Question 1

If you delay paying your suppliers by an additional ten days,then:

Accepted Answer

A)  your payables turnover rate will increase. 
B)  you will require less bank financing of your operations. 
C)  the cash cycle will increase by ten days. 
D)  your operating cycle will lengthen by ten days. 
E)  your stock-out costs will risE. 
A)  your payables turnover rate will increase. 
B)  you will require less bank financing of your operations. 
C)  the cash cycle will increase by ten days. 
D)  your operating cycle will lengthen by ten days. 
E)  your stock-out costs will risE. B

Question 2

Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower. Why,then,would borrowers agree to such terms?
 What other types of financing are there that the firm could use as an alternative?

Accepted Answer

Revolvers are very flexible lending arrangements and it is likely borrowers will value this flexibility,particularly if they follow a restrictive current asset management policy. Furthermore,since the compensating balance is typically required only if the borrower draws on the line,it is only a cost to the firm when borrowing is actually required. Alternative types of financing include letters of credit,accounts receivable financing (including factoring),inventory loans,commercial paper and trade credit.

Question 3

List and describe the three basic types of secured inventory loans. What are the advantages and disadvantages of each type of loan?

Accepted Answer

The three types are blanket lien,trust receipts and field warehouse financing. The blanket lien is certainly the easiest for the firm since the lender just takes a lien against all of the firm's inventory and the borrower typically does not have to give the lender precise lists of what constitutes inventory on a regular basis. Trust receipt financing requires the borrower and lender to specify the exact inventory that backs up each advance. This can be a time-consuming and cumbersome type of financing for the firm. Field warehouse financing requires an independent company supervise the collateral for the lender. This,too,can be a cumbersome type of financing.

Question 4

Wilson,Inc. has an inventory turnover rate of 15,an accounts payable period of 54 days and an accounts receivable period of 37 days. What is the length of the cash cycle?

Accepted Answer

A)  -7.33 days 
B)  -2.00 days 
C)  2.00 days 
D)  6.50 days 
E)  7.33 days 
A)  -7.33 days 
B)  -2.00 days 
C)  2.00 days 
D)  6.50 days 
E)  7.33 days

Question 5

Which of the following increases cash?

Accepted Answer

A)  A decrease in long term debt. 
B)  An increase in equity. 
C)  An increase in current liabilities. 
D)  An increase in equity and an increase in current liabilities. 
E)  A decrease in long term debt; an increase in equity; and an increase in current liabilities. 
A)  A decrease in long term debt. 
B)  An increase in equity. 
C)  An increase in current liabilities. 
D)  An increase in equity and an increase in current liabilities. 
E)  A decrease in long term debt; an increase in equity; and an increase in current liabilities.

Question 6

The Jetson Co. has an $80,000 line of credit with a 12% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed. What is the effective annual interest rate if the firm needs $45,000 of cash for one year?

Accepted Answer

A)  10.80% 
B)  11.44% 
C)  12.12% 
D)  13.33% 
E)  13.78% 
A)  10.80% 
B)  11.44% 
C)  12.12% 
D)  13.33% 
E)  13.78%

Question 7

Net working capital is defined as:

Accepted Answer

A)  the current assets in a business. 
B)  the difference between current assets and current liabilities. 
C)  the present value of short-term cash flows. 
D)  the difference between all assets and liabilities. 
E)  None of these. 
A)  the current assets in a business. 
B)  the difference between current assets and current liabilities. 
C)  the present value of short-term cash flows. 
D)  the difference between all assets and liabilities. 
E)  None of these.

Question 8

Which one of the following statements is correct?

Accepted Answer

A)  A farmer generally uses a type of financing that employs trust receipts to provide financing during the growing season. 
B)  A third-party inventory manager is generally involved with the lender and the borrower in a floor plan arrangement. 
C)  A drug store is more apt to have a financing arrangement involving trust receipts than one involving a blanket lien. 
D)  Floor plan arrangements are most applicable to large, easily identifiable types of inventory. 
E)  A direct loan from a bank is generally less expensive than a loan involving commercial paper. 
A)  A farmer generally uses a type of financing that employs trust receipts to provide financing during the growing season. 
B)  A third-party inventory manager is generally involved with the lender and the borrower in a floor plan arrangement. 
C)  A drug store is more apt to have a financing arrangement involving trust receipts than one involving a blanket lien. 
D)  Floor plan arrangements are most applicable to large, easily identifiable types of inventory. 
E)  A direct loan from a bank is generally less expensive than a loan involving commercial paper.

