Question 1

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 2

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.

Question 3

A firm offers its customers 2/14 net 28. What is the cost of trade credit to a customer who chooses to pay on day 28?

Accepted Answer

A) 32.8% 
B) 67.3% 
C) 69.3% 
D) 72.4% 
A) 32.8% 
B) 67.3% 
C) 69.3% 
D) 72.4%

Question 4

Which of the following is the term used to describe short-term, unsecured debt issued by large corporations, usually in denominations greater than $100,000 or more?

Accepted Answer

A) certificates of deposit 
B) repurchase agreements 
C) banker's acceptances 
D) commercial paper 
A) certificates of deposit 
B) repurchase agreements 
C) banker's acceptances 
D) commercial paper

Question 5

A firm's credit terms specify "1/10 net 30" and the accounts receivable days outstanding is 32 days. Which of the following can be concluded on the basis of this information?

Accepted Answer

A) Most customers pay on time. 
B) The average customer pays two days late. 
C) All customers have paid within 32 days of purchase. 
D) All customers pay late. 
A) Most customers pay on time. 
B) The average customer pays two days late. 
C) All customers have paid within 32 days of purchase. 
D) All customers pay late.

Question 6

What should a firm do after establishing a credit policy?

Accepted Answer

A) decide what should be done for those customers who do not pay their accounts on time 
B) monitor its accounts receivable to analyze whether its credit policy is effective 
C) decide on the length of the period before payment must be made 
D) determine what percent of monthly sales are collected in the month after that sale 
A) decide what should be done for those customers who do not pay their accounts on time 
B) monitor its accounts receivable to analyze whether its credit policy is effective 
C) decide on the length of the period before payment must be made 
D) determine what percent of monthly sales are collected in the month after that sale

Question 7

What is a compensating balance?

Accepted Answer

A) the cash a firm places into short-term investments 
B) the cash a firm holds in order to pay its bills 
C) the cash a firm holds to gain tax advantages 
D) the cash a firm holds in an account at the bank in order for the bank to perform services for that firm 
A) the cash a firm places into short-term investments 
B) the cash a firm holds in order to pay its bills 
C) the cash a firm holds to gain tax advantages 
D) the cash a firm holds in an account at the bank in order for the bank to perform services for that firm

Question 8

Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

The Holiday Corporation had sales of $450 million this year. Its accounts receivable balance averaged $30 million. How long, on average, does it take the firm to collect on its sales?

Accepted Answer

A) 15.0 days 
B) 24.3 days 
C) 12.2 days 
D) 16.7 days 
A) 15.0 days 
B) 24.3 days 
C) 12.2 days 
D) 16.7 days

Question 11

What is collection float?

Accepted Answer

Collection float is the amount

Question 12

Which of the following would increase a firm's cash conversion cycle?

Accepted Answer

A) Increase inventory days. 
B) Decrease accounts receivable days. 
C) Decrease accounts payable days. 
D) Increase cash days. 
A) Increase inventory days. 
B) Decrease accounts receivable days. 
C) Decrease accounts payable days. 
D) Increase cash days.

Question 13

A firm has an average accounts payable balance of $180,000. Its average daily cost of goods sold is $12,000. What is the average number of days that the firm takes to pay its debt?

Accepted Answer

A) 2 days 
B) 8 days 
C) 15 days 
D) 21 days 
A) 2 days 
B) 8 days 
C) 15 days 
D) 21 days

Question 14

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 15

Which of the following short-term securities would a firm invest in if they wanted to invest cash for a term of only a few days?

Accepted Answer

A) Treasury bills 
B) repurchase agreements 
C) banker's acceptances 
D) commercial paper 
A) Treasury bills 
B) repurchase agreements 
C) banker's acceptances 
D) commercial paper

Question 16

LeokLee Industries has an average accounts payable balance of $720,000. Its average annual cost of goods sold is $8,760,000. It receives terms of 1/10 net 30 from its suppliers. Is LeokLee managing its accounts payables well?

Accepted Answer

A) Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B) Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C) Yes, since it, on average, stretches payment beyond the due payment date. 
D) No, since it, on average, does not take advantage of the discount period and pays well before payment is due. 
A) Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B) Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C) Yes, since it, on average, stretches payment beyond the due payment date. 
D) No, since it, on average, does not take advantage of the discount period and pays well before payment is due.

Question 17

Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting processes. How is this inventory cost best categorized?

Accepted Answer

A) an acquisition cost 
B) a carrying cost 
C) an order cost 
D) a holding cost 
A) an acquisition cost 
B) a carrying cost 
C) an order cost 
D) a holding cost

Question 18

Which of the following is the major benefit to a firm of using just-in-time inventory management?

Accepted Answer

A) minimizes the risk of stock-outs 
B) minimizes the total number of orders that the firm places 
C) reduces acquisition costs for placing goods in inventory 
D) largely eliminates the carrying costs of maintaining a large inventory 
A) minimizes the risk of stock-outs 
B) minimizes the total number of orders that the firm places 
C) reduces acquisition costs for placing goods in inventory 
D) largely eliminates the carrying costs of maintaining a large inventory

Question 19

Macrae Products, a manufacturer of building products, buys raw gypsum on credit on May 16. It processes this gypsum to make dry plaster powder on May 20 and pays cash for the raw gypsum on May 30. On June 7 it sells the dry plaster powder to a chain of hardware stores, and on June 21 receives cash payment for this sale. What is the length of the cash cycle in this case?

Accepted Answer

A) 8 days 
B) 14 days 
C) 22 days 
D) 23 days 
A) 8 days 
B) 14 days 
C) 22 days 
D) 23 days

Question 20

Which of the following best describes short-term debt issued by banks with a minimum denomination of $100,000?

Accepted Answer

A) certificates of deposit 
B) repurchase agreements 
C) banker's acceptances 
D) commercial paper 
A) certificates of deposit 
B) repurchase agreements 
C) banker's acceptances 
D) commercial paper

Exam 19: Working Capital Management

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A firm offers its customers 2/14 net 28. What is the cost of trade credit to a customer who chooses to pay on day 28?

Which of the following is the term used to describe short-term, unsecured debt issued by large corporations, usually in denominations greater than $100,000 or more?

A firm's credit terms specify "1/10 net 30" and the accounts receivable days outstanding is 32 days. Which of the following can be concluded on the basis of this information?

What should a firm do after establishing a credit policy?

What is a compensating balance?

Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.

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

The Holiday Corporation had sales of $450 million this year. Its accounts receivable balance averaged $30 million. How long, on average, does it take the firm to collect on its sales?

What is collection float?

Which of the following would increase a firm's cash conversion cycle?

A firm has an average accounts payable balance of $180,000. Its average daily cost of goods sold is $12,000. What is the average number of days that the firm takes to pay its debt?

Collection float is made up of all of the following EXCEPT ________.

Which of the following short-term securities would a firm invest in if they wanted to invest cash for a term of only a few days?

LeokLee Industries has an average accounts payable balance of $720,000. Its average annual cost of goods sold is $8,760,000. It receives terms of 1/10 net 30 from its suppliers. Is LeokLee managing its accounts payables well?

Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting processes. How is this inventory cost best categorized?

Which of the following is the major benefit to a firm of using just-in-time inventory management?

Which of the following best describes short-term debt issued by banks with a minimum denomination of $100,000?

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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