Exam 18: Working Capital Management

The annual percentage rate (APR)on short-term loans from Bank A is 5.75% per year.Bank B claims that their interest rate is only 5.44% per year.However,Bank B charges interest on a discount basis.Which bank is charging the lowest APR on a one-year loan?

Which of the following is a spontaneous source of financing?

Commercial paper

Increasing the accounts payable deferral period also increases the cash conversion cycle.

The December 31,1995 balance sheet for Spitco,Inc.is presented below. Spitco,Inc. Balance Sheet December 31,2010 Current assets $40,000 Net fixed assets 20,000 Total $60,000 Accounts payable 11,000 Notes payable 12,000 Total $23,000 Long-term debt (10%)12,000 Common equity 25,000 Total $60,000 a.Calculate Spitco's current ratio,and net working capital. b.Spitco feels that its current ratio is too far below the industry average of 2.40.To improve their liquidity,the treasurer of Spitco has devised a plan to issue $12,000 in long-term debt at 12% and pay off its notes payable.The funds would be invested in marketable securities at 7% interest when not needed to finance the firm's seasonal asset needs.The notes payable would remain outstanding through the year.Assume this plan had been implemented for 2010.Calculate what the firm's current ratio,and net working capital would have been. c.Did Spitco improve their liquidity? What do you think happened to Spitco's return on investment?

Which of the following is considered to be a spontaneous source of financing?

The Stant Shoe Company established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $100,000 at an annual rate of 5%.A compensating balance of 10% of the amount borrowed is required.What is the largest amount of money Stant will actually be able to use from the line of credit?

Clark Corporation has an average collection period of 7 days,an inventory conversion period of 30 days,and a payables deferrable period of 60 days.What is Clark's operating cycle?

What factors should we consider when selecting a source of short-term credit?

L.Stevens Inc.uses permanent sources of financing to cover its peak level of current assets.When it does not need the money to finance inventories and accounts receivable,it invests the excess funds in short-term certificates of deposit.What are the advantages and disadvantages of this policy?

Firms should hold the minimum amounts of inventories that will not jeopardize productions schedules or the satisfaction of customer expectations.

Pledging accounts receivable as a source of short-term credit

Commercial paper offers the borrower the same flexibility that exists when bank credit is used to meet financing needs.

Within the context of working capital management,the risk-return trade-off involves an increased risk of illiquidity versus increased profitability.

Summary data from the quarterly balance sheets of ACH Air Conditioners are shown below. . a.If ACH follows the self liquidating debt principle,how much long-term debt will be used to finance current assets? Explain your answer briefly. b.What would be the highest and lowest levels of temporary debt?

Which of the following factors does not have a major influence on credit ratings?

All else equal,which of the following is the most likely to occur if actual sales are much less than forecasted sales?

When a commercial bank extends short-term credit to a firm,it can provide a line of credit that involves

With respect to working capital policy,firms most often employ

J.B.'s Wholesale Club has current assets of $12.25 million and current liabilities of $14 million.Which of the following is possible?