Question 1

Working capital management involves decisions related to

Accepted Answer

A)  labor contracts 
B)  current assets and liabilities 
C)  fixed asset acquisition 
D)  long term debt 
A)  labor contracts 
B)  current assets and liabilities 
C)  fixed asset acquisition 
D)  long term debt

Question 2

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is correct?

Accepted Answer

A)  Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. 
B)  A firm will relax its credit standards only if it expects bad debts will not increase because of the change. 
C)  If a firm which sells on terms of "net 30" changes its policy and begins offering all customers terms of "2/10, net 30," and if no change in sales volume occurs, then the firm's DSO will probably increase. 
D)  If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts. 
E)  Statements a, b, c, and d are all false. 
A)  Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. 
B)  A firm will relax its credit standards only if it expects bad debts will not increase because of the change. 
C)  If a firm which sells on terms of "net 30" changes its policy and begins offering all customers terms of "2/10, net 30," and if no change in sales volume occurs, then the firm's DSO will probably increase. 
D)  If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts. 
E)  Statements a, b, c, and d are all false.

Question 4

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

Accepted Answer

A) True 
 B)False

Question 5

Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring receivables.However, they can provide erroneous signals to credit managers when

Accepted Answer

A)  Customers' payments patterns are changing. 
B)  Sales fluctuate seasonally. 
C)  Some customers take the discount and others do not. 
D)  Sales are relatively constant, either seasonally or cyclically. 
E)  None of the above. 
A)  Customers' payments patterns are changing. 
B)  Sales fluctuate seasonally. 
C)  Some customers take the discount and others do not. 
D)  Sales are relatively constant, either seasonally or cyclically. 
E)  None of the above.

Question 6

Other things held constant, which of the following will cause an increase in working capital?

Accepted Answer

A)  Cash is used to buy marketable securities. 
B)  A cash dividend is declared and paid. 
C)  Merchandise is sold at a profit, but the sale is on credit. 
D)  Long-term bonds are retired with the proceeds of a preferred stock issue. 
E)  Missing inventory is written off against retained earnings. 
A)  Cash is used to buy marketable securities. 
B)  A cash dividend is declared and paid. 
C)  Merchandise is sold at a profit, but the sale is on credit. 
D)  Long-term bonds are retired with the proceeds of a preferred stock issue. 
E)  Missing inventory is written off against retained earnings.

Question 7

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 8

A revolving credit agreement is a formal line of credit usually used by large firms.The firm will pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Accepted Answer

A) True 
 B)False

Question 9

Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks.The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment.On the used portion of the loan, Inland paid 1.5 percent above prime for the funds actually borrowed on an annual simple interest basis.The prime rate was at 9 percent for the year.If Inland 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 cost of the loan agreement for one year?

Accepted Answer

A)  $560,000 
B)  $650,000 
C)  $540,000 
D)  $900,000 
E)  $675,000 
A)  $560,000 
B)  $650,000 
C)  $540,000 
D)  $900,000 
E)  $675,000

Question 10

The risk of default on pledged accounts receivable is borne by the lender to whom the receivables are pledged.

Accepted Answer

A) True 
 B)False

Question 11

You go to three different banks to borrow $10,000 for one year.Each says it will lend you the money at 10 percent, but their terms differ as follows:Bank A: Simple interest Bank B: Add-on interest
Bank C: Discounted interest
Banks A and C require a single payment at the end of the year.Bank B requires 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rate in this case?

Accepted Answer

A)  13.0% 
B)  9.5% 
C)  9.0% 
D)  8.5% 
E)  8.0% 
A)  13.0% 
B)  9.5% 
C)  9.0% 
D)  8.5% 
E)  8.0%

Question 12

Cost of Late Payment
East Lansing Appliances
East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy.The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent.Because ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days.This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days.Expected bad debt losses on the remaining sales would fall to 3 percent.The variable cost percentage is 60 percent, and the cost of capital is 15 percent.
-Refer to East Lansing Appliances.What are the incremental pre-tax profits from this proposal?

Accepted Answer

A)  $181,250 
B)  $271,750 
C)  $256,250 
D)  $206,500 
E)  $231,250 
A)  $181,250 
B)  $271,750 
C)  $256,250 
D)  $206,500 
E)  $231,250

Question 13

Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

A) True 
 B)False

Question 14

Trade credit can be separated into two components: free trade credit, which involves credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

Accepted Answer

A) True 
 B)False

Question 15

For a firm that makes heavy use of float, being able to forecast its collections and disbursement check clearings is essential.

Accepted Answer

A) True 
 B)False

Question 16

The risk to the firm of borrowing using short-term credit is usually greater than with long-term debt.Added risk stems from greater variability of interest costs on short-term debt.Even if its long-term prospects are good, the firm's lender may not renew a short-term loan if the firm is even only temporarily unable to repay it.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is correct?

