Question 1

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 B

Question 2

What is cash discount?

Accepted Answer

The cash discount is the percentage discount offered if the buyer pays early.

Question 3

If a firm wishes to invest cash that might be needed at short notice in the very near future, they would be most likely to invest in which of the following securities?

Accepted Answer

A)  Treasury bills 
B)  certificates of deposit 
C)  repurchase agreements 
D)  banker's acceptances 
A)  Treasury bills 
B)  certificates of deposit 
C)  repurchase agreements 
D)  banker's acceptances A

Question 4

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 5

Which of the following firms would be expected to need the most cash to conduct its daily operations?

Accepted Answer

A)  a retail grocery store that sells on a cash only basis 
B)  an electronics manufacturer that only assemble its goods once they have been paid for 
C)  an airline that has many of its fares pre-paid by cash or credit card 
D)  an aircraft manufacturer with large inventory and long development and sales cycles 
A)  a retail grocery store that sells on a cash only basis 
B)  an electronics manufacturer that only assemble its goods once they have been paid for 
C)  an airline that has many of its fares pre-paid by cash or credit card 
D)  an aircraft manufacturer with large inventory and long development and sales cycles

Question 6

Can a firm's cash cycle be longer than a firm's operating cycle?

Accepted Answer

A cash cycle is operating cycl

Question 7

Genovese Fine Foods, a manufacturer of foodstuffs, buys durham wheat flour on credit on June 1. It processes this flour to make pasta on June 6 and pays cash for the flour on June 15. On June 22 it sells the pasta to a chain of supermarkets, and on July 3 receives cash payment for this sale. What is the length of the cash cycle in this case?

Accepted Answer

A)  8 days 
B)  12 days 
C)  18 days 
D)  28 days 
A)  8 days 
B)  12 days 
C)  18 days 
D)  28 days

Question 8

What is a transactions balance?

Accepted Answer

A)  the cash a firm holds to counter the uncertainty surrounding its future cash needs 
B)  the cash a firm places into short-term investments 
C)  the cash a firm holds in order to pay its bills 
D)  the cash a firm holds to gain tax advantages 
A)  the cash a firm holds to counter the uncertainty surrounding its future cash needs 
B)  the cash a firm places into short-term investments 
C)  the cash a firm holds in order to pay its bills 
D)  the cash a firm holds to gain tax advantages

Question 9

Trade credit should always be used when it is offered.

Accepted Answer

A) True 
 B)False

Question 10

What is the meaning of the term 2/10 net 30?

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 11

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 12

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 13

A firm offers its customers 1/10 net 40. What is the cost of trade credit to a customer who chooses to pay on day 40?

Accepted Answer

A)  12.8% 
B)  13.0% 
C)  65.5% 
D)  96.0% 
A)  12.8% 
B)  13.0% 
C)  65.5% 
D)  96.0%

Question 14

Which of the following money market investments is a short-term debt obligations of the U.S. government?

Accepted Answer

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

Question 15

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

Question 16

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%

Question 17

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%

Question 18

A firm that chooses a low-risk, restrictive credit policy will tend to have a larger investment in receivables.

Accepted Answer

A) True 
 B)False

Question 19

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'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 20

Evertz Metals buys and stockpiles dolomite to use in its smelting processes. Before all this dolomite is used, however, they alter their smelting process so that calcite limestone is used instead. How is the inventory cost of the unused dolomite 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

Exam 19: Working Capital Management

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?

What is cash discount?

If a firm wishes to invest cash that might be needed at short notice in the very near future, they would be most likely to invest in which of the following securities?

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

Which of the following firms would be expected to need the most cash to conduct its daily operations?

Can a firm's cash cycle be longer than a firm's operating cycle?

What is a transactions balance?

Trade credit should always be used when it is offered.

What is the meaning of the term 2/10 net 30?

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

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?

A firm offers its customers 1/10 net 40. What is the cost of trade credit to a customer who chooses to pay on day 40?

Which of the following money market investments is a short-term debt obligations of the U.S. government?

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

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 that chooses a low-risk, restrictive credit policy will tend to have a larger investment in receivables.

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's cash conversion cycle is closest to ________.

Evertz Metals buys and stockpiles dolomite to use in its smelting processes. Before all this dolomite is used, however, they alter their smelting process so that calcite limestone is used instead. How is the inventory cost of the unused dolomite best categorized?

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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