Question 1

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 2

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 3

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 4

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

Question 5

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 6

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 7

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 8

What is the effective annual cost of credit terms of 3/15 net 30, if the firm stretches the accounts payable to 60 days?

Accepted Answer

A)  1.7% 
B)  3.35% 
C)  12.65% 
D)  28.03% 
A)  1.7% 
B)  3.35% 
C)  12.65% 
D)  28.03%

Question 9

What are the costs of holding inventory?

Accepted Answer

The costs for holdin

Question 10

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 11

ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. What was its average days of inventory?

Accepted Answer

A)  43.8 days 
B)  36.5 days 
C)  73.0 days 
D)  9.1 days 
A)  43.8 days 
B)  36.5 days 
C)  73.0 days 
D)  9.1 days

Question 12

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

Question 13

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 14

Which of the following is NOT an advantage of trade credit versus a standard loan?

Accepted Answer

A)  Trade credit reduces a firm's collection float. 
B)  If the buyer defaults, the supplier may be able to seize the inventory as collateral. 
C)  The supplier may have more information about the credit quality of the customer than a bank. 
D)  Providing financing at below-market rates is an indirect way to lower prices for only certain customers. 
A)  Trade credit reduces a firm's collection float. 
B)  If the buyer defaults, the supplier may be able to seize the inventory as collateral. 
C)  The supplier may have more information about the credit quality of the customer than a bank. 
D)  Providing financing at below-market rates is an indirect way to lower prices for only certain customers.

Question 15

Which of the following are the "5-C's of Credit"?

Accepted Answer

A)  Character, Capacity, Compensation, Collateral, Conditions 
B)  Character, Cash, Credit, Collateral, Collectability 
C)  Character, Capacity, Capital, Collateral, Conditions 
D)  Cash, Capacity, Capital, Compensation, Collectability 
A)  Character, Capacity, Compensation, Collateral, Conditions 
B)  Character, Cash, Credit, Collateral, Collectability 
C)  Character, Capacity, Capital, Collateral, Conditions 
D)  Cash, Capacity, Capital, Compensation, Collectability

Question 16

Which of the following statements is FALSE?

Accepted Answer

A)  A firm's cash cycle is the length of time between when the firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory. 
B)  The longer a firm's cash cycle, the more working capital it has, and the more cash it needs to carry to conduct its daily operations. 
C)  Most firms buy their inventory on credit, which increases the amount of time between the cash investment and the receipt of cash from that investment. 
D)  Any reduction in working capital requirements generates a positive free cash flow that the firm can distribute immediately to shareholders. 
A)  A firm's cash cycle is the length of time between when the firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory. 
B)  The longer a firm's cash cycle, the more working capital it has, and the more cash it needs to carry to conduct its daily operations. 
C)  Most firms buy their inventory on credit, which increases the amount of time between the cash investment and the receipt of cash from that investment. 
D)  Any reduction in working capital requirements generates a positive free cash flow that the firm can distribute immediately to shareholders.

Question 17

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 18

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 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 19

Which of the following money market investments is a short-term, unsecured debt obligation issued by a large corporation? The minimum denomination is $25,000, but most have a face value of $100,000 or more.

Accepted Answer

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

Question 20

SwenCorp had sales of $154 million this year and an average accounts receivable of $18 million per day. Its credit terms specify "2/14 net 40." On average, how long does it take to collect on its sales?

Accepted Answer

A)  8.5 days 
B)  13 days 
C)  28 days 
D)  43 days 
A)  8.5 days 
B)  13 days 
C)  28 days 
D)  43 days

Exam 19: Working Capital Management

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

What should a firm do after establishing a credit policy?

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?

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

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 statements is FALSE?

What is the effective annual cost of credit terms of 3/15 net 30, if the firm stretches the accounts payable to 60 days?

What are the costs of holding inventory?

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

ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. What was its average days of inventory?

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?

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

Which of the following is NOT an advantage of trade credit versus a standard loan?

Which of the following are the "5-C's of Credit"?

Which of the following statements is FALSE?

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 ________.

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 Inventory days is closest to ________.

Which of the following money market investments is a short-term, unsecured debt obligation issued by a large corporation? The minimum denomination is $25,000, but most have a face value of $100,000 or more.

SwenCorp had sales of $154 million this year and an average accounts receivable of $18 million per day. Its credit terms specify "2/14 net 40." On average, how long does it take to collect on its sales?

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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