Question 1

Which of the following are legitimate financial reasons for holding marketable securities?

Accepted Answer

A)  Expansion of inventory for the summer selling season. 
B)  Payment of dividends. 
C)  The firm just sold long-term securities. 
D)  All of the above. 
E)  Only answers a and c above. 
A)  Expansion of inventory for the summer selling season. 
B)  Payment of dividends. 
C)  The firm just sold long-term securities. 
D)  All of the above. 
E)  Only answers a and c above.

Question 2

The economic order quantity is that order quantity that results in the minimum ordering costs.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is false?

Accepted Answer

A)  In addition to sales price,product quality,and advertising,credit policy is a major controllable variable which can affect product demand. 
B)  Sharp seasonal swings in sales and fast growth are two reasons why a firm's aging schedule and DSO may show high variability. 
C)  Changes in a firm's collection policy can affect sales and working capital but will not affect additional funds needed. 
D)  Cash discounts can be used to influence a firm's sales volume and its DSO. 
E)  Firms which offer credit terms with a cash discount usually seek two benefits: (1)to attract more customers,and (2)to reduce their DSO. 
A)  In addition to sales price,product quality,and advertising,credit policy is a major controllable variable which can affect product demand. 
B)  Sharp seasonal swings in sales and fast growth are two reasons why a firm's aging schedule and DSO may show high variability. 
C)  Changes in a firm's collection policy can affect sales and working capital but will not affect additional funds needed. 
D)  Cash discounts can be used to influence a firm's sales volume and its DSO. 
E)  Firms which offer credit terms with a cash discount usually seek two benefits: (1)to attract more customers,and (2)to reduce their DSO.

Question 4

Accruals represent a spontaneous source of funding but,unfortunately,due to economic forces,firms have little control over the level of these accounts.

Accepted Answer

A) True 
 B)False

Question 5

The aging schedule is a commonly used method of monitoring receivables.

Accepted Answer

A) True 
 B)False

Question 6

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 the firm's EOQ?

Accepted Answer

A)  26,833 
B)  30,040 
C)  43,987 
D)  15,218 
E)  21,456 
A)  26,833 
B)  30,040 
C)  43,987 
D)  15,218 
E)  21,456

Question 7

In the text,the "red-line method" refers to

Accepted Answer

A)  The policy of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to people who live within those areas. 
B)  Restrictions imposed by companies which insure credit risks. 
C)  The use,in Dun & Bradstreet's reports,of a red line to show the maximum amount of credit which should be extended to a given customer;companies using this limit when they screen customers' orders are said to be using the "red-line method." 
D)  A method of controlling inventories by drawing a red line on the inside of a bin. 
E)  A method of controlling receivables by drawing a red line on invoices of companies that are expected to pay late. 
A)  The policy of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to people who live within those areas. 
B)  Restrictions imposed by companies which insure credit risks. 
C)  The use,in Dun & Bradstreet's reports,of a red line to show the maximum amount of credit which should be extended to a given customer;companies using this limit when they screen customers' orders are said to be using the "red-line method." 
D)  A method of controlling inventories by drawing a red line on the inside of a bin. 
E)  A method of controlling receivables by drawing a red line on invoices of companies that are expected to pay late.

Question 8

If a firm's sales and those of its customers are closely correlated with economic conditions,it is possible for a firm's total investment in accounts receivable to decrease while its days sales outstanding increases.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following will not help a firm speed up the timing of when it can obtain the use of funds from checks written to it?

Accepted Answer

A)  Lockbox arrangement. 
B)  Concentration banking. 
C)  Zero-balance accounts. 
D)  All of the above. 
E)  Only answers a and b. 
A)  Lockbox arrangement. 
B)  Concentration banking. 
C)  Zero-balance accounts. 
D)  All of the above. 
E)  Only answers a and b.

Question 10

Multinational firms can reduce the risk of exchange rate changes between the time a sale is made and the time a receivable is collected without cost by hedging.

Accepted Answer

A) True 
 B)False

Question 11

Reston Inc.has expected sales of $17,000,000.While 10 percent of its customers pay cash,the remaining 90 percent pay on credit with 40 percent paying on Day 10,30 percent paying on Day 20,15 percent paying on Day 25,and 15 percent paying on Day 30.Assume that the cost of funds invested in receivables is 10 percent.Suppose that the firm's customers begin paying later,such that the new DSO increases to 24 days,that the firm uses a 360-day year,and that the firm's variable cost ratio is 80 percent.What is the additional interest cost to Reston of the additional investment in A/R caused by the delay in payment by its customers?

Accepted Answer

A)  $19,550 
B)  $24,438 
C)  $42,500 
D)  $78,625 
E)  $102,000 
A)  $19,550 
B)  $24,438 
C)  $42,500 
D)  $78,625 
E)  $102,000

Question 12

Working capital needs typically decline during recessions and increase during booms in the economy.

Accepted Answer

A) True 
 B)False

Question 13

A line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank.

Accepted Answer

A) True 
 B)False

Question 14

Suppose the credit terms offered to your firm by your suppliers are 2/10,net 30 days.Out of convenience,your firm is not taking discounts,but is paying after 20 days,instead of waiting until day 30.You point out that the approximate cost of not taking the discount and paying on day 30 is around 37 percent.But since your firm is not taking discounts and is paying on day 20,what is the effective annual percentage cost (not approximate)of your firm's current practice,using a 360-day year?

