Exam 15: Working Capital Management

Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds.

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed,would want to separate the construction loan from other current liabilities associated with working capital management.

The pledging of receivables differs from factoring in that,under pledging,the lender normally has recourse against the borrower.

The principal goal of most inventory management systems is to balance the costs of ordering,shipping,and receiving goods with the cost of carrying those goods,while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules.

Berkeley Prints Berkeley Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Because Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent. -Refer to Berkeley Prints.What would be the cost to Berkeley of the discounts taken?

An aggressive method of financing an ongoing construction program would be for a company to sell bonds and equity before it actually needs funds,and to invest the proceeds in marketable securities until they are actually needed.

One of the advantages of short-term debt financing is that firms can expand or contract their short-term credit more easily than their long-term credit.

For a firm that makes heavy use of float,being able to forecast its collections and disbursement check clearings is essential.

The cash budget focuses on the firm's ability to generate sufficient cash inflows to meet its required cash outflows.

A firm is offered trade credit terms of 3/15,net 45.The firm does not take the discount,and it pays after 67 days.What is the approximate annual cost of not taking the discount?

Which of the following would cause average inventory holdings to decrease,other things held constant?

Which of the following statements is correct?

In part because money has time value,cash sales are always more profitable and more valuable than credit sales.

Aberwald Corporation Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360-day year.) -Refer to Aberwald Corporation.At the EOQ,what is Aberwald's cost of ordering and carrying inventory?

Berkeley Prints Berkeley Prints expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Because Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent. -Refer to Berkeley Prints.What would be the incremental bad debt losses if the change were made?

Calculate the economic ordering quantity for Nashville Records Inc. ,given the following information: Sales= 15,000 units per year Sales price= $10 per unit Purchase price= $5 Carrying cost= 0.25 times inventory value Fixed cost per order= $1,000

Sound Systems Inc.wants to use the economic ordering quantity model to determine the optimal order quantity of speakers.The wholesale unit purchase price to Sound Systems is $50,and annual sales at a $100 per unit retail price total $50,000.The fixed cost of placing an order is $10,and the carrying cost is 50 percent of the purchase price.What is the EOQ,in units?

A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep.

Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive working capital strategy because of the inherent risks of using short-term financing.

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e.runs out of an inventory item).