Question 1

Which of the following money market investments is a short-term debt obligation of the Canadian government?

Accepted Answer

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

Question 2

Which of the following money market investments is short-term debt issued by a bank with a minimum denomination of $100,000?

Accepted Answer

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

Question 3

Your firm purchases goods from its supplier on terms of 2/10,net 45.Calculate the effective annual cost to your firm if it chooses not to take advantage of the trade discount offered.

Accepted Answer

The difference in days = 45 -

Question 4

Which of the following statements is false?

Accepted Answer

A)  After a firm decides on its credit standards, it must next establish its credit terms. 
B)  The decision of how much credit risk to assume plays a large role in determining how much money a firm ties up in its payables. 
C)  Knowledge of the payments pattern is also useful for forecasting the firm's working capital requirements. 
D)  An aging schedule categorizes accounts by the number of days they have been on the firm's books. 
A)  After a firm decides on its credit standards, it must next establish its credit terms. 
B)  The decision of how much credit risk to assume plays a large role in determining how much money a firm ties up in its payables. 
C)  Knowledge of the payments pattern is also useful for forecasting the firm's working capital requirements. 
D)  An aging schedule categorizes accounts by the number of days they have been on the firm's books.

Question 5

The cash cycle is the ________ between when a firm pays for its inventory and when it receives cash from the sale of its product.

Accepted Answer

A)  average time 
B)  minimum time 
C)  maximum time 
D)  delayed time 
A)  average time 
B)  minimum time 
C)  maximum time 
D)  delayed time

Question 6

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 inventory days is closest to:

Accepted Answer

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

Question 7

Collection float is made up of all of the following EXCEPT

Accepted Answer

A)  disbursement float. 
B)  processing float. 
C)  mail float. 
D)  availability float. 
A)  disbursement float. 
B)  processing float. 
C)  mail float. 
D)  availability float.

Question 8

Kinston Industries has an average accounts payable balance of $220,000.Its annual cost of goods sold is $5,475,000,and it receives terms of 2/10,net 30 from its suppliers.Kinston chooses to forgo this discount.Is Kinston managing its accounts payable well?

Accepted Answer

The firm is not managing its accounts pa

Question 9

Which of the following is NOT a direct cost associated with inventory?

Accepted Answer

A)  Acquisition costs 
B)  Order costs 
C)  Carrying costs 
D)  Stock-out costs 
A)  Acquisition costs 
B)  Order costs 
C)  Carrying costs 
D)  Stock-out costs

Question 10

Calculate the number of days in Luther's Operating Cycle.

Accepted Answer

Inventory days = @#IMG-DLM& = @#IMG-DLM& = 58.66 d

Question 11

Which of the following statements is false?

Accepted Answer

A)  The aging schedule is also sometimes augmented by analysis of the payments pattern, which provides information on the percentage of monthly sales that the firm collects in each month after the sale. 
B)  Because accounts receivable days can be calculated from the firm's financial statement, outside investors commonly use this measure to evaluate a firm's credit management policy. 
C)  If the aging schedule gets "top-heavy" - that is, if the percentages in the upper half of the schedule begin to increase - the firm will likely need to revisit its credit policy. 
D)  Seasonal sales patterns may cause the number calculated for the accounts receivable days to change depending on when the calculation takes place. 
A)  The aging schedule is also sometimes augmented by analysis of the payments pattern, which provides information on the percentage of monthly sales that the firm collects in each month after the sale. 
B)  Because accounts receivable days can be calculated from the firm's financial statement, outside investors commonly use this measure to evaluate a firm's credit management policy. 
C)  If the aging schedule gets "top-heavy" - that is, if the percentages in the upper half of the schedule begin to increase - the firm will likely need to revisit its credit policy. 
D)  Seasonal sales patterns may cause the number calculated for the accounts receivable days to change depending on when the calculation takes place.

Question 12

Which of the following statements is false?

Accepted Answer

A)  The main components of net working capital are cash, inventory, receivables, and payables. 
B)  The firm's cash cycle is the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its product. 
C)  Working capital includes the cash that is needed to run the firm on a day-to-day basis. It does not include excess cash, which is cash that is not required to run the business and can be invested at a market rate. 
D)  If the firm pays cash for its inventory, the firm's operating cycle is identical to the firm's cash cycle. 
A)  The main components of net working capital are cash, inventory, receivables, and payables. 
B)  The firm's cash cycle is the average length of time between when a firm originally purchases its inventory and when it receives the cash back from selling its product. 
C)  Working capital includes the cash that is needed to run the firm on a day-to-day basis. It does not include excess cash, which is cash that is not required to run the business and can be invested at a market rate. 
D)  If the firm pays cash for its inventory, the firm's operating cycle is identical to the firm's cash cycle.

Question 13

Luther Industries bills its accounts on terms of 2/10,net 30.The firm's accounts receivable include $250,000 that has been outstanding for 10 or fewer days,$375,000 outstanding for 11 to 30 days,$70,000 outstanding for 31 to 40 days,$35,000 outstanding for 41 to 50 days,$20,000 outstanding for 51 to 60 days,and $8,000 outstanding for more than 60 days.Prepare an aging schedule for Luther Industries.

