Question 1

Collection float is the amount of time it takes for a firm to be able to use funds after a customer has paid for its goods.

Accepted Answer

A) True 
 B)False  True

Question 2

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 
B) commercial paper 
C) banker's acceptance 
D) repurchase agreement 
E) Treasury bills 
A) certificates of deposit 
B) commercial paper 
C) banker's acceptance 
D) repurchase agreement 
E) Treasury bills D

Question 3

What is the effective annual cost of credit terms of 1/10 net 30, if the firm stretches the accounts payable to 45 days?

Accepted Answer

A)  8.49 % 
B) 10.91% 
C) 11.05% 
D) 18.03% 
A)  8.49 % 
B) 10.91% 
C) 11.05% 
D) 18.03% C

Question 4

A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding.

Accepted Answer

A) True 
 B)False

Question 5

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 6

The three steps in establishing a credit policy are establishing credit standards, establishing credit terms, and establishing a collection policy.

Accepted Answer

A) True 
 B)False

Question 7

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 8

Which of the following best describes the availability float?

Accepted Answer

A) how long it takes the firm to process the check and deposit it in the bank 
B) how long it takes before the bank gives the firm credit for the funds 
C) how long it takes before payments to suppliers actually result in a cash outflow for the firm 
D) how long it takes for a firm to be able to use funds after a customer has paid for its goods 
A) how long it takes the firm to process the check and deposit it in the bank 
B) how long it takes before the bank gives the firm credit for the funds 
C) how long it takes before payments to suppliers actually result in a cash outflow for the firm 
D) how long it takes for a firm to be able to use funds after a customer has paid for its goods

Question 9

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 10

Franklin Industries has a current net working capital of $2.5 million. It expects that this will grow at a rate of 3.5% annually forever. If it could slow that growth to 3% per year, how would that affect the value of the firm, given that it has a cost of capital of 11%?

Accepted Answer

A) a decrease of $2.22 million 
B) an increase of $12,500 
C) an increase of $0.78 million 
D) an increase of $2.08 million 
A) a decrease of $2.22 million 
B) an increase of $12,500 
C) an increase of $0.78 million 
D) an increase of $2.08 million

Question 11

What are the five C's of Credit?

Accepted Answer

Lenders have coined the phrase

Question 12

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) One factor that contributes to the length of a firm's receivables and payables is the delay between the time a bill is paid and the cash is actually received. 
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 customer is known as trade credit. 
A) Under the Modigliani-Miller assumptions of perfect capital markets, the amounts of payables and receivables are irrelevant. 
B) One factor that contributes to the length of a firm's receivables and payables is the delay between the time a bill is paid and the cash is actually received. 
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 customer is known as trade credit.

Question 13

Jerome Industries has inventory days of 48, accounts receivable days of 21, and accounts payable days of 30. What is its cash conversion cycle?

Accepted Answer

A) 39 days 
B) 57 days 
C) 69 days 
D) 72 days 
A) 39 days 
B) 57 days 
C) 69 days 
D) 72 days

Question 14

Which of the following is a firm's cash cycle?

Accepted Answer

A) the average length of time between when a firm arranges funds to purchase its inventory and when it receives the cash back from selling its product 
B) the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory 
C) the average length of time between when a firm pays cash to purchase its initial inventory and when it sells output from that product 
D) the average length of time between when a firm arranges funds to purchase its inventory and when it sells the output produced from that inventory 
A) the average length of time between when a firm arranges funds to purchase its inventory and when it receives the cash back from selling its product 
B) the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory 
C) the average length of time between when a firm pays cash to purchase its initial inventory and when it sells output from that product 
D) the average length of time between when a firm arranges funds to purchase its inventory and when it sells the output produced from that inventory

Question 15

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 16

What is cash discount?

Accepted Answer

The cash discount is

Question 17

What is the effective cost of credit terms of 2/10, net 30 if the firm stretches the accounts payable to 45 days?

Accepted Answer

A) 49.76% 
B) 36.12% 
C) 23.45% 
D) 44.59% 
A) 49.76% 
B) 36.12% 
C) 23.45% 
D) 44.59%

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 and stretches the accounts payable to 45 days is closest to ________.

Accepted Answer

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

Question 19

What is a firm's cash cycle?

Accepted Answer

A firm's cash cycle is the len

Question 20

What is the effective cost of credit terms of 3/5 net 45 if the firm stretches the accounts payable to 60 days?

Accepted Answer

A) 12.9% 
B) 35.6% 
C) 39.9% 
D) 22.4% 
A) 12.9% 
B) 35.6% 
C) 39.9% 
D) 22.4%

Exam 19: Working Capital Management

Collection float is the amount of time it takes for a firm to be able to use funds after a customer has paid for its goods.

What is the effective annual cost of credit terms of 1/10 net 30, if the firm stretches the accounts payable to 45 days?

A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding.

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 ________.

The three steps in establishing a credit policy are establishing credit standards, establishing credit terms, and establishing a collection policy.

Which of the following statements is FALSE?

Which of the following best describes the availability float?

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

Franklin Industries has a current net working capital of $2.5 million. It expects that this will grow at a rate of 3.5% annually forever. If it could slow that growth to 3% per year, how would that affect the value of the firm, given that it has a cost of capital of 11%?

What are the five C's of Credit?

Which of the following statements is FALSE?

Jerome Industries has inventory days of 48, accounts receivable days of 21, and accounts payable days of 30. What is its cash conversion cycle?

Which of the following is a firm's cash cycle?

Which of the following statements is FALSE?

What is cash discount?

What is the effective cost of credit terms of 2/10, net 30 if the firm stretches the accounts payable to 45 days?

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 and stretches the accounts payable to 45 days is closest to ________.

What is a firm's cash cycle?

What is the effective cost of credit terms of 3/5 net 45 if the firm stretches the accounts payable to 60 days?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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