Question 1

Which of the following statements is false?

Accepted Answer

A)  Firms may hold inventory because factors such as seasonality in demand mean that customer purchases do not perfectly match the most efficient production cycle. 
B)  Inventory helps minimize the risk that the firm will not be able to obtain an input it needs for production. 
C)  If a firm holds too much inventory, stock-outs, the situation when a firm runs out of product, may occur, leading to lost sales. 
D)  Because excessive inventory uses cash, efficient management of inventory increases firm value. 
A)  Firms may hold inventory because factors such as seasonality in demand mean that customer purchases do not perfectly match the most efficient production cycle. 
B)  Inventory helps minimize the risk that the firm will not be able to obtain an input it needs for production. 
C)  If a firm holds too much inventory, stock-outs, the situation when a firm runs out of product, may occur, leading to lost sales. 
D)  Because excessive inventory uses cash, efficient management of inventory increases firm value. C

Question 2

In Canada,large firms assess credit risk in-house with their own credit departments.Small firms purchase credit reports from credit rating systems such as ________.

Accepted Answer

A)  the System for Electronic Document Analysis and Retrieval (SEDAR) 
B)  the Profit Impact of Market Strategy (PIMS) 
C)  the Business Information Center of Industry Canada 
D)  Dun and Bradstreet Business Information (Dn
B)  
A)  the System for Electronic Document Analysis and Retrieval (SEDAR) 
B)  the Profit Impact of Market Strategy (PIMS) 
C)  the Business Information Center of Industry Canada 
D)  Dun and Bradstreet Business Information (Dn
B)  D

Question 3

The ________ the discount percentage offered,the ________ the cost of forgoing the discount.

Accepted Answer

A)  lower; greater 
B)  higher; smaller 
C)  higher; greater 
D)  lower; the more expensive 
A)  lower; greater 
B)  higher; smaller 
C)  higher; greater 
D)  lower; the more expensive C

Question 4

Which of the following statements is false?

Accepted Answer

A)  A firm's cash cycle is the length of time between when the firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory. 
B)  The longer a firm's cash cycle, the more working capital it has, and the more cash it needs to carry to conduct its daily operations. 
C)  Most firms buy their inventory on credit, which increases the amount of time between the cash investment and the receipt of cash from that investment. 
D)  Any reduction in working capital requirements generates a positive free cash flow that the firm can distribute immediately to shareholders. 
A)  A firm's cash cycle is the length of time between when the firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory. 
B)  The longer a firm's cash cycle, the more working capital it has, and the more cash it needs to carry to conduct its daily operations. 
C)  Most firms buy their inventory on credit, which increases the amount of time between the cash investment and the receipt of cash from that investment. 
D)  Any reduction in working capital requirements generates a positive free cash flow that the firm can distribute immediately to shareholders.

Question 5

Working capital alters a firm's value by affecting its ________.

Accepted Answer

A)  operating cash flow 
B)  financing cash flow 
C)  investment cash flow 
D)  free cash flow 
A)  operating cash flow 
B)  financing cash flow 
C)  investment cash flow 
D)  free cash flow

Question 6

Which of the following statements is false?

Accepted Answer

A)  In reality, product markets are rarely perfectly competitive, so firms can maximize their value by using their trade credit options effectively. 
B)  Trade credit is, in essence, a loan from the selling firm to its customer. 
C)  The accounts receivable balance represents the amount that a firm owes its suppliers for goods that it has received but for which it has not yet paid. 
D)  Providing financing at below-market rates is an indirect way to lower prices for only certain customers. 
A)  In reality, product markets are rarely perfectly competitive, so firms can maximize their value by using their trade credit options effectively. 
B)  Trade credit is, in essence, a loan from the selling firm to its customer. 
C)  The accounts receivable balance represents the amount that a firm owes its suppliers for goods that it has received but for which it has not yet paid. 
D)  Providing financing at below-market rates is an indirect way to lower prices for only certain customers.

Question 7

Which of the following money market investments is essentially a loan arrangement wherein a securities dealer is the "borrower" and the investor is the "lender?" The investor buys securities from the securities dealer,with an agreement to sell the securities back to the dealer at a later date for a specified higher price.

