Exam 16: Supply Chains and Working Capital Management

Short-term financing is riskier than long-term financing since,during periods of tight credit,the firm may not be able to rollover (renew)its debt.This is especially true if the funds are used to finance long-term assets rather than short-term assets.

Long-term loan agreements always contain provisions,or covenants,that constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interest of the lender.

Blueroot Inc.is considering a change in its financing policy.Currently,it uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10 net 30 days,and the firm pays on time.The new CFO is considering borrowing from its bank,using short-term notes payable,and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11,760 per day,using a 365-day year.The interest rate on the notes payable is 10%,and the tax rate is 40%.If the firm implements the plan,what is the expected change in net income?

The calculated cost of trade credit can be reduced by paying late.

The company you just started has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year. )

The cash budget and the capital budget are handled separately,and although they are both important,they are developed completely independently of one another.

Cash is often referred to as a "non-earning" asset.Thus,one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from (1)the greater variability of interest costs on short-term than long-term debt and (2)the fact that even if its long-term prospects are good,the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

Noddings Inc.needs to raise more capital because its business is booming.The company purchases supplies on terms of 1/10 net 20,and it currently takes the discount.One way of getting the needed funds would be to forgo the discount,and the firm's owner believes she could delay payment to 40 days without adverse effects.What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year. )

For a zero-growth firm,it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level,provided the firm can shorten the length of its collection period sufficiently.

Baltimore Baking is preparing its cash budget and expects to have sales of $30,000 in January,$35,000 in February,and $35,000 in March.If 20% of sales are for cash,40% are credit sales paid in the month after the sale,and another 40% are credit sales paid 2 months after the sale,what are the expected cash receipts for March?

Mark's Manufacturing's average age of accounts receivable is 45 days,the average age of accounts payable is 40 days,and the average age of inventory is 69 days.Assuming a 365-day year,what is the length of its cash conversion cycle?

Safety Window and Door Co.buys on terms of 2/15,net 60 days.It does not take discounts,and it typically pays on time,60 days after the invoice date.Net purchases amount to $450,000 per year.On average,how much "free" trade credit does the firm receive during the year? (Assume a 365-day year,and note that purchases are net of discounts. )

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30.The change is meant to meet competition,so no increase in sales is expected.The average accounts receivable balance will probably decline as a result of this change.

Which of the following is NOT commonly regarded as being a credit policy variable?

Whitson Co.is looking for ways to shorten its cash conversion cycle.It has annual sales of $36,500,000,or $100,000 a day on a 365-day basis.The firm's cost of goods sold is 75% of sales.On average,the company has $9,000,000 in inventory and $8,000,000 in accounts receivable.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%,while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

Which of the following statements concerning the cash budget is CORRECT?

Brothers Breads has the following data.What is the firm's cash conversion cycle? Inventory conversion period = 50 days Average collection period = 17 days Payables deferral period = 25 days

A firm constructing a new manufacturing plant and financing it with short-term loans,which are scheduled to be converted to first mortgage bonds when the plant is completed,would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.