Question 1

Just-in-time inventory management is suitable for an aircraft manufacturer,like Boeing,whose production schedules are known well in advance.

Accepted Answer

A) True 
 B)False

Question 2

On each nondelinquent sale,Cast Iron Company receives revenues with a present value of $1,200 and incurs costs with a present value of $1,000.Suppose that 10% of Cast Iron's customers are slow payers and that slow payers have a probability of 30% of defaulting on their bills.If it costs $5 to determine whether a customer has been a prompt or slow payer in the past,should Cast Iron undertake such a check? Hint: What is the expected savings from the credit check? It will depend on both the probability of uncovering a slow payer and the savings from denying these payers credit.

Accepted Answer

PV(REV)= $1,200
PV(COST)= $1,000
Slow pa

Question 3

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.

Accepted Answer

A) True 
 B)False

Question 4

Would it ever make financial sense to forgo cash discounts that are offered from suppliers? Can you provide an example?

Accepted Answer

The provision of trade credit is a form

Question 5

What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

Accepted Answer

A)  20% 
B)  25% 
C)  50% 
D)  75% 
A)  20% 
B)  25% 
C)  50% 
D)  75%

Question 6

A corporation such as Walmart with about $400 billion of annual sales has an average daily cash flow of more than $1,096 million.

Accepted Answer

A) True 
 B)False

Question 7

A firm that is located in New York receives on the average 2,000 checks a day from its customers in the Twin Cities area.Average payment per check is $1,500.A bank in the Twin Cities is offering a lock-box arrangement for collection and processing of these checks at a cost of $0.50 per check.This arrangement will reduce the float by 2 days.The daily interest rate for the firm is 0.02%.What is the net saving from the lock-box arrangement?

Accepted Answer

A)  $200 
B)  $400 
C)  $1,000 
D)  $1,200 
A)  $200 
B)  $400 
C)  $1,000 
D)  $1,200

Question 8

Credit scoring systems can be used to:

Accepted Answer

A)  reduce the effective cost of trade. 
B)  determine the cost of goods sold. 
C)  evaluate Dun and Bradstreet reports. 
D)  evaluate credit risk based on the borrower's characteristics. 
A)  reduce the effective cost of trade. 
B)  determine the cost of goods sold. 
C)  evaluate Dun and Bradstreet reports. 
D)  evaluate credit risk based on the borrower's characteristics.

Question 9

What is the opportunity cost of keeping a cash balance of $2.5 million,if the daily interest rate is 0.025% and the average transaction cost of investing money overnight is $50?

Accepted Answer

A)  $121 
B)  $171 
C)  $575 
D)  $675 
A)  $121 
B)  $171 
C)  $575 
D)  $675

Question 10

Discuss the premise behind the validity of a numerical credit scoring system.

Accepted Answer

This form of credit scoring attempts to

Question 11

Which of the following statements is correct about banker's acceptances?

Accepted Answer

A)  They are equivalent to a sight draft. 
B)  They represent the norm for installment sales. 
C)  The bank guarantees payment of the invoice. 
D)  The bank retains title to the merchandise. 
A)  They are equivalent to a sight draft. 
B)  They represent the norm for installment sales. 
C)  The bank guarantees payment of the invoice. 
D)  The bank retains title to the merchandise.

Question 12

ABC Corp.shows a ledger balance of $50,000 prior to writing a check for $5,000 and depositing $1,000 in checks.What is the amount of its net float?

Accepted Answer

A)  $1,000 
B)  $4,000 
C)  $5,000 
D)  $6,000 
A)  $1,000 
B)  $4,000 
C)  $5,000 
D)  $6,000

Question 13

Which of the following conditions would make a lock-box system potentially more attractive to a firm?

Accepted Answer

A)  The interest rate declines. 
B)  Mail time saved is lower. 
C)  Payment size is higher. 
D)  Processing time saved is lower. 
A)  The interest rate declines. 
B)  Mail time saved is lower. 
C)  Payment size is higher. 
D)  Processing time saved is lower.