Accepted Answer

A)  36.7% 
B)  105.4% 
C)  73.4% 
D)  43.6% 
E)  106.9% 
A)  36.7% 
B)  105.4% 
C)  73.4% 
D)  43.6% 
E)  106.9%

Question 15

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.How many orders should Aberwald place during the year?

Accepted Answer

A)  12 
B)  25 
C)  30 
D)  40 
E)  60 
A)  12 
B)  25 
C)  30 
D)  40 
E)  60

Question 16

Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is correct?

Accepted Answer

A)  Under normal conditions,the shape of the yield curve implies that the interest cost of short-term debt is greater than that of long-term debt,although short-term debt has other advantages that make it desirable as a financing source. 
B)  Flexibility is an advantage of short-term credit but this is somewhat offset by the higher flotation costs associated with the need to repeatedly renew short-term credit. 
C)  A short-term loan usually can be obtained more quickly than a long-term loan but the penalty for early repayment of a short-term loan is significantly higher than for a long-term loan. 
D)  Statements about the flexibility,cost,and riskiness of short-term versus long-term credit are dependent on the type of credit that actually is used. 
E)  Short-term debt is often less costly than long-term debt and the major reason for this is that short-term debt exposes the borrowing firm to much less risk than long-term debt. 
A)  Under normal conditions,the shape of the yield curve implies that the interest cost of short-term debt is greater than that of long-term debt,although short-term debt has other advantages that make it desirable as a financing source. 
B)  Flexibility is an advantage of short-term credit but this is somewhat offset by the higher flotation costs associated with the need to repeatedly renew short-term credit. 
C)  A short-term loan usually can be obtained more quickly than a long-term loan but the penalty for early repayment of a short-term loan is significantly higher than for a long-term loan. 
D)  Statements about the flexibility,cost,and riskiness of short-term versus long-term credit are dependent on the type of credit that actually is used. 
E)  Short-term debt is often less costly than long-term debt and the major reason for this is that short-term debt exposes the borrowing firm to much less risk than long-term debt.

Question 18

Temporary current assets are assets used specifically to finance particular projects in the firm's capital budget.

Accepted Answer

A) True 
 B)False

Question 19

A firm changes its credit policy from 2/10,net 30,to 3/10,net 30.The change is meant to meet competition,so no increase in sales is expected.Average accounts receivable will probably decline as a result of this change.

Accepted Answer

A) True 
 B)False

Question 20

Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks.The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment.On the used portion of the loan,Inland paid 1.5 percent above prime for the funds actually borrowed on an annual simple interest basis.The prime rate was at 9 percent for the year.If Inland borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year,what was the total dollar cost of the loan agreement for one year?

Accepted Answer

A)  $560,000 
B)  $650,000 
C)  $540,000 
D)  $900,000 
E)  $675,000 
A)  $560,000 
B)  $650,000 
C)  $540,000 
D)  $900,000 
E)  $675,000

Which of the following are legitimate financial reasons for holding marketable securities?

The economic order quantity is that order quantity that results in the minimum ordering costs.

Which of the following statements is false?

Accruals represent a spontaneous source of funding but,unfortunately,due to economic forces,firms have little control over the level of these accounts.

The aging schedule is a commonly used method of monitoring receivables.

In the text,the "red-line method" refers to

If a firm's sales and those of its customers are closely correlated with economic conditions,it is possible for a firm's total investment in accounts receivable to decrease while its days sales outstanding increases.

Which of the following will not help a firm speed up the timing of when it can obtain the use of funds from checks written to it?

Multinational firms can reduce the risk of exchange rate changes between the time a sale is made and the time a receivable is collected without cost by hedging.

Working capital needs typically decline during recessions and increase during booms in the economy.

A line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank.

Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex.

Which of the following statements is correct?

Temporary current assets are assets used specifically to finance particular projects in the firm's capital budget.

A firm changes its credit policy from 2/10,net 30,to 3/10,net 30.The change is meant to meet competition,so no increase in sales is expected.Average accounts receivable will probably decline as a result of this change.

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

Exam 15: Working Capital Management

Which of the following are legitimate financial reasons for holding marketable securities?

The economic order quantity is that order quantity that results in the minimum ordering costs.

Which of the following statements is false?

Accruals represent a spontaneous source of funding but,unfortunately,due to economic forces,firms have little control over the level of these accounts.

The aging schedule is a commonly used method of monitoring receivables.

In the text,the "red-line method" refers to

If a firm's sales and those of its customers are closely correlated with economic conditions,it is possible for a firm's total investment in accounts receivable to decrease while its days sales outstanding increases.

Which of the following will not help a firm speed up the timing of when it can obtain the use of funds from checks written to it?

Multinational firms can reduce the risk of exchange rate changes between the time a sale is made and the time a receivable is collected without cost by hedging.

Working capital needs typically decline during recessions and increase during booms in the economy.

A line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank.

Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex.

Which of the following statements is correct?

Temporary current assets are assets used specifically to finance particular projects in the firm's capital budget.

A firm changes its credit policy from 2/10,net 30,to 3/10,net 30.The change is meant to meet competition,so no increase in sales is expected.Average accounts receivable will probably decline as a result of this change.

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