Question 9

Which of the following statements are correct concerning the cash balance of a firm?
I. Most firms plan on maintaining a minimum cash balance at all times.
II. The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum cash balance retained by the firm.
III. The cumulative cash surplus at the end of March is used as the beginning cash balance for April when you are compiling a projected monthly cash balance report.
IV. A negative cumulative cash surplus indicates a borrowing need by the firm.

Accepted Answer

A)  I and III only 
B)  II and IV only 
C)  I and IV only 
D)  II and III only 
E)  I and II only 
A)  I and III only 
B)  II and IV only 
C)  I and IV only 
D)  II and III only 
E)  I and II only

Question 10

Your bank offers you a $100,000 line of credit with an interest rate of 2.5% per quarter. The loan agreement also requires that 4% of the unused portion of the credit line be deposited in a non-interest bearing account as a compensating balance. Your short-term investments are paying 1.25% per quarter. What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume that both the funds you borrow and the funds you invest use compound interest.

Accepted Answer

A)  5.00% 
B)  5.05% 
C)  5.09% 
D)  5.13% 
E)  5.25% 
A)  5.00% 
B)  5.05% 
C)  5.09% 
D)  5.13% 
E)  5.25%

Question 11

Which of the following decreases cash?

Accepted Answer

A)  A decrease in current assets other than cash. 
B)  A decrease in fixed assets. 
C)  An increase in current liabilities. 
D)  A decrease in current assets other than cash and an increase in current liabilities. 
E)  None of these. 
A)  A decrease in current assets other than cash. 
B)  A decrease in fixed assets. 
C)  An increase in current liabilities. 
D)  A decrease in current assets other than cash and an increase in current liabilities. 
E)  None of these.

Question 12

Which of the following changes cash?

Accepted Answer

A)  A decrease in fixed assets. 
B)  A decrease in current liabilities. 
C)  An increase in current liabilities. 
D)  A decrease in fixed assets and an increase in current liabilities. 
E)  All of 
A)  A decrease in fixed assets. 
B)  A decrease in current liabilities. 
C)  An increase in current liabilities. 
D)  A decrease in fixed assets and an increase in current liabilities. 
E)  All of

Question 13

The length of time between the payment for inventory and the collection of cash from receivables is called the:

Accepted Answer

A)  operating cycle. 
B)  inventory period. 
C)  accounts receivable period. 
D)  accounts payable period. 
E)  cash cyclE. 
A)  operating cycle. 
B)  inventory period. 
C)  accounts receivable period. 
D)  accounts payable period. 
E)  cash cyclE.

Question 14

Assets presented on the balance sheet are in order of accounting liquidity. Accounting liquidity refers to:

Accepted Answer

A)  how much inventory a brewer keeps. 
B)  a firm's ability to sell its product. 
C)  the risk of receiving payment on their accounts. 
D)  ability and time it takes to convert assets to cash. 
E)  None of these. 
A)  how much inventory a brewer keeps. 
B)  a firm's ability to sell its product. 
C)  the risk of receiving payment on their accounts. 
D)  ability and time it takes to convert assets to cash. 
E)  None of these.

Question 15

Quiet Press has a 45 day accounts receivable period. The estimated quarterly sales for this year,starting with the first quarter,are $1,200,$1,400,$1,900 and $3,200,respectively. How much does the firm expect to collect in the third quarter? Assume that a year has 360 days.

Accepted Answer

A)  $1,300 
B)  $1,400 
C)  $1,650 
D)  $1,900 
E)  $2,550 
A)  $1,300 
B)  $1,400 
C)  $1,650 
D)  $1,900 
E)  $2,550

Question 16

Candra's Cameras,Inc. has sales of $642,000 and average accounts payable of $36,400. The cost of goods sold is equivalent to 65% of sales. How long does it take Candra's Cameras to pay its suppliers?