Accepted Answer

A)  Certificates of Deposit (C
D)  
B)  Commercial Paper 
C)  Banker's Acceptance 
D)  Repurchase Agreement 
E)  Treasury Bill 
A)  Certificates of Deposit (C
D)  
B)  Commercial Paper 
C)  Banker's Acceptance 
D)  Repurchase Agreement 
E)  Treasury Bill

Question 8

Describe "just-in-time" inventory management.

Accepted Answer

Some firms seek to reduce their carrying

Question 9

Which of the following statements is false?

Accepted Answer

A)  Under the Modigliani-Miller assumptions of perfect capital markets, the amounts of payables and receivables are irrelevant. 
B)  If the firm can obtain a bank loan at a lower interest rate, it would be better off borrowing at the lower rate and using the cash proceeds of the loan to take advantage of the discount offered by the supplier. 
C)  Collection float is the amount of time it takes before payments to suppliers actually result in a cash outflow for the firm. 
D)  The credit that the firm is extending to its customers is known as trade credit. 
A)  Under the Modigliani-Miller assumptions of perfect capital markets, the amounts of payables and receivables are irrelevant. 
B)  If the firm can obtain a bank loan at a lower interest rate, it would be better off borrowing at the lower rate and using the cash proceeds of the loan to take advantage of the discount offered by the supplier. 
C)  Collection float is the amount of time it takes before payments to suppliers actually result in a cash outflow for the firm. 
D)  The credit that the firm is extending to its customers is known as trade credit.

Question 10

Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)
  
-Luther's cash conversion cycle is closest to:

Accepted Answer

A)  51 days 
B)  66 days 
C)  71 days 
D)  129 days 
A)  51 days 
B)  66 days 
C)  71 days 
D)  129 days

Question 11

The amount of cash a firm holds to counter the uncertainty surrounding its future cash needs is known as a(n)

Accepted Answer

A)  speculative balance. 
B)  compensating balance. 
C)  operating balance. 
D)  precautionary balance. 
A)  speculative balance. 
B)  compensating balance. 
C)  operating balance. 
D)  precautionary balance.

Question 12

If the firm can obtain a bank loan ________ interest rate,it would be ________ borrowing at that rate and using the cash proceeds of the loan to take advantage of the discount offered by the supplier.

Accepted Answer

A)  at a higher; better off 
B)  at a required rate of return; worse off 
C)  at a lower; better off 
D)  at a required rate of return; better off 
A)  at a higher; better off 
B)  at a required rate of return; worse off 
C)  at a lower; better off 
D)  at a required rate of return; better off

Question 13

Any ________ in working capital requirements generates a ________ free cash flow that the firm can distribute immediately to shareholders.

Accepted Answer

A)  reduction; negative 
B)  increase; positive 
C)  reduction; positive 
D)  increase; negative 
A)  reduction; negative 
B)  increase; positive 
C)  reduction; positive 
D)  increase; negative

Question 14

Goldsboro Industries has an average accounts payable balance of $680,000.Its annual cost of goods sold is $4,500,000,and it receives terms of 1/10,net 40 from its suppliers.Goldsboro chooses to forgo this discount.Is Goldsboro managing its accounts payable well?

Accepted Answer

The firm is not managing its accounts pa

Question 15

Which of the following money market investments is a short-term,unsecured debt obligation issued by a large corporation? The minimum denomination is $25,000,but most have a face value of $100,000 or more.

Accepted Answer

A)  Banker's Acceptance 
B)  Commercial Paper 
C)  Repurchase Agreement 
D)  Certificates of Deposit (C
D)  
E)  Treasury Bill 
A)  Banker's Acceptance 
B)  Commercial Paper 
C)  Repurchase Agreement 
D)  Certificates of Deposit (C
D)  
E)  Treasury Bill

Question 16

Use the table for the question(s) below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the firm appears below:
Luther Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)
  
-Luther's Accounts Receivable days is closest to:

Accepted Answer

A)  42 days 
B)  39 days 
C)  32 days 
D)  59 days 
A)  42 days 
B)  39 days 
C)  32 days 
D)  59 days

Question 17

Which one of the following is NOT one of the three steps involved in establishing a credit policy?

