Exam 20: Working Capital Management

A firm currently offers terms of sale of 3/20, net 40. What effect will the following actions have on the implicit interest rate charged to customers that pass up the cash discount? State whether the implicit interest rate will increase or decrease. a. The terms are changed to 4/20, net 40. b. The terms are changed to 3/30, net 40.

Which one of the following terms of sale is the most restrictive?

What are some popular tactics for decreasing collection float?

What are the costs and benefits of holding cash?

Assuming that a credit decision has been analyzed and credit refused due to a negative expected profit, which of the following changes, if of sufficient magnitude, might change the decision to one of approval?

As the number of inventory orders per year increases, the total order costs decrease.

Which of these firms will benefit the most from a lock-box service?

When you deposit a check, there may be a delay before it gets credited to your bank account. This reduces your available balance compared to your ledger balance.

A corporation has excess cash that does not appear to be needed for several months. How can it evaluate the differences between parking the funds in commercial paper versus repurchase agreements?

Credit scoring systems can be used to:

Assume a firm can either hold cash paying no interest or invest in marketable securities. Which one of the following might induce the manager to hold higher cash balances today?

What is the break-even probability in the following case? A customer wishes to purchase a $2,000 item that has been marked up 50% over cost and the probability of collection is only 65%. Assume all cash flows are discounted to present value.

In times of crisis, investors are most apt to prefer Treasury bills over any other money market security.

Higher Z scores from a multiple discriminate analysis indicate a:

Smith Corp. produces a product that generates repeat orders on an annual basis. The product has a current price of $2,500 and a current cost of $2,100. The company uses a 15% opportunity cost of capital. Due to the product's high cost, there is a 17% chance that each new customer will default on payment. If the customer does not default, then business from that customer forms an infinite annuity income stream. What is the expected profit from granting credit to a new customer under these conditions?

Which of the following is correct concerning terms of trade credit of 4/10, EOM, net 90?

Money market securities usually have a maturity of:

Short-term securities have high interest-rate risk.

Which of the following is not a money market instrument?

The decision to offer credit depends on the probability of payment. You should grant credit if the expected profit from doing so is greater than the profit from refusing.