Question 1

Which one of the following financial ratios is not used to develop Altman's Z score from multiple discriminant analysis?

Accepted Answer

A)  Market value of equity/Total book debt 
B)  EBIT/Total assets 
C)  Interest expense/Total assets 
D) Working capital/Total assets 
A)  Market value of equity/Total book debt 
B)  EBIT/Total assets 
C)  Interest expense/Total assets 
D) Working capital/Total assets

Question 2

Which one of the following financial ratios has the highest weight in Altman's Z-score estimation?

Accepted Answer

A)  Working capital/Total assets 
B)  Retained earnings/Total assets 
C)  EBIT/Total assets 
D) Sales/Total assets 
A)  Working capital/Total assets 
B)  Retained earnings/Total assets 
C)  EBIT/Total assets 
D) Sales/Total assets

Question 3

Firms should hold cash in a sufficient quantity so that the marginal value of liquidity noticeably exceeds the value of interest forgone.

Accepted Answer

A) True 
 B)False

Question 4

How much value would be added to a firm that could permanently reduce its collection period by 2 days if daily collections average $10,000 and the opportunity cost is 5% annually?

Accepted Answer

A)  $1,000 
B)  $1,200 
C)  $10,000 
D) $20,000 
A)  $1,000 
B)  $1,200 
C)  $10,000 
D) $20,000

Question 5

Lock-box systems allow local banks to collect and process the firm's remittances from that area.

Accepted Answer

A) True 
 B)False

Question 6

A primary purpose of restricting the investment of idle cash balances to money market instruments is to:

Accepted Answer

A)  obtain government guarantees on the investment. 
B)  minimize transaction costs. 
C)  minimize interest-rate risk. 
D) have a continual market for selling the investments. 
A)  obtain government guarantees on the investment. 
B)  minimize transaction costs. 
C)  minimize interest-rate risk. 
D) have a continual market for selling the investments.

Question 7

Bond ratings are an expensive source of credit information on publicly traded companies.

Accepted Answer

A) True 
 B)False

Question 8

Under the terms of a sight draft, the buyer's bank:

Accepted Answer

A)  is instructed to make immediate payment. 
B)  treats the invoice like a postdated check. 
C)  forwards the acceptance to the seller until due. 
D) treats the purchase as a conditional sale. 
A)  is instructed to make immediate payment. 
B)  treats the invoice like a postdated check. 
C)  forwards the acceptance to the seller until due. 
D) treats the purchase as a conditional sale.

Question 9

Which one of the following credit decisions appears correct for a customer who intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?

Accepted Answer

A)  Reject because expected loss equals $320 
B)  Reject because expected profit equals $0 
C)  Accept because expected profit equals $1,440 
D) Accept because expected profit equals $3,200 
A)  Reject because expected loss equals $320 
B)  Reject because expected profit equals $0 
C)  Accept because expected profit equals $1,440 
D) Accept because expected profit equals $3,200

Question 10

In general, has bank float been increasing or decreasing on a per item basis over the past few years?

Accepted Answer

Float time has decreased dramatically ov

Question 11

The economic order quantity:

Accepted Answer

A)  is the order size that minimizes the order costs. 
B)  is independent of forecast sales. 
C)  is based on sales, carrying costs, and order costs. 
D) increases as cost per order decreases. 
A)  is the order size that minimizes the order costs. 
B)  is independent of forecast sales. 
C)  is based on sales, carrying costs, and order costs. 
D) increases as cost per order decreases.

Question 12

What is the benefit for a firm with daily sales of $30,000 to be able to speed up collections by 3 days, assuming an annual opportunity cost of funds of 8%?

Accepted Answer

A)  $7,200 daily benefit 
B)  $7,200 annual benefit 
C)  $30,000 annual benefit 
D) $90,000 annual benefit 
A)  $7,200 daily benefit 
B)  $7,200 annual benefit 
C)  $30,000 annual benefit 
D) $90,000 annual benefit

Question 13

Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.

Accepted Answer

A)  No; the expected loss is $33.33. 
B)  No; the expected loss is $150.00. 
C)  Yes; the expected profit is $33.33. 
D) Yes; the expected profit is $150.00. 
A)  No; the expected loss is $33.33. 
B)  No; the expected loss is $150.00. 
C)  Yes; the expected profit is $33.33. 
D) Yes; the expected profit is $150.00.

