Question 1

A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following money market investments is essentially a loan arrangement wherein a securities dealer is the "borrower" and the investor is the "lender"? The investor buys securities from the securities dealer, with an agreement to sell the securities back to the dealer at a later date for a specified higher price.

Accepted Answer

A)  certificates of deposit 
B)  commercial paper 
C)  banker's acceptance 
D)  repurchase agreement 
E)  Treasury bills 
A)  certificates of deposit 
B)  commercial paper 
C)  banker's acceptance 
D)  repurchase agreement 
E)  Treasury bills

Question 3

Which of the following best describes the collection float?

Accepted Answer

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

Question 4

Which of the following is NOT an advantage of trade credit versus a standard loan?

Accepted Answer

A)  Trade credit reduces a firm's collection float. 
B)  If the buyer defaults, the supplier may be able to seize the inventory as collateral. 
C)  The supplier may have more information about the credit quality of the customer than a bank. 
D)  Providing financing at below-market rates is an indirect way to lower prices for only certain customers. 
A)  Trade credit reduces a firm's collection float. 
B)  If the buyer defaults, the supplier may be able to seize the inventory as collateral. 
C)  The supplier may have more information about the credit quality of the customer than a bank. 
D)  Providing financing at below-market rates is an indirect way to lower prices for only certain customers.

Question 5

What are the five C's of Credit?

Accepted Answer

Lenders have coined the phrase, "The fiv

Question 6

Can a firm's cash cycle be longer than a firm's operating cycle?

Accepted Answer

A cash cycle is operating cycl

Question 7

Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is a firm's cash cycle?

Accepted Answer

A)  the average length of time between when a firm arranges funds to purchase its inventory and when it receives the cash back from selling its product 
B)  the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory 
C)  the average length of time between when a firm pays cash to purchase its initial inventory and when it sells output from that product 
D)  the average length of time between when a firm arranges funds to purchase its inventory and when it sells the output produced from that inventory 
A)  the average length of time between when a firm arranges funds to purchase its inventory and when it receives the cash back from selling its product 
B)  the average length of time between when a firm pays cash to purchase its initial inventory and when it receives cash from the sale of the output produced from that inventory 
C)  the average length of time between when a firm pays cash to purchase its initial inventory and when it sells output from that product 
D)  the average length of time between when a firm arranges funds to purchase its inventory and when it sells the output produced from that inventory

Question 9

What is the effective annual cost of credit terms of 1/10 net 30, if the firm stretches the accounts payable to 45 days?

Accepted Answer

A)  8.49 % 
B)  10.91% 
C)  11.05% 
D)  18.03% 
A)  8.49 % 
B)  10.91% 
C)  11.05% 
D)  18.03%

Question 10

Bercraft Industries has an average accounts payable balance of $280,000. Its average annual cost of goods sold is $4,780,000. It receives terms of 1/20 net 40 from its suppliers. Is Bercraft managing its accounts payables well?

Accepted Answer

A)  Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B)  Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C)  Yes, since it, on average, stretches payment beyond the due payment date. 
D)  No, since it, on average, does not take advantage of the discount period and pays well before payment is due. 
A)  Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B)  Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C)  Yes, since it, on average, stretches payment beyond the due payment date. 
D)  No, since it, on average, does not take advantage of the discount period and pays well before payment is due.

Question 11

Working capital management involves the management of all of a firm's assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 12

Macrae Products, a manufacturer of building products, buys raw gypsum on credit on May 16. It processes this gypsum to make dry plaster powder on May 20 and pays cash for the raw gypsum on May 30. On June 7 it sells the dry plaster powder to a chain of hardware stores, and on June 21 receives cash payment for this sale. What is the length of the cash cycle in this case?

Accepted Answer

A)  8 days 
B)  14 days 
C)  22 days 
D)  23 days 
A)  8 days 
B)  14 days 
C)  22 days 
D)  23 days

Question 13

What is a firm's operating cycle?

Accepted Answer

A firm's operating cycle is th

Question 14

Ally Manufacturing has an average accounts payable balance of $420,000. Its average annual cost of goods sold is $10,220,000. It receives terms of 2/15 net 30 from its suppliers. Is Ally managing its accounts payables well?

