Exam 14: Working Capital Management and Policies

Stellar Shoes would like to maintain their cash account at a minimum level of $25,000, but expects the standard deviation in net daily cash flows to be $2,000; the effective annual rate on marketable securities to be 5 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal upper cash limit?

Suppose that Freddie's Fries has annual sales of $500,000; cost of goods sold of $375,000; average inventories of $9,000; average accounts receivable of $25,000; and an average accounts payable balance of $20,000. Assuming that all of Freddie's sales are on credit, what will be the firm's cash cycle?

Dandee Lions, Inc. has a cash balance of $105,000; accounts payable of $290,000; inventory of $213,000; accounts receivable of $310,000; notes payable of $95,000; and accrued wages and taxes of $65,000. How much net working capital does the firm need to fund?

Happy Feet would like to maintain their cash account at a minimum level of $75,000, but expects the standard deviation in net daily cash flows to be $5,000; the effective annual rate on marketable securities to be 7 percent per year; and the trading cost per sale or purchase of marketable securities to be $150 per transaction. What will be their optimal upper cash limit?

PBJ Enterprises estimates that it takes, on average, three days for their customers' payments to reach them, three days for the payments to be processed and deposited by their bookkeeping department, and three more days for the checks to clear once they're deposited. What is their collection float?

Which of the following actions will cause a firm's net working capital to decrease?

"The net amount of current assets that the firm has to fund, above and beyond those that someone else funds for them" is referred to as:

Rose Resources faces a smooth annual demand for cash of $10 million; incurs transaction costs of $325 every time they sell marketable securities; and can earn 3.9 percent on their marketable securities. What will be their optimal cash replenishment level?

Rose Axels faces a smooth annual demand for cash of $8 million; incurs transaction costs of $200 every time they sell marketable securities; and can earn 3.8 percent on their marketable securities. What will be their optimal cash replenishment level?

Suppose your firm is seeking a five-year, amortizing $900,000 loan with annual payments and your bank is offering you the choice between a $950,000 loan with a $50,000 compensating balance and a $900,000 loan without a compensating balance. If the interest rate on the $900,000 loan is 9.5 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

Which of the following resemble checks, but differ in that they are payable by the firm issuing them rather than payable by a bank?

All of the following will result in an increase in net working capital EXCEPT:

Drawing, Inc. has sales of $860,000 and cost of goods sold of $450,000. The firm had a beginning inventory of $50,000 and an ending inventory of $59,000. What is the length of the days' sales in inventory?

Would it be worth it to incur a compensating balance of $9,000 in order to get a 0.70 percent lower interest rate on a 1-year, pure discount loan of $250,000?

Elle Mae Industries has a cash balance of $50,000; accounts payable of $150,000; inventory of $190,000; accounts receivable of $250,000; notes payable of $210,000; and accrued wages and taxes of $40,000. How much net working capital does the firm need to fund?

Which of the following is defined as the cost or forgone opportunity of using an asset already in use by the firm, or a person already employed by the firm, in a new project?

Which of the following will decrease the operating cycle?

Suppose that LilyMac Photography has annual sales of $218,000, cost of goods sold of $123,000, average inventories of $1,250, and average accounts receivable of $22,000. Assuming that all of LilyMac's sales are on credit, what will be the firm's operating cycle?

If a firm has a cash cycle of 20 days and an operating cycle of 60 days, what is its payables turnover?

Suppose that Jamie's Jams has annual sales of $900,000; cost of goods sold of $600,000; average inventories of $11,000; average accounts receivable of $50,000; and an average accounts payable balance of $30,000. Assuming that all of Jamie's sales are on credit, what will be the firm's cash cycle?