Question 1

Determination of a firm's investment in current assets and how that investment is financed are elements of working capital policy.

Accepted Answer

A) True 
 B)False

Question 2

Working capital policy involves

Accepted Answer

A)  The level of current assets. 
B)  The financing of current assets. 
C)  Current maturities of long-term debt. 
D)  All of the above. 
E)  Only answers a and b above. 
A)  The level of current assets. 
B)  The financing of current assets. 
C)  Current maturities of long-term debt. 
D)  All of the above. 
E)  Only answers a and b above.

Question 3

The economic ordering quantity will rise due to an increase in which of the following variable(s)?

Accepted Answer

A)  Product demand (sales). 
B)  Carrying costs. 
C)  Ordering costs. 
D)  Both a and b above. 
E)  Both a and c above. 
A)  Product demand (sales). 
B)  Carrying costs. 
C)  Ordering costs. 
D)  Both a and b above. 
E)  Both a and c above.

Question 4

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

Accepted Answer

A) True 
 B)False

Question 5

Incremental Profits
Aberwald Corporation
Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate.Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price.(Assume a 360-day year.)
-Refer to Aberwald Corporation.What is its average inventory level?

Accepted Answer

A)  1,588 
B)  3,175 
C)  1,123 
D)  13,675 
E)  8,124 
A)  1,588 
B)  3,175 
C)  1,123 
D)  13,675 
E)  8,124

Question 6

The working capital cash flow cycle encompasses order and receipt of raw materials, conversion of raw material into inventory, and finally, conversion of inventory into sales and accounts receivable.

Accepted Answer

A) True 
 B)False

Question 7

An increase in a current asset account must be accompanied by a corresponding increase in a liability account.

Accepted Answer

A) True 
 B)False

Question 8

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e.runs out of an inventory item).

Accepted Answer

A) True 
 B)False

Question 9

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 working capital strategy because of the inherent risks of using short-term financing.

Accepted Answer

A) True 
 B)False

Question 10

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

Accepted Answer

A) True 
 B)False

Question 11

A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position.

Accepted Answer

A) True 
 B)False

Question 12

Jumpdisk Company writes checks averaging $15,000 a day, and it takes 5 days for these checks to clear.The firm also receives checks in the amount of $17,000 per day, but the firm loses three days while its receipts are being deposited and cleared.What is the firm's net float in dollars?

Accepted Answer

A)  $126,000 
B)  $75,000 
C)  $32,000 
D)  $24,000 
E)  $16,000 
A)  $126,000 
B)  $75,000 
C)  $32,000 
D)  $24,000 
E)  $16,000

Question 13

Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days.Out of convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting until day 30.You point out that the approximate cost of not taking the discount and paying on day 30 is around 37 percent.But since your firm is not taking discounts and is paying on day 20, what is the effective annual percentage cost (not approximate) of your firm's current practice, using a 360-day year?

Accepted Answer

A)  36.7% 
B)  105.4% 
C)  73.4% 
D)  43.6% 
E)  106.9% 
A)  36.7% 
B)  105.4% 
C)  73.4% 
D)  43.6% 
E)  106.9%

Question 14

Jordan Air Inc.has average inventory of $1,000,000.Its estimated annual sales are 15 million and the firm estimates its receivables collection period to be twice as long as its inventory conversion period.The firm pays its trade credit on time; its terms are net 30.The firm wants to decrease its cash conversion cycle by 10 days.It believes that it can reduce its average inventory to $900,000.Assume a 360-day year and that sales will not change.Cost of goods sold equal 80 percent of sales.By how much must the firm also reduce its accounts receivable to meet its goal of a 10 day reduction?

Accepted Answer

A)  $101,900 
B)  $1,000,000 
C)  $291,667 
D)  $333,520 
E)  $0 
A)  $101,900 
B)  $1,000,000 
C)  $291,667 
D)  $333,520 
E)  $0

Question 15

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

Accepted Answer

A) True 
 B)False

Question 16

Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Accepted Answer

A) True 
 B)False

Question 17

Multinational firms can reduce the risk of exchange rate changes between the time a sale is made and the time a receivable is collected without cost by hedging.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following statements is correct?

