Question 1

Calculate the economic ordering quantity for Nashville Records Inc., given the following information:

Accepted Answer

A)  3,464 units 
B)  4,899 units 
C)  346 units 
D)  490 units 
E)  1,549 units 
A)  3,464 units 
B)  4,899 units 
C)  346 units 
D)  490 units 
E)  1,549 units

Question 2

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 the economic ordering quantity for chips?

Accepted Answer

A)  12,088 
B)  3,175 
C)  6,243 
D)  13,675 
E)  2,245 
A)  12,088 
B)  3,175 
C)  6,243 
D)  13,675 
E)  2,245

Question 3

The best way to get a comprehensive picture of a firm's liquidity position is to examine its ____, which forecasts cash inflows and outflows.

Accepted Answer

A)  cash and marketable securities 
B)  net working capital 
C)  current ratio 
D)  cash budget 
A)  cash and marketable securities 
B)  net working capital 
C)  current ratio 
D)  cash budget

Question 4

Wicker Corporation is determining whether to support $100,000 of its permanent current assets with a bank note or a short-term bond.The firm's bank offers a two-year note where the firm will receive $100,000 and repay $118,810 at the end of two years.The firm has the option to renew the loan at market rates.As an alternative, the firm can sell its own 8.5 percent annual coupon bonds, with $1,000 face value and 2-year maturity, at a price of $973.97.Comparing the cost of the two alternatives, how many percentage points lower is the interest rate on the less expensive debt instrument?

Accepted Answer

A)  0%; the rates are equal. 
B)  1.2% 
C)  1.0% 
D)  1.8% 
E)  0.6% 
A)  0%; the rates are equal. 
B)  1.2% 
C)  1.0% 
D)  1.8% 
E)  0.6%

Question 5

A firm is offered trade credit terms of 3/15, net 45.The firm does not take the discount, and it pays after 67 days.What is the approximate annual cost of not taking the discount?

Accepted Answer

A)  21.41% 
B)  22.07% 
C)  22.95% 
D)  23.48% 
E)  24.52% 
A)  21.41% 
B)  22.07% 
C)  22.95% 
D)  23.48% 
E)  24.52%

Question 6

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 would be the incremental cost of carrying receivables if this change were made?

Accepted Answer

A)  $108,750 
B)  −$116,250 (carrying costs would decline) 
C)  $157,900 
D)  −$225,000 (carrying costs would decline) 
E)  $260,500 
A)  $108,750 
B)  −$116,250 (carrying costs would decline) 
C)  $157,900 
D)  −$225,000 (carrying costs would decline) 
E)  $260,500

Question 7

A firm is offered trade credit terms of 2/8, net 45.The firm does not take the discount, and it pays after 58 days.What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost.)

Accepted Answer

A)  21.63% 
B)  13.35% 
C)  22.95% 
D)  15.65% 
E)  18.70% 
A)  21.63% 
B)  13.35% 
C)  22.95% 
D)  15.65% 
E)  18.70%

Question 8

Small, undercapitalized firms

Accepted Answer

A)  Are generally users of net trade credit. 
B)  Are major users of banker's acceptances. 
C)  Generally do not issue commercial paper. 
D)  Typically have a high cost of debt capital. 
E)  Are described by all of the above statements. 
A)  Are generally users of net trade credit. 
B)  Are major users of banker's acceptances. 
C)  Generally do not issue commercial paper. 
D)  Typically have a high cost of debt capital. 
E)  Are described by all of the above statements.

Question 9

Incremental Profits
Berkeley Prints
Berkeley Prints 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.Also, Berkeley's cost of capital is 15 percent, and its variable costs total 60 percent of sales.Because Berkeley wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30.The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount.The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.
-Refer to Berkeley Prints.What are the incremental pre-tax profits from this proposal?

Accepted Answer

A)  $283,750 
B)  $250,500 
C)  $303,250 
D)  $493,750 
E)  $288,250 
A)  $283,750 
B)  $250,500 
C)  $303,250 
D)  $493,750 
E)  $288,250

Question 10

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

Accepted Answer

A) True 
 B)False

Question 11

Long-term debt which is coming due in the next accounting period is defined as a current liability but is not considered a working capital decision variable.

Accepted Answer

A) True 
 B)False

Question 12

When a firm pledges its accounts receivable, if a customer that purchased goods from the firm does not pay, the selling firm must take the loss.

Accepted Answer

A) True 
 B)False

Question 13

Due to advanced technology and the similarity of general procedures, working capital management for multinational firms is no more complex than it is for domestic firms.

Accepted Answer

A) True 
 B)False

Question 14

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.How many orders should Aberwald place during the year?

Accepted Answer

A)  12 
B)  25 
C)  30 
D)  40 
E)  60 
A)  12 
B)  25 
C)  30 
D)  40 
E)  60

Question 15

As a rule, managers should try to always use the free component of trade credit but should use the costly component only after comparing its costs to the costs of similar credit from other sources.

