Question 1

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

Accepted Answer

A) True 
 B)False

Question 2

For the Cook County Company,the average age of accounts receivable is 60 days,the average age of accounts payable is 45 days,and the average age of inventory is 72 days.Assuming a 360-day year,what is the length of the firm's cash conversion cycle?

Accepted Answer

A)  87 days 
B)  90 days 
C)  65 days 
D)  48 days 
E)  66 days 
A)  87 days 
B)  90 days 
C)  65 days 
D)  48 days 
E)  66 days

Question 3

Which of the following statements is correct?

Accepted Answer

A)  In a factoring arrangement,the factor always performs three functions: (1)credit checking, (2)lending,and (3)receivables collection. 
B)  The pledging of accounts receivable involves a transfer of the risk associated with accounts receivable from the borrower to the lender. 
C)  In a factoring arrangement,the seller can select various combinations of credit checking,lending,and risk bearing the factor performs by changing provisions in the factoring agreement. 
D)  In a factoring agreement,the factor would not perform the credit checking and risk taking functions without performing the lending function,because the former are required before the factor can lend to the seller. 
E)  The financing of accounts receivable involves an agreement which is informal and non-binding,which makes it difficult for the factor to protect itself. 
A)  In a factoring arrangement,the factor always performs three functions: (1)credit checking, (2)lending,and (3)receivables collection. 
B)  The pledging of accounts receivable involves a transfer of the risk associated with accounts receivable from the borrower to the lender. 
C)  In a factoring arrangement,the seller can select various combinations of credit checking,lending,and risk bearing the factor performs by changing provisions in the factoring agreement. 
D)  In a factoring agreement,the factor would not perform the credit checking and risk taking functions without performing the lending function,because the former are required before the factor can lend to the seller. 
E)  The financing of accounts receivable involves an agreement which is informal and non-binding,which makes it difficult for the factor to protect itself.

Question 4

Jordan Air Inc.has average inventory of $1,000,000.Its estimated annual sales are 15 million and the firm estimates its receivables collection period to be twice as long as its inventory conversion period.The firm pays its trade credit on time;its terms are net 30.The firm wants to decrease its cash conversion cycle by 10 days.It believes that it can reduce its average inventory to $900,000.Assume a 360-day year and that sales will not change.Cost of goods sold equal 80 percent of sales.By how much must the firm also reduce its accounts receivable to meet its goal of a 10 day reduction?

Accepted Answer

A)  $101,900 
B)  $1,000,000 
C)  $291,667 
D)  $333,520 
E)  $0 
A)  $101,900 
B)  $1,000,000 
C)  $291,667 
D)  $333,520 
E)  $0

Question 5

The risk to the firm of borrowing using short-term credit is usually greater than with long-term debt.Added risk stems from greater variability of interest costs on short-term debt.Even if its long-term prospects are good,the firm's lender may not renew a short-term loan if the firm is even only temporarily unable to repay it.

Accepted Answer

A) True 
 B)False

Question 6

Wicker Corporation is determining whether to support $100,000 of its permanent current assets with a bank note or a short-term bond.The firm's bank offers a two-year note where the firm will receive $100,000 and repay $118,810 at the end of two years.The firm has the option to renew the loan at market rates.As an alternative,the firm can sell its own 8.5 percent annual coupon bonds,with $1,000 face value and 2-year maturity,at a price of $973.97.Comparing the cost of the two alternatives,how many percentage points lower is the interest rate on the less expensive debt instrument?

Accepted Answer

A)  0%;the rates are equal. 
B)  1.2% 
C)  1.0% 
D)  1.8% 
E)  0.6% 
A)  0%;the rates are equal. 
B)  1.2% 
C)  1.0% 
D)  1.8% 
E)  0.6%

Question 7

Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Accepted Answer

A) True 
 B)False

Question 8

For the Prince Company,the average age of accounts receivable is 60 days,the average age of accounts payable is 45 days,and the average age of inventory is 72 days.Assume a 360-day year.If Prince's annual sales are $936,000,what is the firm's average accounts receivable balance?

Accepted Answer

A)  $104,000 
B)  $118,000 
C)  $156,000 
D)  $212,000 
E)  $260,000 
A)  $104,000 
B)  $118,000 
C)  $156,000 
D)  $212,000 
E)  $260,000

Question 9

Wildthing Amusements Company's total assets fluctuate between $320,000 and $410,000,while its fixed assets remain constant at $260,000.If the firm follows a maturity matching or moderate working capital financing policy,what is the likely level of its long-term financing?

Accepted Answer

A)  $90,000 
B)  $260,000 
C)  $350,000 
D)  $410,000 
E)  $320,000 
A)  $90,000 
B)  $260,000 
C)  $350,000 
D)  $410,000 
E)  $320,000

Question 10

Working capital management involves decisions related to

Accepted Answer

A)  labor contracts 
B)  current assets and liabilities 
C)  fixed asset acquisition 
D)  long term debt 
A)  labor contracts 
B)  current assets and liabilities 
C)  fixed asset acquisition 
D)  long term debt

Question 11

Fashion Clothiers Inc.
Assume that Fashion Clothiers Inc. uses 1,440,000 yards of material each year. Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order. The firm's carrying cost is 20 percent of the inventory value, at cost.
-Refer to Fashion Clothiers Inc.What is Fashion Clothiers' minimum cost of ordering and holding inventory?

