Question 1

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

Accepted Answer

A) True 
 B)False

Question 2

The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the average collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  credit policy has an impact on working capital because it influences both sales and the time before receivables are collected. 
B)  the cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans. 
C)  if a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60. 
D)  managing working capital is important because it influences financing decisions and the firm's profitability. 
E)  a company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year. 
A)  credit policy has an impact on working capital because it influences both sales and the time before receivables are collected. 
B)  the cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans. 
C)  if a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60. 
D)  managing working capital is important because it influences financing decisions and the firm's profitability. 
E)  a company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.

Question 4

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A) True 
 B)False

Question 5

Which of the following statements is CORRECT?

Accepted Answer

A)  although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. 
B)  if a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
C)  net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased. 
D)  if a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt. 
E)  net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased. 
A)  although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. 
B)  if a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
C)  net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased. 
D)  if a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt. 
E)  net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.

Question 6

When deciding whether or not to take a cash discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

Accepted Answer

A)  take steps to reduce the dso. 
B)  start paying its bills sooner, which would reduce the average accounts payable but not affect sales. 
C)  sell common stock to retire long-term bonds. 
D)  sell an issue of long-term bonds and use the proceeds to buy back some of its common stock. 
E)  increase average inventory without increasing sales. 
A)  take steps to reduce the dso. 
B)  start paying its bills sooner, which would reduce the average accounts payable but not affect sales. 
C)  sell common stock to retire long-term bonds. 
D)  sell an issue of long-term bonds and use the proceeds to buy back some of its common stock. 
E)  increase average inventory without increasing sales.

Question 8

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Accepted Answer

A)  place larger orders for raw materials to take advantage of price breaks. 
B)  take all cash discounts that are offered. 
C)  continue to take all cash discounts that are offered and pay on the net date. 
D)  offer longer payment terms to customers. 
E)  carry a constant amount of receivables as sales decline. 
A)  place larger orders for raw materials to take advantage of price breaks. 
B)  take all cash discounts that are offered. 
C)  continue to take all cash discounts that are offered and pay on the net date. 
D)  offer longer payment terms to customers. 
E)  carry a constant amount of receivables as sales decline.

Question 9

Hinkle Corporation 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 $550,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)  $90,411 
B)  $94,932 
C)  $99,678 
D)  $104,662 
E)  $109,895 
A)  $90,411 
B)  $94,932 
C)  $99,678 
D)  $104,662 
E)  $109,895

Question 10

Data on Nathan Enterprises for the most recent year are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. 
$\begin{array}{lr}
\text { Sales } & \$ 110,000 \
\text { Accounts receivable } & \$ 16,000 \
\text { Days sales outstanding (DSO) } & 53.09 \
\text { Benchmark days sales outstanding (DSO) } & 20.00
\end{array}$

Accepted Answer

A)  $8,078 
B)  $8,975 
C)  $9,973 
D)  $10,970 
E)  $12,067 
A)  $8,078 
B)  $8,975 
C)  $9,973 
D)  $10,970 
E)  $12,067

Question 11

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Accepted Answer

A) True 
 B)False

Question 12

The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low. Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

Accepted Answer

A) True 
 B)False

Question 13

An increase in any current asset must be accompanied by an equal increase in some current liability.

Accepted Answer

A) True 
 B)False

Question 14

During the coming year, Gold & Gold wants to increase its free cash flow by $180 million, which should result in a higher stock price. The CFO has made these projections for the upcoming year:
. EBIT is projected to equal $850 million.
. Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million.
. The tax rate is 40%.
. There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals.
What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

Accepted Answer

A)  $72 
B)  $90 
C)  $108 
D)  $130 
E)  $156 
A)  $72 
B)  $90 
C)  $108 
D)  $130 
E)  $156

Question 15

Kiley Corporation had the following data for the most recent year (in millions). The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?$\begin{array}{lrrr} 
& \text { Orignal } & & \text { Revised } \
\text { Annual sales: unchanged } & \$ 110,000 & & \$ 110,000 \
\text { Cost of goods sold: unchanged } & \$ 80,000 & & \$ 80,000 \
\text { Average inventory: lowered by } \$ 4,000 & \$ 20,000 & & \$ 16,000 \
\text { Average receivables: lowered by } \$ 2,000 & \$ 16,000 & & \$ 14,000 \
\text { Average payables: increased by } \$ 2,000 & \$ 10,000 & & \$ 12,000 \
\text { Days in year } & 365 & & 365
\end{array}$

Accepted Answer

A)  34.0 
B)  37.4 
C)  41.2 
D)  45.3 
E)  49.8 
A)  34.0 
B)  37.4 
C)  41.2 
D)  45.3 
E)  49.8

Question 16

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Accepted Answer

A) True 
 B)False

Question 17

Sanders Enterprises arranged a revolving credit agreement of $9,000,000 with a group of banks. The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment. On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis. The prime rate was 3.25% during the year. If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver?

Accepted Answer

A)  $285,000 
B)  $300,000 
C)  $315,000 
D)  $330,750 
E)  $347,288 
A)  $285,000 
B)  $300,000 
C)  $315,000 
D)  $330,750 
E)  $347,288

Question 18

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 cycleσ Round to the nearest whole day.

Accepted Answer

A) $26 days 
B)  $22 days 
C)  $18 days 
D)  $14 days 
E) $11 days 
A) $26 days 
B)  $22 days 
C)  $18 days 
D)  $14 days 
E) $11 days

Question 19

Arnold Inc. purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance?(Assume a 365-day year.)

Accepted Answer

A)  $458,160 
B)  $482,273 
C)  $507,656 
D)  $534,375 
E)  $562,500 
A)  $458,160 
B)  $482,273 
C)  $507,656 
D)  $534,375 
E)  $562,500

Question 20

The calculated cost of trade credit for a firm that buys on terms of 2/10 net 30 is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.

Accepted Answer

A) True 
 B)False

Exam 21: Supply Chains and Working Capital Management

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

Which of the following statements is NOT CORRECT?

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Which of the following statements is CORRECT?

When deciding whether or not to take a cash discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

The concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low. Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

An increase in any current asset must be accompanied by an equal increase in some current liability.

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Arnold Inc. purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance?(Assume a 365-day year.)

The calculated cost of trade credit for a firm that buys on terms of 2/10 net 30 is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.

An Overview of Financial Management and the Financial Environment

Risk and Return-Part I

Risk and Return-Part II

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Criteria

Capital Budgeting-Estimating Cash Flows and Analyzing Risk

Real Options

Distributions to Shareholders-Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings-Investment Banking: and Financial Restructuring

Lease Financing

Hybrid Financing Preferred Stock-Warrants and Convertibles

Providing and Obtaining Credit

Other Topics in Working Capital Management

Enterprise Risk Management

Bankruptcy-Reorganization and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Basic Financial Tools: A review

Pension Plan Management

Financial Management in Not for Profit Businesses

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