Accepted Answer

A)  Establishing credit payment patterns 
B)  Establishing credit standards 
C)  Establishing a collection policy 
D)  Establishing credit terms 
A)  Establishing credit payment patterns 
B)  Establishing credit standards 
C)  Establishing a collection policy 
D)  Establishing credit terms

Question 18

Your firm purchases goods from its supplier on terms of 1/10,net 30.The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered is closest to:

Accepted Answer

A)  16.8% 
B)  44.6% 
C)  20.1% 
D)  13.0% 
A)  16.8% 
B)  44.6% 
C)  20.1% 
D)  13.0%

Question 19

Which of the following statements is false?

Accepted Answer

A)  Similar to the situation with its accounts receivable, a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time. 
B)  Some firms ignore the payment due period and pay later, in a practice referred to as pushing the accounts payable. 
C)  Suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (CO
D)  or cash before delivery (CB
D) . 
D)  If the accounts payable outstanding is 40 days and the terms are 2/10, net 30, the firm can conclude that it generally pays late and may be risking supplier difficulties. 
A)  Similar to the situation with its accounts receivable, a firm should monitor its accounts payable to ensure that it is making its payments at an optimal time. 
B)  Some firms ignore the payment due period and pay later, in a practice referred to as pushing the accounts payable. 
C)  Suppliers may react to a firm whose payments are always late by imposing terms of cash on delivery (CO
D)  or cash before delivery (CB
D) . 
D)  If the accounts payable outstanding is 40 days and the terms are 2/10, net 30, the firm can conclude that it generally pays late and may be risking supplier difficulties.

Question 20

The amount of cash a firm needs to be able to pay its bills is sometimes referred to as a(n)

Accepted Answer

A)  operating balance. 
B)  compensating balance. 
C)  transactions balance. 
D)  precautionary balance. 
A)  operating balance. 
B)  compensating balance. 
C)  transactions balance. 
D)  precautionary balance.

Exam 26: Working Capital Management

Which of the following statements is false?

In Canada,large firms assess credit risk in-house with their own credit departments.Small firms purchase credit reports from credit rating systems such as ________.

The ________ the discount percentage offered,the ________ the cost of forgoing the discount.

Which of the following statements is false?

Working capital alters a firm's value by affecting its ________.

Which of the following statements is false?

Describe "just-in-time" inventory management.

Which of the following statements is false?

The amount of cash a firm holds to counter the uncertainty surrounding its future cash needs is known as a(n)

If the firm can obtain a bank loan ________ interest rate,it would be ________ borrowing at that rate and using the cash proceeds of the loan to take advantage of the discount offered by the supplier.

Any ________ in working capital requirements generates a ________ free cash flow that the firm can distribute immediately to shareholders.

Goldsboro Industries has an average accounts payable balance of $680,000.Its annual cost of goods sold is $4,500,000,and it receives terms of 1/10,net 40 from its suppliers.Goldsboro chooses to forgo this discount.Is Goldsboro managing its accounts payable well?

Which of the following money market investments is a short-term,unsecured debt obligation issued by a large corporation? The minimum denomination is $25,000,but most have a face value of $100,000 or more.

Which one of the following is NOT one of the three steps involved in establishing a credit policy?

Your firm purchases goods from its supplier on terms of 1/10,net 30.The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered is closest to:

Which of the following statements is false?

The amount of cash a firm needs to be able to pay its bills is sometimes referred to as a(n)

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress, managerial Incentives, and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modelling: a Case Study

The Mechanics of Raising Equity Capital

Debt Financing

Leasing

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

The the discount percentage offered,the the cost of forgoing the discount.

If the firm can obtain a bank loan interest rate,it would be borrowing at that rate and using the cash proceeds of the loan to take advantage of the discount offered by the supplier.

Any in working capital requirements generates a free cash flow that the firm can distribute immediately to shareholders.