Question 1

Describe in general a firm's cash conversion cycle.

Accepted Answer

The cash conversion cycle is measured by

Question 2

A firm has $50 million and $60 million credit sales during the first two quarters of the year.Eighty percent of the receivables are collected in the same quarter and the balance in the next quarter.What will be the total collection for the firm in the second quarter?

Accepted Answer

A)  $55 million 
B)  $58 million 
C)  $88 million 
D)  $98 million 
A)  $55 million 
B)  $58 million 
C)  $88 million 
D)  $98 million

Question 3

Net working capital will decrease when a firm buys raw materials on credit.

Accepted Answer

A) True 
 B)False

Question 4

Customers may change firms when faced with minimal inventory selection.Sales lost in this manner illustrate the:

Accepted Answer

A)  costs of carrying inventory. 
B)  lack of customer loyalty. 
C)  need to maintain a high current ratio. 
D)  impact of shortage costs. 
A)  costs of carrying inventory. 
B)  lack of customer loyalty. 
C)  need to maintain a high current ratio. 
D)  impact of shortage costs.

Question 5

A line of credit would be considered:

Accepted Answer

A)  an agreement to borrow up to a specific total amount on demand from a bank. 
B)  a short-term unsecured loan with minimum interest expense. 
C)  a secured loan to be amortized over three to five years. 
D)  a long-term, permanent source of funding. 
A)  an agreement to borrow up to a specific total amount on demand from a bank. 
B)  a short-term unsecured loan with minimum interest expense. 
C)  a secured loan to be amortized over three to five years. 
D)  a long-term, permanent source of funding.

Question 6

Which of the following is least likely to be correct about the factoring of receivables?

Accepted Answer

A)  The selling firm bears the risk of default. 
B)  The higher the perceived quality of the receivables, the lower the discount rate. 
C)  The discount is paid by the selling firm in the form of reduced sales price. 
D)  Factoring may be the cheapest method of avoiding a cash flow problem. 
A)  The selling firm bears the risk of default. 
B)  The higher the perceived quality of the receivables, the lower the discount rate. 
C)  The discount is paid by the selling firm in the form of reduced sales price. 
D)  Factoring may be the cheapest method of avoiding a cash flow problem.

Question 7

The text suggests that,of the three strategies shown,the relaxed strategy is probably the worst from the standpoint of managerial evaluation.Why is this thought to be the case,and when may it be an acceptable practice?

Accepted Answer

The relaxed strategy of funding the firm

Question 8

The principle of "matched maturities" in finance refers to:

Accepted Answer

A)  finding sources of funds with the longest maturity, in order to avoid liquidity crises. 
B)  funding long-term assets with long-term sources, and vice versa. 
C)  using as much short-term financing as possible due to the lower cost of interest. 
D)  buying marketable securities when demand is high and borrowing short-term when demand is low. 
A)  finding sources of funds with the longest maturity, in order to avoid liquidity crises. 
B)  funding long-term assets with long-term sources, and vice versa. 
C)  using as much short-term financing as possible due to the lower cost of interest. 
D)  buying marketable securities when demand is high and borrowing short-term when demand is low.

Question 9

For most corporations,net working capital is:

Accepted Answer

A)  negative during the inventory period of the cash conversion cycle. 
B)  equal to the amount of current assets. 
C)  positive to provide liquidity during the cash conversion cycle. 
D)  present only during slack periods of the year. 
A)  negative during the inventory period of the cash conversion cycle. 
B)  equal to the amount of current assets. 
C)  positive to provide liquidity during the cash conversion cycle. 
D)  present only during slack periods of the year.

Question 10

Permanent working capital requirements can be financed using commercial paper.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following would not be included as a source of short-term financing?

Accepted Answer

A)  Line of credit 
B)  Increase in the minimum operating cash balance 
C)  Sale of marketable securities 
D)  Stretching of accounts payable 
A)  Line of credit 
B)  Increase in the minimum operating cash balance 
C)  Sale of marketable securities 
D)  Stretching of accounts payable

Question 12

When accounts payable exceed the sum of inventory and accounts receivable,net working capital is negative.