Accepted Answer

A)  Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B)  Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C)  Yes, since it, on average, stretches payment beyond the due payment date. 
D)  No, since it, on average, does not take advantage of the discount period and pays well before payment is due. 
A)  Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B)  Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C)  Yes, since it, on average, stretches payment beyond the due payment date. 
D)  No, since it, on average, does not take advantage of the discount period and pays well before payment is due.

Question 15

LeokLee Industries has an average accounts payable balance of $720,000. Its average annual cost of goods sold is $8,760,000. It receives terms of 1/10 net 30 from its suppliers. Is LeokLee managing its accounts payables well?

Accepted Answer

A)  Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B)  Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C)  Yes, since it, on average, stretches payment beyond the due payment date. 
D)  No, since it, on average, does not take advantage of the discount period and pays well before payment is due. 
A)  Yes, since it, on average, chooses not to take the discount, but pays when payment is due. 
B)  Yes, since it, on average, takes the discount, and pays at the end of the discount period. 
C)  Yes, since it, on average, stretches payment beyond the due payment date. 
D)  No, since it, on average, does not take advantage of the discount period and pays well before payment is due.

Question 16

If a supplier is offering trade credit of 1/10 net 30, and a buyer chooses not to take the discount, when should they pay, assuming that they wish to stay on good terms with the supplier?

Accepted Answer

A)  any time before day 10 
B)  on day 10 
C)  on day 30 
D)  any time after day 30 
A)  any time before day 10 
B)  on day 10 
C)  on day 30 
D)  any time after day 30

Question 17

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 Inventory days is closest to ________.

Accepted Answer

A)  32 days 
B)  59 days 
C)  39 days 
D)  42 days 
A)  32 days 
B)  59 days 
C)  39 days 
D)  42 days

Question 18

Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting processes. How is this inventory cost best categorized?

Accepted Answer

A)  an acquisition cost 
B)  a carrying cost 
C)  an order cost 
D)  a holding cost 
A)  an acquisition cost 
B)  a carrying cost 
C)  an order cost 
D)  a holding cost

Question 19

What are the advantages of holding inventory?

Accepted Answer

A firm needs its inv

Question 20

Which of the following is a component of disbursement float but not a component of collection float?

Accepted Answer

A)  availability float 
B)  mail float 
C)  processing float 
D)  check-clearing float 
A)  availability float 
B)  mail float 
C)  processing float 
D)  check-clearing float

Exam 19: Working Capital Management

A firm should choose to borrow using accounts payable only if trade credit is the cheapest source of funding.

Which of the following best describes the collection float?

Which of the following is NOT an advantage of trade credit versus a standard loan?

What are the five C's of Credit?

Can a firm's cash cycle be longer than a firm's operating cycle?

Effective inventory management builds up assets through increases in inventory and thus increases a firm's value.

Which of the following is a firm's cash cycle?

What is the effective annual cost of credit terms of 1/10 net 30, if the firm stretches the accounts payable to 45 days?

Bercraft Industries has an average accounts payable balance of $280,000. Its average annual cost of goods sold is $4,780,000. It receives terms of 1/20 net 40 from its suppliers. Is Bercraft managing its accounts payables well?

Working capital management involves the management of all of a firm's assets and liabilities.

What is a firm's operating cycle?

Ally Manufacturing has an average accounts payable balance of $420,000. Its average annual cost of goods sold is $10,220,000. It receives terms of 2/15 net 30 from its suppliers. Is Ally managing its accounts payables well?

LeokLee Industries has an average accounts payable balance of $720,000. Its average annual cost of goods sold is $8,760,000. It receives terms of 1/10 net 30 from its suppliers. Is LeokLee managing its accounts payables well?

If a supplier is offering trade credit of 1/10 net 30, and a buyer chooses not to take the discount, when should they pay, assuming that they wish to stay on good terms with the supplier?

Evertz Metals buys and stockpiles $4,000,000 worth of dolomite to use in its smelting processes. How is this inventory cost best categorized?

What are the advantages of holding inventory?

Which of the following is a component of disbursement float but not a component of collection float?

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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