Exam 16: Supply Chains and Working Capital Management

Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Which of the following statements is CORRECT?

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Thornton Universal Sales' cost of goods sold (COGS)average $2,000,000 per month,and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year,what is its inventory conversion period?

A promissory note is the document signed when a bank loan is executed,and it specifies financial aspects of the loan.

Fairweather Corporation purchases merchandise on terms of 2/15,net 40,and its gross purchases (i.e. ,purchases before taking off the discount)are $800,000 per year.What is the maximum dollar amount of costly trade credit the firm could get,assuming it abides by the supplier's credit terms? (Assume a 365-day year. )

Howes Inc.purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 50.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year. )

Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year).The company carries average inventory of $750,000.Its annual sales are $10 million,its cost of goods sold is 75% of annual sales,and its average collection period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days,and it pays on time.The CFO believes he can reduce the average inventory to $647,260 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

Refer to the data for Hardwig Inc.If the firm adopts a restricted policy,how much lower would its interest expense be than under the relaxed policy?

Frosty Corporation has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $31,500 Inventory = $4,000 Accounts receivable = $2,000 Accounts payable = $2,400

Dimon Products' sales are expected to be $5 million this year,with 90% on credit and 10% for cash.Sales are expected to grow at a stable,steady rate of 10% annually in the future.Dimon's accounts receivable balance will remain constant at the current level,because the 10% cash sales can be used to support the 10% growth rate,other things held constant.

Newsome Inc.buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Arnold Inc.purchases merchandise on terms of 2/10 net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $375,000.What is the firm's average accounts payable balance? (Assume a 365-day year. )

Which of the following items should a company report directly in its monthly cash budget?

Freeman Builders,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Other things held constant,if a firm "stretches" (i.e. ,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

Which of the following will cause an increase in net working capital,other things held constant?

Which of the following statements is CORRECT?