Accepted Answer

A) True 
 B)False

Question 13

Bank lines of credit must be judiciously requested because the lines often:

Accepted Answer

A)  accrue interest regardless of whether funds are borrowed. 
B)  require payment of a commitment fee to establish. 
C)  appear as a liability on the firm's balance sheet. 
D)  have a negative impact on the firm's credit history. 
A)  accrue interest regardless of whether funds are borrowed. 
B)  require payment of a commitment fee to establish. 
C)  appear as a liability on the firm's balance sheet. 
D)  have a negative impact on the firm's credit history.

Question 14

Which of the following statements about total capital requirement is least likely to be correct for a profitable firm?

Accepted Answer

A)  Requirements remain constant over time. 
B)  Seasonal variations are often experienced. 
C)  The trend is often upward-sloping. 
D)  A portion of working capital is permanent. 
A)  Requirements remain constant over time. 
B)  Seasonal variations are often experienced. 
C)  The trend is often upward-sloping. 
D)  A portion of working capital is permanent.

Question 15

A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable.The net effect of these transactions on the firm's net working capital is a decrease of:

Accepted Answer

A)  $1,700,000. 
B)  $1,000,000. 
C)  $700,000. 
D)  $300,000. 
A)  $1,700,000. 
B)  $1,000,000. 
C)  $700,000. 
D)  $300,000.

Question 16

What is the cash conversion cycle for a firm with a receivables period of 40 days,a payables period of 30 days,and an inventory period of 60 days?

Accepted Answer

A)  10 days 
B)  50 days 
C)  70 days 
D)  130 days 
A)  10 days 
B)  50 days 
C)  70 days 
D)  130 days

Question 17

What is the payable period for a firm with average accounts payable of $4 million and annual cost of goods sold of $44 million.

Accepted Answer

A)  20.0 days 
B)  30.0 days 
C)  35.6 days 
D)  33.2 days 
A)  20.0 days 
B)  30.0 days 
C)  35.6 days 
D)  33.2 days

Question 18

Discuss the concept of "maturities matching" in finance.

Accepted Answer

The concept of matched maturities sugges

Question 19

When financial managers are asked the key reason for choosing short-term rather than long-term debt,they often say that they try to "match" the maturities of the firm's assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is not typically a characteristic of commercial paper borrowing?

Accepted Answer

A)  Maturity is short-term. 
B)  Banks are not the lenders. 
C)  The loans are secured. 
D)  Borrowers have high credit quality. 
A)  Maturity is short-term. 
B)  Banks are not the lenders. 
C)  The loans are secured. 
D)  Borrowers have high credit quality.

Exam 19: Short-Term Financial Planning

Describe in general a firm's cash conversion cycle.

A firm has $50 million and $60 million credit sales during the first two quarters of the year.Eighty percent of the receivables are collected in the same quarter and the balance in the next quarter.What will be the total collection for the firm in the second quarter?

Net working capital will decrease when a firm buys raw materials on credit.

Customers may change firms when faced with minimal inventory selection.Sales lost in this manner illustrate the:

A line of credit would be considered:

Which of the following is least likely to be correct about the factoring of receivables?

The text suggests that,of the three strategies shown,the relaxed strategy is probably the worst from the standpoint of managerial evaluation.Why is this thought to be the case,and when may it be an acceptable practice?

The principle of "matched maturities" in finance refers to:

For most corporations,net working capital is:

Permanent working capital requirements can be financed using commercial paper.

Which of the following would not be included as a source of short-term financing?

When accounts payable exceed the sum of inventory and accounts receivable,net working capital is negative.

Bank lines of credit must be judiciously requested because the lines often:

Which of the following statements about total capital requirement is least likely to be correct for a profitable firm?

A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable.The net effect of these transactions on the firm's net working capital is a decrease of:

What is the cash conversion cycle for a firm with a receivables period of 40 days,a payables period of 30 days,and an inventory period of 60 days?

What is the payable period for a firm with average accounts payable of $4 million and annual cost of goods sold of $44 million.

Discuss the concept of "maturities matching" in finance.

When financial managers are asked the key reason for choosing short-term rather than long-term debt,they often say that they try to "match" the maturities of the firm's assets and liabilities.

Which of the following is not typically a characteristic of commercial paper borrowing?

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

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