Accepted Answer

A) True 
 B)False

Question 16

The accounts of Weston Inc.indicate the following changes in long-term assets and capital for the past year:   What was the increase or decrease in net working capital? (Hint: Changes in net fixed assets incorporate changes in both gross fixed assets and accumulated depreciation.)

Accepted Answer

A)  +$450,000 
B)  −$250,000 
C)  −$1,950,000 
D)  +$1,950,000 
E)  +$3,300,000 
A)  +$450,000 
B)  −$250,000 
C)  −$1,950,000 
D)  +$1,950,000 
E)  +$3,300,000

Question 17

The amount of safety stocks held by a firm generally

Accepted Answer

A)  increases with greater uncertainty of demand forecasts. 
B)  increases with higher costs (in terms of lost sales and lost goodwill) of stockouts. 
C)  increases with a greater chance that delays will occur in receiving shipments. 
D)  decreases as the cost of carrying additional inventory increases. 
E)  All of the above 
A)  increases with greater uncertainty of demand forecasts. 
B)  increases with higher costs (in terms of lost sales and lost goodwill) of stockouts. 
C)  increases with a greater chance that delays will occur in receiving shipments. 
D)  decreases as the cost of carrying additional inventory increases. 
E)  All of the above

Question 18

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 the firm's EOQ?

Accepted Answer

A)  26,833 
B)  30,040 
C)  43,987 
D)  15,218 
E)  21,456 
A)  26,833 
B)  30,040 
C)  43,987 
D)  15,218 
E)  21,456

Question 19

Your company has been offered credit terms on its purchases of 4/30, net 90.What will be the approximate cost of trade credit if your company pays on the 35th day after receiving the invoice?

Accepted Answer

A)  30% 
B)  300% 
C)  3% 
D)  87% 
E)  156% 
A)  30% 
B)  300% 
C)  3% 
D)  87% 
E)  156%

Question 20

Factoring involves the outright sale of accounts receivable.

Accepted Answer

A) True 
 B)False

Calculate the economic ordering quantity for Nashville Records Inc., given the following information:

The best way to get a comprehensive picture of a firm's liquidity position is to examine its ____, which forecasts cash inflows and outflows.

A firm is offered trade credit terms of 3/15, net 45.The firm does not take the discount, and it pays after 67 days.What is the approximate annual cost of not taking the discount?

A firm is offered trade credit terms of 2/8, net 45.The firm does not take the discount, and it pays after 58 days.What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost.)

Small, undercapitalized firms

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

Long-term debt which is coming due in the next accounting period is defined as a current liability but is not considered a working capital decision variable.

When a firm pledges its accounts receivable, if a customer that purchased goods from the firm does not pay, the selling firm must take the loss.

Due to advanced technology and the similarity of general procedures, working capital management for multinational firms is no more complex than it is for domestic firms.

As a rule, managers should try to always use the free component of trade credit but should use the costly component only after comparing its costs to the costs of similar credit from other sources.

The accounts of Weston Inc.indicate the following changes in long-term assets and capital for the past year: What was the increase or decrease in net working capital? (Hint: Changes in net fixed assets incorporate changes in both gross fixed assets and accumulated depreciation.)

The amount of safety stocks held by a firm generally

Your company has been offered credit terms on its purchases of 4/30, net 90.What will be the approximate cost of trade credit if your company pays on the 35th day after receiving the invoice?

Factoring involves the outright sale of accounts receivable.

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

Calculate the economic ordering quantity for Nashville Records Inc., given the following information:

The best way to get a comprehensive picture of a firm's liquidity position is to examine its ____, which forecasts cash inflows and outflows.

A firm is offered trade credit terms of 3/15, net 45.The firm does not take the discount, and it pays after 67 days.What is the approximate annual cost of not taking the discount?

A firm is offered trade credit terms of 2/8, net 45.The firm does not take the discount, and it pays after 58 days.What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost.)

Small, undercapitalized firms

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

Long-term debt which is coming due in the next accounting period is defined as a current liability but is not considered a working capital decision variable.

When a firm pledges its accounts receivable, if a customer that purchased goods from the firm does not pay, the selling firm must take the loss.

Due to advanced technology and the similarity of general procedures, working capital management for multinational firms is no more complex than it is for domestic firms.

As a rule, managers should try to always use the free component of trade credit but should use the costly component only after comparing its costs to the costs of similar credit from other sources.

The accounts of Weston Inc.indicate the following changes in long-term assets and capital for the past year: What was the increase or decrease in net working capital? (Hint: Changes in net fixed assets incorporate changes in both gross fixed assets and accumulated depreciation.)

The amount of safety stocks held by a firm generally

Your company has been offered credit terms on its purchases of 4/30, net 90.What will be the approximate cost of trade credit if your company pays on the 35th day after receiving the invoice?

Factoring involves the outright sale of accounts receivable.

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