Question 14

While many firms may hold too much cash,it is virtually impossible to hold too little cash.

Accepted Answer

A) True 
 B)False

Question 15

How can financial ratios be used to predict bankruptcy?

Accepted Answer

A)  As early as 4 years before they went bankrupt, failing firms were earning a much lower return on assets (RO
A)  than firms that survived. 
B)  On average, failing firms also had a high ratio of liabilities to assets. 
C)  EBITDA (earnings before interest, taxes, depreciation, and amortization) was low relative to the firms' total liabilities. 
D)  All of these. In each case, these indicators of the firms' financial health steadily deteriorated as bankruptcy approached. 
A)  As early as 4 years before they went bankrupt, failing firms were earning a much lower return on assets (RO
A)  than firms that survived. 
B)  On average, failing firms also had a high ratio of liabilities to assets. 
C)  EBITDA (earnings before interest, taxes, depreciation, and amortization) was low relative to the firms' total liabilities. 
D)  All of these. In each case, these indicators of the firms' financial health steadily deteriorated as bankruptcy approached.

Question 16

Which of the following credit agreements will provide the highest likelihood of cash payment to a seller of goods?

Accepted Answer

A)  Banker's acceptance 
B)  Time draft 
C)  Open account 
D)  Conditional sale 
A)  Banker's acceptance 
B)  Time draft 
C)  Open account 
D)  Conditional sale

Question 17

The Quick Corp.has implemented procedures to cut 1.5 days from its cash collection process.Annual sales (all charge 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

Daily sales * number of days s

Question 18

Which of the following strategies would continue to be effective if a cash-strapped firm determines that the effective interest rate charged on trade credit is lower than the bank's interest rate?

Accepted Answer

A)  Take the discount but pay after the discount period. 
B)  Borrow from the bank and take the discount. 
C)  Ignore the discount, pay at the end of the period. 
D)  Take the discount and hope for longer payment float. 
A)  Take the discount but pay after the discount period. 
B)  Borrow from the bank and take the discount. 
C)  Ignore the discount, pay at the end of the period. 
D)  Take the discount and hope for longer payment float.

Question 19

The set of rules that determines whether or not to extend credit is known as:

Accepted Answer

A)  credit analysis. 
B)  credit policy. 
C)  multiple discriminate analysis. 
D)  the terms of trade credit. 
A)  credit analysis. 
B)  credit policy. 
C)  multiple discriminate analysis. 
D)  the terms of trade credit.

Question 20

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?

Accepted Answer

Maturities: Commercial paper can have ma

Exam 12: Risk, Return, and Capital Budgeting

Just-in-time inventory management is suitable for an aircraft manufacturer,like Boeing,whose production schedules are known well in advance.

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.

Would it ever make financial sense to forgo cash discounts that are offered from suppliers? Can you provide an example?

What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

A corporation such as Walmart with about $400 billion of annual sales has an average daily cash flow of more than $1,096 million.

Credit scoring systems can be used to:

What is the opportunity cost of keeping a cash balance of $2.5 million,if the daily interest rate is 0.025% and the average transaction cost of investing money overnight is $50?

Discuss the premise behind the validity of a numerical credit scoring system.

Which of the following statements is correct about banker's acceptances?

ABC Corp.shows a ledger balance of $50,000 prior to writing a check for $5,000 and depositing $1,000 in checks.What is the amount of its net float?

Which of the following conditions would make a lock-box system potentially more attractive to a firm?

While many firms may hold too much cash,it is virtually impossible to hold too little cash.

How can financial ratios be used to predict bankruptcy?

Which of the following credit agreements will provide the highest likelihood of cash payment to a seller of goods?

Which of the following strategies would continue to be effective if a cash-strapped firm determines that the effective interest rate charged on trade credit is lower than the bank's interest rate?

The set of rules that determines whether or not to extend credit is known as:

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?

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

Filters