Accepted Answer

The answer of Luther Industries bills its accounts on terms...

Question 14

KT Enterprises would like to construct and operate a new ice skating rink.In addition to the capital expenditures on the rink,management estimates that the project will require an investment today of $220,000 in net working capital.The firm will recover the investment in net working capital fifteen years from today,when management anticipates closing the rink.The discount rate for this type of cash flow is 8% per year.Calculate the present value of the cost of working capital for the ice skating rink.

Accepted Answer

NPV = -$22

Question 15

What does the term 2/10 net 30 mean?

Accepted Answer

A)  If the invoice is paid within 10 days a 2% discount can be taken. If the invoice is paid between 11 and 29 days a 1% discount can be taken. After 30 days the full invoice is due. 
B)  If the invoice is paid within 2 days a 10% discount can be taken, otherwise the full invoice is due in 30 days. 
C)  If the invoice is paid within 2 days a 10% discount can be taken, otherwise a 2% discount can be taken if the invoice is paid in 30 days. 
D)  If the invoice is paid within 10 days a 2% discount can be taken, otherwise the full invoice is due in 30 days. 
A)  If the invoice is paid within 10 days a 2% discount can be taken. If the invoice is paid between 11 and 29 days a 1% discount can be taken. After 30 days the full invoice is due. 
B)  If the invoice is paid within 2 days a 10% discount can be taken, otherwise the full invoice is due in 30 days. 
C)  If the invoice is paid within 2 days a 10% discount can be taken, otherwise a 2% discount can be taken if the invoice is paid in 30 days. 
D)  If the invoice is paid within 10 days a 2% discount can be taken, otherwise the full invoice is due in 30 days.

Question 16

Your firm purchases goods from its supplier on terms of 2/10,net 40.The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to:

Accepted Answer

A)  20.1% 
B)  15.9% 
C)  13.0% 
D)  11.1% 
A)  20.1% 
B)  15.9% 
C)  13.0% 
D)  11.1%

Question 17

What is a compensating balance?

Accepted Answer

A firm's bank may require it to hold a c

Question 18

Which of the following statements is false?

Accepted Answer

A)  Under the Modigliani-Miller assumptions of perfect capital markets, the amount of inventory is irrelevant. 
B)  Unlike trade credit, inventory represents one of the required factors of production. 
C)  It is the firm's financial manager who must arrange for the financing necessary to support the firm's inventory policy and who is responsible for ensuring the firm's overall profitability. 
D)  Inventory management receives extensive coverage in courses on operations management. 
A)  Under the Modigliani-Miller assumptions of perfect capital markets, the amount of inventory is irrelevant. 
B)  Unlike trade credit, inventory represents one of the required factors of production. 
C)  It is the firm's financial manager who must arrange for the financing necessary to support the firm's inventory policy and who is responsible for ensuring the firm's overall profitability. 
D)  Inventory management receives extensive coverage in courses on operations management.

Question 19

The difference between a firm's operating cycle and its cash cycle is

Accepted Answer

A)  its account receivable days. 
B)  its accounts payable days. 
C)  its inventory days. 
D)  there is no difference between the cash and operating cycles. 
A)  its account receivable days. 
B)  its accounts payable days. 
C)  its inventory days. 
D)  there is no difference between the cash and operating cycles.

Question 20

Which of the following statements is false?

Accepted Answer

A)  The lower the discount percentage offered, the greater the cost of forgoing the discount and using trade credit. 
B)  A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding. 
C)  A firm should always pay on the latest day allowed. 
D)  A firm should strive to keep its money working for it as long as possible without developing a bad relationship with its suppliers or engaging in unethical practices. 
A)  The lower the discount percentage offered, the greater the cost of forgoing the discount and using trade credit. 
B)  A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding. 
C)  A firm should always pay on the latest day allowed. 
D)  A firm should strive to keep its money working for it as long as possible without developing a bad relationship with its suppliers or engaging in unethical practices.

Exam 26: Working Capital Management

Which of the following money market investments is a short-term debt obligation of the Canadian government?

Which of the following money market investments is short-term debt issued by a bank with a minimum denomination of $100,000?

Your firm purchases goods from its supplier on terms of 2/10,net 45.Calculate the effective annual cost to your firm if it chooses not to take advantage of the trade discount offered.

Which of the following statements is false?

The cash cycle is the ________ between when a firm pays for its inventory and when it receives cash from the sale of its product.

Collection float is made up of all of the following EXCEPT

Kinston Industries has an average accounts payable balance of $220,000.Its annual cost of goods sold is $5,475,000,and it receives terms of 2/10,net 30 from its suppliers.Kinston chooses to forgo this discount.Is Kinston managing its accounts payable well?

Which of the following is NOT a direct cost associated with inventory?

Calculate the number of days in Luther's Operating Cycle.

Which of the following statements is false?

Which of the following statements is false?

What does the term 2/10 net 30 mean?

Your firm purchases goods from its supplier on terms of 2/10,net 40.The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to:

What is a compensating balance?

Which of the following statements is false?

The difference between a firm's operating cycle and its cash cycle is

Which of the following statements is false?

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

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