Accepted Answer

A)  Poor synchronization of cash flows that results in high cash management costs can be partially offset by increasing disbursement float and decreasing collections float. 
B)  The size of a firm's net float is primarily a function of its natural cash flow synchronization and how it clears its checks. 
C)  Lockbox systems are used mainly for security purposes as well as to decrease the firm's net float. 
D)  If a firm can speed up its collections and slow down its disbursements, it will be able to reduce its net float. 
E)  A firm practicing good cash management and making use of positive net float will bring its check book balance as close to zero as possible, but must never generate a negative book balance. 
A)  Poor synchronization of cash flows that results in high cash management costs can be partially offset by increasing disbursement float and decreasing collections float. 
B)  The size of a firm's net float is primarily a function of its natural cash flow synchronization and how it clears its checks. 
C)  Lockbox systems are used mainly for security purposes as well as to decrease the firm's net float. 
D)  If a firm can speed up its collections and slow down its disbursements, it will be able to reduce its net float. 
E)  A firm practicing good cash management and making use of positive net float will bring its check book balance as close to zero as possible, but must never generate a negative book balance.

Question 18

Which of the following statements is correct?

Accepted Answer

A)  If a firm begins buying on terms of 2/20, net 60, after having bought on terms of 2/10, net 30, this will, other things held constant, probably lengthen its cash conversion cycle. 
B)  If a firm begins buying on terms of 2/20, net 60, after having bought on terms of 2/10, net 30, this will, other things held constant, increase the cost of nonfree (costly) trade credit. 
C)  Because the loan is paid off faster, the effective interest rate is lower if a firm borrows $100,000 on the basis of a 10% "add-on interest rate" loan paid off in 12 equal monthly installments than if the firm borrows the $100,000 on a loan which calls for a nominal 10% rate and for all interest and principal to be paid (repaid) at the end of one year. 
D)  "Commercial paper" is the name given to a type of short-term loan typically used by firms that are too small and financially weak to obtain credit from banks and other normal sources of credit. 
E)  Statements a, b, c, and d are all false. 
A)  If a firm begins buying on terms of 2/20, net 60, after having bought on terms of 2/10, net 30, this will, other things held constant, probably lengthen its cash conversion cycle. 
B)  If a firm begins buying on terms of 2/20, net 60, after having bought on terms of 2/10, net 30, this will, other things held constant, increase the cost of nonfree (costly) trade credit. 
C)  Because the loan is paid off faster, the effective interest rate is lower if a firm borrows $100,000 on the basis of a 10% "add-on interest rate" loan paid off in 12 equal monthly installments than if the firm borrows the $100,000 on a loan which calls for a nominal 10% rate and for all interest and principal to be paid (repaid) at the end of one year. 
D)  "Commercial paper" is the name given to a type of short-term loan typically used by firms that are too small and financially weak to obtain credit from banks and other normal sources of credit. 
E)  Statements a, b, c, and d are all false.

Question 19

The Lasser Company needs to finance an increase in its working capital for the coming year.Lasser is reviewing the following three options: (1) The firm can borrow from its bank on a simple interest basis for one year at 13 percent.(2) It can borrow on a 3-month, but renewable, loan at a 12 percent simple rate.The loan is a simple interest loan, completely paid off at the end of each quarter, then renewed for another quarter.(3) The firm can increase its accounts payable by not taking discounts.Lasser buys on credit terms of 1/30, net 60 days.What is the effective annual cost (not the approximate cost) of the least expensive type of credit, assuming 360 days per year?

Accepted Answer

A)  13.0% 
B)  12.82% 
C)  11.46% 
D)  12.12% 
E)  12.55% 
A)  13.0% 
B)  12.82% 
C)  11.46% 
D)  12.12% 
E)  12.55%

Question 20

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?

Accepted Answer

A)  It normally stimulates sales. 
B)  To meet competitive pressures. 
C)  To increase the firm's deferral period for payables. 
D)  All of the above. 
E)  Both a and b above. 
A)  It normally stimulates sales. 
B)  To meet competitive pressures. 
C)  To increase the firm's deferral period for payables. 
D)  All of the above. 
E)  Both a and b above.

Working capital management involves decisions related to

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

Which of the following statements is correct?

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring receivables.However, they can provide erroneous signals to credit managers when

Other things held constant, which of the following will cause an increase in working capital?

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

A revolving credit agreement is a formal line of credit usually used by large firms.The firm will pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

The risk of default on pledged accounts receivable is borne by the lender to whom the receivables are pledged.

Net working capital is defined as current assets divided by current liabilities.

Trade credit can be separated into two components: free trade credit, which involves credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

For a firm that makes heavy use of float, being able to forecast its collections and disbursement check clearings is essential.

Which of the following statements is correct?

Which of the following statements is correct?

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?

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

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Exam 15: Working Capital Management

Working capital management involves decisions related to

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

Which of the following statements is correct?

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring receivables.However, they can provide erroneous signals to credit managers when

Other things held constant, which of the following will cause an increase in working capital?

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

A revolving credit agreement is a formal line of credit usually used by large firms.The firm will pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

The risk of default on pledged accounts receivable is borne by the lender to whom the receivables are pledged.

Net working capital is defined as current assets divided by current liabilities.

Trade credit can be separated into two components: free trade credit, which involves credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

For a firm that makes heavy use of float, being able to forecast its collections and disbursement check clearings is essential.

Which of the following statements is correct?

Which of the following statements is correct?

If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions?

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