Accepted Answer

A)  11.46 days 
B)  13.45 days 
C)  20.69 days 
D)  26.18 days 
E)  31.85 days 
A)  11.46 days 
B)  13.45 days 
C)  20.69 days 
D)  26.18 days 
E)  31.85 days

Question 17

Which two of the following four conditions are most apt to cause a quarterly cash shortfall for a firm which is financially sound?
I. a relatively constant level of sales
II. periodic expenditures for major equipment purchases
III. a steady dependence on a constant level of external financing
IV. highly seasonal sales

Accepted Answer

A)  I and III only 
B)  II and IV only 
C)  III and IV only 
D)  I, II and III only 
E)  II, III and IV only 
A)  I and III only 
B)  II and IV only 
C)  III and IV only 
D)  I, II and III only 
E)  II, III and IV only

Question 18

A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a:

Accepted Answer

A)  compensating balance. 
B)  cleanup loan. 
C)  letter of credit. 
D)  line of credit. 
E)  roll-over. 
A)  compensating balance. 
B)  cleanup loan. 
C)  letter of credit. 
D)  line of credit. 
E)  roll-over.

Question 19

Which one of the following will decrease the operating cycle?

Accepted Answer

A)  Decreasing the days sales in inventory 
B)  Decreasing the days in accounts payable 
C)  Decreasing the cash cycle by increasing the accounts payable period 
D)  Decreasing the accounts receivable turnover rate 
E)  Decreasing the speed at which inventory is sold 
A)  Decreasing the days sales in inventory 
B)  Decreasing the days in accounts payable 
C)  Decreasing the cash cycle by increasing the accounts payable period 
D)  Decreasing the accounts receivable turnover rate 
E)  Decreasing the speed at which inventory is sold

Question 20

Salem,Inc. has an inventory turnover of 15 and an accounts receivable turnover of 9. The accounts payable period is 51 days. What is the length of the cash cycle?

Accepted Answer

A)  13.89 days 
B)  14.07 days 
C)  14.23 days 
D)  18.79 days 
E)  23.00 days 
A)  13.89 days 
B)  14.07 days 
C)  14.23 days 
D)  18.79 days 
E)  23.00 days

Exam 26: Short-Term Finance and Planning

If you delay paying your suppliers by an additional ten days,then:

Compensating balances are frequently a part of revolving lending arrangements with banks,yet they add to the cost of financing for the borrower. Why,then,would borrowers agree to such terms? What other types of financing are there that the firm could use as an alternative?

List and describe the three basic types of secured inventory loans. What are the advantages and disadvantages of each type of loan?

Wilson,Inc. has an inventory turnover rate of 15,an accounts payable period of 54 days and an accounts receivable period of 37 days. What is the length of the cash cycle?

Which of the following increases cash?

The Jetson Co. has an $80,000 line of credit with a 12% interest rate and a 10% compensating balance requirement which is based on the total amount borrowed. What is the effective annual interest rate if the firm needs $45,000 of cash for one year?

Net working capital is defined as:

Which one of the following statements is correct?

Which of the following decreases cash?

Which of the following changes cash?

The length of time between the payment for inventory and the collection of cash from receivables is called the:

Assets presented on the balance sheet are in order of accounting liquidity. Accounting liquidity refers to:

Quiet Press has a 45 day accounts receivable period. The estimated quarterly sales for this year,starting with the first quarter,are $1,200,$1,400,$1,900 and $3,200,respectively. How much does the firm expect to collect in the third quarter? Assume that a year has 360 days.

Candra's Cameras,Inc. has sales of $642,000 and average accounts payable of $36,400. The cost of goods sold is equivalent to 65% of sales. How long does it take Candra's Cameras to pay its suppliers?

A fraction of the available credit on a loan agreement deposited by the borrower with the bank in a low or non-interest-bearing account is called a:

Which one of the following will decrease the operating cycle?

Salem,Inc. has an inventory turnover of 15 and an accounts receivable turnover of 9. The accounts payable period is 51 days. What is the length of the cash cycle?

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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