Question 14

How much money can be saved annually by setting up a lock-box system that will process 500 checks per day at a cost of $0.15 per check if each check averages $220, collection float is reduced by 3 days, and the annual interest rate is 8%? (Use a 365-day year.)

Accepted Answer

A)  -$2,125 
B)  -$975 
C)  $2,650 
D) $26,325 
A)  -$2,125 
B)  -$975 
C)  $2,650 
D) $26,325

Question 15

How much time must be saved to justify a lock-box system that processes 350 checks per day at an average amount of $400 per check if the system will cost $20,000 annually and interest rates average 8%?

Accepted Answer

A)  0.56 days 
B)  1.79 days 
C)  2.14 days 
D) 7.00 days 
A)  0.56 days 
B)  1.79 days 
C)  2.14 days 
D) 7.00 days

Question 16

Optimal inventory levels are lower when carrying costs are high, and are higher when the cost of restocking inventories is high.

Accepted Answer

A) True 
 B)False

Question 17

The Quick Corp. has implemented procedures to cut 1.5 days from its cash collection process. Annual credit sales are $30 million and the opportunity cost of funds is 9%. What is the value of the annual savings, and how much would the savings be worth if the speed-up in collections can be considered permanent?

Accepted Answer

Annual savings = ($30m/365) ×

Question 18

Which one of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that are 50% higher than total carrying costs?

Accepted Answer

A)  Current order size is greater than optimal. 
B)  Current order size is less than optimal. 
C)  Per unit carrying costs are too high. 
D) The optimal order size is currently being used. 
A)  Current order size is greater than optimal. 
B)  Current order size is less than optimal. 
C)  Per unit carrying costs are too high. 
D) The optimal order size is currently being used.

Question 19

When sales are made without the accompaniment of a formal debt contract, the sales are said to be on:

Accepted Answer

A)  conditional sale terms. 
B)  open account. 
C)  trade credit. 
D) sight draft. 
A)  conditional sale terms. 
B)  open account. 
C)  trade credit. 
D) sight draft.

Question 20

Describe the Z score suggested by Edward Altman.

Accepted Answer

Firms use several statistical techniques

Exam 20: Working Capital Management

Which one of the following financial ratios is not used to develop Altman's Z score from multiple discriminant analysis?

Which one of the following financial ratios has the highest weight in Altman's Z-score estimation?

Firms should hold cash in a sufficient quantity so that the marginal value of liquidity noticeably exceeds the value of interest forgone.

How much value would be added to a firm that could permanently reduce its collection period by 2 days if daily collections average $10,000 and the opportunity cost is 5% annually?

Lock-box systems allow local banks to collect and process the firm's remittances from that area.

A primary purpose of restricting the investment of idle cash balances to money market instruments is to:

Bond ratings are an expensive source of credit information on publicly traded companies.

Under the terms of a sight draft, the buyer's bank:

Which one of the following credit decisions appears correct for a customer who intends to order $1,000 of goods annually that have a 20% profit margin if the probability of default is 20% and the discount rate is 10%?

In general, has bank float been increasing or decreasing on a per item basis over the past few years?

The economic order quantity:

What is the benefit for a firm with daily sales of $30,000 to be able to speed up collections by 3 days, assuming an annual opportunity cost of funds of 8%?

Should credit be granted to a customer wishing to purchase a $2,000 item that has been marked up 50% over cost if the probability of collection is only 65%? Assume all cash flows are discounted to present value.

How much money can be saved annually by setting up a lock-box system that will process 500 checks per day at a cost of $0.15 per check if each check averages $220, collection float is reduced by 3 days, and the annual interest rate is 8%? (Use a 365-day year.)

How much time must be saved to justify a lock-box system that processes 350 checks per day at an average amount of $400 per check if the system will cost $20,000 annually and interest rates average 8%?

Optimal inventory levels are lower when carrying costs are high, and are higher when the cost of restocking inventories is high.

Which one of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that are 50% higher than total carrying costs?

When sales are made without the accompaniment of a formal debt contract, the sales are said to be on:

Describe the Z score suggested by Edward Altman.

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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