Question 1

A firm offers its customers 1/10 net 40. What is the cost of trade credit to a customer who chooses to pay on day 40?

Accepted Answer

A)  12.8% 
B)  13.0% 
C)  65.5% 
D)  96.0% 
A)  12.8% 
B)  13.0% 
C)  65.5% 
D)  96.0% B

Question 2

Which of the following is the term used to describe short-term, unsecured debt issued by large corporations, usually in denominations greater than $100,000 or more?

Accepted Answer

A)  certificates of deposit 
B)  repurchase agreements 
C)  banker's acceptances 
D)  commercial paper 
A)  certificates of deposit 
B)  repurchase agreements 
C)  banker's acceptances 
D)  commercial paper D

Question 3

What is credit period?

Accepted Answer

The credit period is the total length of time credit is extended to the buyer i.e. the total amount of time they have to pay.

Question 4

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 5

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 Industries
Balance Sheet
As of December 31, 2006
(millions of dollars)
  
-Luther's cash conversion cycle is closest to ________.

Accepted Answer

A)  51 days 
B)  66 days 
C)  71 days 
D)  129 days 
A)  51 days 
B)  66 days 
C)  71 days 
D)  129 days

Question 6

The amount of cash a firm holds to counter the uncertainty surrounding its future cash needs is known as a(n) ________.

Accepted Answer

A)  speculative balance 
B)  compensating balance 
C)  operating balance 
D)  precautionary balance 
A)  speculative balance 
B)  compensating balance 
C)  operating balance 
D)  precautionary balance

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

The cash conversion cycle (CCC) is defined as ________.

Accepted Answer

A)  Inventory Days + Accounts Receivable Days - Accounts Payable Days 
B)  Inventory Days - Accounts Receivable Days - Accounts Payable Days 
C)  Inventory Days + Accounts Receivable Days + Accounts Payable Days 
D)  Inventory Days + Accounts Payable Days - Accounts Receivable Days 
A)  Inventory Days + Accounts Receivable Days - Accounts Payable Days 
B)  Inventory Days - Accounts Receivable Days - Accounts Payable Days 
C)  Inventory Days + Accounts Receivable Days + Accounts Payable Days 
D)  Inventory Days + Accounts Payable Days - Accounts Receivable Days

Question 9

Genovese Fine Foods, a manufacturer of foodstuffs, buys durham wheat flour on credit on June 1. It processes this flour to make pasta on June 6 and pays cash for the flour on June 15. On June 22 it sells the pasta to a chain of supermarkets, and on July 3 receives cash payment for this sale. What is the length of the cash cycle in this case?

Accepted Answer

A)  8 days 
B)  12 days 
C)  18 days 
D)  28 days 
A)  8 days 
B)  12 days 
C)  18 days 
D)  28 days

Question 10

Which of the following best describes short-term debt issued by banks with a minimum denomination of $100,000?

Accepted Answer

A)  certificates of deposit 
B)  repurchase agreements 
C)  banker's acceptances 
D)  commercial paper 
A)  certificates of deposit 
B)  repurchase agreements 
C)  banker's acceptances 
D)  commercial paper

Question 11

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 12

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 13

Which of the following would decrease a firm's cash conversion cycle?

Accepted Answer

A)  Increase the inventory days. 
B)  Increase the accounts receivable days. 
C)  Increase the accounts payable days. 
D)  Increase the cash days. 
A)  Increase the inventory days. 
B)  Increase the accounts receivable days. 
C)  Increase the accounts payable days. 
D)  Increase the cash days.

Question 14

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 15

Which of the following is/are direct costs associated with inventory?
I. Acquisition costs
II. Carrying costs
III. Order costs

Accepted Answer

A)  I only 
B)  I and II 
C)  II and III 
D)  I, II, and III 
A)  I only 
B)  I and II 
C)  II and III 
D)  I, II, and III

Question 16

Which of the following short-term securities would a firm invest in if they wanted to invest cash for a term of only a few days?

Accepted Answer

A)  Treasury bills 
B)  repurchase agreements 
C)  banker's acceptances 
D)  commercial paper 
A)  Treasury bills 
B)  repurchase agreements 
C)  banker's acceptances 
D)  commercial paper

Question 17

Which of the following best describes the availability float?

Accepted Answer

A)  how long it takes the firm to process the check and deposit it in the bank 
B)  how long it takes before the bank gives the firm credit for the funds 
C)  how long it takes before payments to suppliers actually result in a cash outflow for the firm 
D)  how long it takes for a firm to be able to use funds after a customer has paid for its goods 
A)  how long it takes the firm to process the check and deposit it in the bank 
B)  how long it takes before the bank gives the firm credit for the funds 
C)  how long it takes before payments to suppliers actually result in a cash outflow for the firm 
D)  how long it takes for a firm to be able to use funds after a customer has paid for its goods

Question 18

What are the costs of holding inventory?

Accepted Answer

The costs for holdin

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

The difference between a firm's operating cycle and its cash cycle is ________.

Accepted Answer

A)  its account receivable days 
B)  its accounts payable days 
C)  its inventory days 
D)  There is no difference between the cash and operating cycles. 
A)  its account receivable days 
B)  its accounts payable days 
C)  its inventory days 
D)  There is no difference between the cash and operating cycles.

Exam 19: Working Capital Management

A firm offers its customers 1/10 net 40. What is the cost of trade credit to a customer who chooses to pay on day 40?

Which of the following is the term used to describe short-term, unsecured debt issued by large corporations, usually in denominations greater than $100,000 or more?

What is credit period?

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

The amount of cash a firm holds to counter the uncertainty surrounding its future cash needs is known as a(n) ________.

Which of the following statements is FALSE?

The cash conversion cycle (CCC) is defined as ________.

Which of the following best describes short-term debt issued by banks with a minimum denomination of $100,000?

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

Which of the following statements is FALSE?

Which of the following would decrease a firm's cash conversion cycle?

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?

Which of the following is/are direct costs associated with inventory? I. Acquisition costs II. Carrying costs III. Order costs

Which of the following short-term securities would a firm invest in if they wanted to invest cash for a term of only a few days?

Which of the following best describes the availability float?

What are the costs of holding inventory?

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.

The difference between a firm's operating cycle and its cash cycle is ________.

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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