Accepted Answer

A)  Under normal conditions, the shape of the yield curve implies that the interest cost of short-term debt is greater than that of long-term debt, although short-term debt has other advantages that make it desirable as a financing source. 
B)  Flexibility is an advantage of short-term credit but this is somewhat offset by the higher flotation costs associated with the need to repeatedly renew short-term credit. 
C)  A short-term loan usually can be obtained more quickly than a long-term loan but the penalty for early repayment of a short-term loan is significantly higher than for a long-term loan. 
D)  Statements about the flexibility, cost, and riskiness of short-term versus long-term credit are dependent on the type of credit that actually is used. 
E)  Short-term debt is often less costly than long-term debt and the major reason for this is that short-term debt exposes the borrowing firm to much less risk than long-term debt. 
A)  Under normal conditions, the shape of the yield curve implies that the interest cost of short-term debt is greater than that of long-term debt, although short-term debt has other advantages that make it desirable as a financing source. 
B)  Flexibility is an advantage of short-term credit but this is somewhat offset by the higher flotation costs associated with the need to repeatedly renew short-term credit. 
C)  A short-term loan usually can be obtained more quickly than a long-term loan but the penalty for early repayment of a short-term loan is significantly higher than for a long-term loan. 
D)  Statements about the flexibility, cost, and riskiness of short-term versus long-term credit are dependent on the type of credit that actually is used. 
E)  Short-term debt is often less costly than long-term debt and the major reason for this is that short-term debt exposes the borrowing firm to much less risk than long-term debt.

Question 19

You need to borrow $25,000 for one year.Your bank offers to make the loan, and it offers you three choices: (1) 15 percent simple interest, annual compounding; (2) 13 percent simple interest, daily compounding (360-day year); (3) 9 percent add-on interest, 12 end-of-month payments.The first two loans would require a single payment at the end of the year, the third would require 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rate?

Accepted Answer

A)  1.12% 
B)  2.48% 
C)  3.60% 
D)  4.25% 
E)  5.00% 
A)  1.12% 
B)  2.48% 
C)  3.60% 
D)  4.25% 
E)  5.00%

Question 20

Total Inventory Costs
Fashion Clothiers Inc.
Assume that Fashion Clothiers Inc.uses 1,440,000 yards of material each year.Further, assume that Fashion can order the material at a cost of $2 per yard, plus fixed ordering costs of $100 per order.The firm's carrying cost is 20 percent of the inventory value, at cost.
-Refer to Fashion Clothiers Inc.What is Fashion Clothiers' minimum cost of ordering and holding inventory?

Accepted Answer

A)  $6,254 
B)  $10,733 
C)  $11,560 
D)  $13,563 
E)  $19,825 
A)  $6,254 
B)  $10,733 
C)  $11,560 
D)  $13,563 
E)  $19,825

Determination of a firm's investment in current assets and how that investment is financed are elements of working capital policy.

Working capital policy involves

The economic ordering quantity will rise due to an increase in which of the following variable(s)?

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

The working capital cash flow cycle encompasses order and receipt of raw materials, conversion of raw material into inventory, and finally, conversion of inventory into sales and accounts receivable.

An increase in a current asset account must be accompanied by a corresponding increase in a liability account.

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e.runs out of an inventory item).

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 working capital strategy because of the inherent risks of using short-term financing.

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position.

Jumpdisk Company writes checks averaging $15,000 a day, and it takes 5 days for these checks to clear.The firm also receives checks in the amount of $17,000 per day, but the firm loses three days while its receipts are being deposited and cleared.What is the firm's net float in dollars?

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Multinational firms can reduce the risk of exchange rate changes between the time a sale is made and the time a receivable is collected without cost by hedging.

Which of the following statements is correct?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Investment Concepts

Security Valuation and Selection

Filters

Exam 15: Working Capital Management

Determination of a firm's investment in current assets and how that investment is financed are elements of working capital policy.

Working capital policy involves

The economic ordering quantity will rise due to an increase in which of the following variable(s)?

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

The working capital cash flow cycle encompasses order and receipt of raw materials, conversion of raw material into inventory, and finally, conversion of inventory into sales and accounts receivable.

An increase in a current asset account must be accompanied by a corresponding increase in a liability account.

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e.runs out of an inventory item).

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 working capital strategy because of the inherent risks of using short-term financing.

The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding.

A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position.

Jumpdisk Company writes checks averaging $15,000 a day, and it takes 5 days for these checks to clear.The firm also receives checks in the amount of $17,000 per day, but the firm loses three days while its receipts are being deposited and cleared.What is the firm's net float in dollars?

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Multinational firms can reduce the risk of exchange rate changes between the time a sale is made and the time a receivable is collected without cost by hedging.

Which of the following statements is correct?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Investment Concepts

Security Valuation and Selection

Filters