Question 1

Ignoring defaults,what is the approximate effective cost of factoring if receivables are sold at a 4% discount and the average collection period is 2 months?

Accepted Answer

A)  19.40% 
B)  24.00% 
C)  26.53% 
D)  27.75% 
A)  19.40% 
B)  24.00% 
C)  26.53% 
D)  27.75%

Question 2

How would you develop a model to analyze the benefits and costs of stretching payables? Assume that cash discounts will be forgone and that short-term bank funds are usually available.

Accepted Answer

First,one could calculate the implicit c

Question 3

A reduction in inventory levels from year-end to year-end would be considered a source of cash.

Accepted Answer

A) True 
 B)False

Question 4

Keeping a large surplus of cash and investing it in Treasury bills will bring positive NPV to a firm.

Accepted Answer

A) True 
 B)False

Question 5

When the length of the financing is directly related to the life of the asset being financed,the firm is said to follow a:

Accepted Answer

A)  policy of maturity matching. 
B)  restrictive financing strategy. 
C)  matched depreciation strategy. 
D)  minimum working capital strategy. 
A)  policy of maturity matching. 
B)  restrictive financing strategy. 
C)  matched depreciation strategy. 
D)  minimum working capital strategy.

Question 6

Although commercial paper is unsecured,the companies that issue this short-term security are:

Accepted Answer

A)  typically known to repay all defaults. 
B)  large firms of top credit quality. 
C)  small firms of top credit quality. 
D)  firms that have government-sponsored guarantees for the debt. 
A)  typically known to repay all defaults. 
B)  large firms of top credit quality. 
C)  small firms of top credit quality. 
D)  firms that have government-sponsored guarantees for the debt.

Question 7

A firm that follows a "relaxed strategy" toward the total capital requirement will be a:

Accepted Answer

A)  short-term borrower. 
B)  short-term lender. 
C)  long-term lender. 
D)  long-term borrower. 
A)  short-term borrower. 
B)  short-term lender. 
C)  long-term lender. 
D)  long-term borrower.

Question 8

A firm sells its $1,000,000 receivables to a factor for $960,000.Average collection period is one month.The effective annual rate is:

Accepted Answer

A)  27.43%. 
B)  48.00%. 
C)  60.10%. 
D)  63.21%. 
A)  27.43%. 
B)  48.00%. 
C)  60.10%. 
D)  63.21%.

Question 9

Trade credit is created when:

Accepted Answer

A)  customers return unacceptable goods. 
B)  final consumers purchase goods on credit. 
C)  companies purchase goods on credit. 
D)  current assets exceed current liabilities. 
A)  customers return unacceptable goods. 
B)  final consumers purchase goods on credit. 
C)  companies purchase goods on credit. 
D)  current assets exceed current liabilities.

Question 10

The safety margin kept by the bank on loan against liquid assets is called:

Accepted Answer

A)  a haircut. 
B)  a line of credit. 
C)  factoring. 
D)  field warehousing. 
A)  a haircut. 
B)  a line of credit. 
C)  factoring. 
D)  field warehousing.

Question 11

A cash conversion cycle is the period between a firm's payment for materials and collection on its sales.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is more likely for a firm practicing the "relaxed" strategy of long- versus short-term borrowing at the height of sales demand?

Accepted Answer

A)  It will borrow heavily on a short-term basis. 
B)  It will invest heavily in marketable securities. 
C)  It will borrow heavily on a long-term basis. 
D)  Long-term financing will approximate capital requirements. 
A)  It will borrow heavily on a short-term basis. 
B)  It will invest heavily in marketable securities. 
C)  It will borrow heavily on a long-term basis. 
D)  Long-term financing will approximate capital requirements.

Question 13

The credit crisis of 2007 to 2009 largely left the market for commercial paper unaffected.

Accepted Answer

A) True 
 B)False

Question 14

An increase in long-term assets is a source of cash.

Accepted Answer

A) True 
 B)False

Question 15

During the year the following changes were observed. I.Inventory period increased by 12 days.
II)Receivables period decreased by 6 days.
III)Accounts payable period increased by 4 days.
Find the net change in cash conversion cycle.

Accepted Answer

A)  -10 days 
B)  +2 days 
C)  +10 days 
D)  +14 days 
A)  -10 days 
B)  +2 days 
C)  +10 days 
D)  +14 days

Question 16

Which of the following would not be included among the costs of carrying inventory?

Accepted Answer

A)  Obsolescence 
B)  Opportunity cost of capital 
C)  Raw material cost 
D)  Risk of pilferage 
A)  Obsolescence 
B)  Opportunity cost of capital 
C)  Raw material cost 
D)  Risk of pilferage

Question 17

A company that sells $5 million of marketable securities for cash will see a $5 million increase in cash.

Accepted Answer

A) True 
 B)False

Question 18

When managers are continually short-term lenders they are said to follow a:

Accepted Answer

A)  middle-of-the-road financing strategy. 
B)  restrictive financing strategy. 
C)  relaxed financing strategy. 
D)  permanent working-capital strategy. 
A)  middle-of-the-road financing strategy. 
B)  restrictive financing strategy. 
C)  relaxed financing strategy. 
D)  permanent working-capital strategy.

Question 19

A company that borrows $1 million short term and invests the proceeds in inventory will see no change in its net working capital.

Accepted Answer

A) True 
 B)False

Question 20

If a firm increases its accounts payable period,other things equal,it increases the cash conversion cycle.

Accepted Answer

A) True 
 B)False

Exam 19: Short-Term Financial Planning

Ignoring defaults,what is the approximate effective cost of factoring if receivables are sold at a 4% discount and the average collection period is 2 months?

How would you develop a model to analyze the benefits and costs of stretching payables? Assume that cash discounts will be forgone and that short-term bank funds are usually available.

A reduction in inventory levels from year-end to year-end would be considered a source of cash.

Keeping a large surplus of cash and investing it in Treasury bills will bring positive NPV to a firm.

When the length of the financing is directly related to the life of the asset being financed,the firm is said to follow a:

Although commercial paper is unsecured,the companies that issue this short-term security are:

A firm that follows a "relaxed strategy" toward the total capital requirement will be a:

A firm sells its $1,000,000 receivables to a factor for $960,000.Average collection period is one month.The effective annual rate is:

Trade credit is created when:

The safety margin kept by the bank on loan against liquid assets is called:

A cash conversion cycle is the period between a firm's payment for materials and collection on its sales.

Which of the following is more likely for a firm practicing the "relaxed" strategy of long- versus short-term borrowing at the height of sales demand?

The credit crisis of 2007 to 2009 largely left the market for commercial paper unaffected.

An increase in long-term assets is a source of cash.

During the year the following changes were observed. I.Inventory period increased by 12 days. II)Receivables period decreased by 6 days. III)Accounts payable period increased by 4 days. Find the net change in cash conversion cycle.

Which of the following would not be included among the costs of carrying inventory?

A company that sells $5 million of marketable securities for cash will see a $5 million increase in cash.

When managers are continually short-term lenders they are said to follow a:

A company that borrows $1 million short term and invests the proceeds in inventory will see no change in its net working capital.

If a firm increases its accounts payable period,other things equal,it increases the cash conversion cycle.

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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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