Accepted Answer

A)  $6,254 
B)  $10,733 
C)  $11,560 
D)  $13,563 
E)  $19,825 
A)  $6,254 
B)  $10,733 
C)  $11,560 
D)  $13,563 
E)  $19,825

Question 12

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Accepted Answer

A) True 
 B)False

Question 13

Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.

Accepted Answer

A) True 
 B)False

Question 14

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.What is the economic ordering quantity for chips?

Accepted Answer

A)  12,088 
B)  3,175 
C)  6,243 
D)  13,675 
E)  2,245 
A)  12,088 
B)  3,175 
C)  6,243 
D)  13,675 
E)  2,245

Question 15

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following investments is not likely to be a proper investment for temporarily idle cash?

Accepted Answer

A)  Commercial paper. 
B)  Treasury bills. 
C)  Recently issued long-term corporate bonds. 
D)  Government bonds due shortly. 
E)  AT&T bonds due within one year. 
A)  Commercial paper. 
B)  Treasury bills. 
C)  Recently issued long-term corporate bonds. 
D)  Government bonds due shortly. 
E)  AT&T bonds due within one year.

Question 17

As long as a firm is generating positive net income each year it need not be concerned with working capital management because it will always be able to meet all short-term liquidity needs.

Accepted Answer

A) True 
 B)False

Question 18

The ____ is the average length of time to convert the firm's receivables into cash.

Accepted Answer

A)  payables deferral period 
B)  receivables collection period 
C)  cash conversion period 
D)  inventory conversion period 
A)  payables deferral period 
B)  receivables collection period 
C)  cash conversion period 
D)  inventory conversion period

Question 19

As a rule,managers should try to always use the free component of trade credit but should use the costly component only after comparing its costs to the costs of similar credit from other sources.

Accepted Answer

A) True 
 B)False

Question 20

Due to advanced technology and the similarity of general procedures,working capital management for multinational firms is no more complex than it is for domestic firms.

Accepted Answer

A) True 
 B)False

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

For the Cook County Company,the average age of accounts receivable is 60 days,the average age of accounts payable is 45 days,and the average age of inventory is 72 days.Assuming a 360-day year,what is the length of the firm's cash conversion cycle?

Which of the following statements is correct?

Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

For the Prince Company,the average age of accounts receivable is 60 days,the average age of accounts payable is 45 days,and the average age of inventory is 72 days.Assume a 360-day year.If Prince's annual sales are $936,000,what is the firm's average accounts receivable balance?

Wildthing Amusements Company's total assets fluctuate between $320,000 and $410,000,while its fixed assets remain constant at $260,000.If the firm follows a maturity matching or moderate working capital financing policy,what is the likely level of its long-term financing?

Working capital management involves decisions related to

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Which of the following investments is not likely to be a proper investment for temporarily idle cash?

As long as a firm is generating positive net income each year it need not be concerned with working capital management because it will always be able to meet all short-term liquidity needs.

The ____ is the average length of time to convert the firm's receivables into cash.

As a rule,managers should try to always use the free component of trade credit but should use the costly component only after comparing its costs to the costs of similar credit from other sources.

Due to advanced technology and the similarity of general procedures,working capital management for multinational firms is no more complex than it is for domestic firms.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Investment and Securities

Investment Analysis and Valuation Techniques

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Exam 15: Working Capital Management

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

For the Cook County Company,the average age of accounts receivable is 60 days,the average age of accounts payable is 45 days,and the average age of inventory is 72 days.Assuming a 360-day year,what is the length of the firm's cash conversion cycle?

Which of the following statements is correct?

Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

For the Prince Company,the average age of accounts receivable is 60 days,the average age of accounts payable is 45 days,and the average age of inventory is 72 days.Assume a 360-day year.If Prince's annual sales are $936,000,what is the firm's average accounts receivable balance?

Wildthing Amusements Company's total assets fluctuate between $320,000 and $410,000,while its fixed assets remain constant at $260,000.If the firm follows a maturity matching or moderate working capital financing policy,what is the likely level of its long-term financing?

Working capital management involves decisions related to

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers.

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Which of the following investments is not likely to be a proper investment for temporarily idle cash?

As long as a firm is generating positive net income each year it need not be concerned with working capital management because it will always be able to meet all short-term liquidity needs.

The ____ is the average length of time to convert the firm's receivables into cash.

As a rule,managers should try to always use the free component of trade credit but should use the costly component only after comparing its costs to the costs of similar credit from other sources.

Due to advanced technology and the similarity of general procedures,working capital management for multinational firms is no more complex than it is for domestic firms.

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Investment and Securities

Investment Analysis and Valuation Techniques

Filters