources and uses of cash from the following entries:

Company which sees a customer pay a $2,500 bill resulting from a previous sale will see a $2,500 increase in cash.

The text suggests that, of the three financing strategies shown, the relaxed strategy is probably the worst from the standpoint of managerial evaluation.Why is this thought to be the case, and when may it be an acceptable practice?

Which of the following is more likely for a firm practicing the "relaxed" strategy of long- versus short-term borrowing at the height of sales demand?

Carrying costs are the cost of holding inventory.

Company which borrows $1 million long-term and invests the proceeds in inventory will see a $1 million increase in its net working capital.

Why do firms need to invest in net working capital?

CumChan has issued commercial paper with a face value of $250,000 that will mature in 60 days.The present market value of the paper is $242,000.Interest on the paper is, therefore:

Which of the following would not be included among the costs of carrying inventory?

If the Statement of Sources and Uses of Cash shows a decrease in cash balance, which of the following changes might have eliminated that decrease?

Net working capital will decrease when a firm buys raw materials on credit.

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.

Calculate the change in cash given the following information:

Firms that continually invest in non-trivial amounts of marketable securities may be guilty of:

Which of the following is least likely to be correct about the factoring of receivables?

Customers may change firms when faced with minimal inventory selection.Sales lost in this manner illustrate the:

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded quarterly?

Some bank loans require the firm to maintain some amount of money on a balance at the bank which is known as:

Which of the following is not a source of cash?

If the effective rate of interest if 15.55% based on monthly compounding, determine the nominal rate of interest.

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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