Question 1

What should a firm do after establishing a credit policy?

Accepted Answer

A)  decide what should be done for those customers who do not pay their accounts on time 
B)  monitor its accounts receivable to analyze whether its credit policy is effective 
C)  decide on the length of the period before payment must be made 
D)  determine what percent of monthly sales are collected in the month after that sale 
A)  decide what should be done for those customers who do not pay their accounts on time 
B)  monitor its accounts receivable to analyze whether its credit policy is effective 
C)  decide on the length of the period before payment must be made 
D)  determine what percent of monthly sales are collected in the month after that sale

Question 2

Which of the following statements is FALSE?

Accepted Answer

A)  The aging schedule is also sometimes augmented by analysis of the payments pattern, which provides information on the percentage of monthly sales that the firm collects in each month after the sale. 
B)  Because accounts receivable days can be calculated from the firm's financial statement, outside investors commonly use this measure to evaluate a firm's credit management policy. 
C)  If the aging schedule gets "top-heavy"-that is, if the percentages in the upper half of the schedule begin to increase, the firm will likely need to revisit its credit policy. 
D)  Seasonal sales patterns may cause the number calculated for the accounts receivable days to change depending on when the calculation takes place. 
A)  The aging schedule is also sometimes augmented by analysis of the payments pattern, which provides information on the percentage of monthly sales that the firm collects in each month after the sale. 
B)  Because accounts receivable days can be calculated from the firm's financial statement, outside investors commonly use this measure to evaluate a firm's credit management policy. 
C)  If the aging schedule gets "top-heavy"-that is, if the percentages in the upper half of the schedule begin to increase, the firm will likely need to revisit its credit policy. 
D)  Seasonal sales patterns may cause the number calculated for the accounts receivable days to change depending on when the calculation takes place.

Question 3

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

Accepted Answer

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

Question 4

Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?

Accepted Answer

A)  Delaying payment can increase the effective cost of credit in some circumstances. 
B)  The supplier may demand COD or CBD in the future. 
C)  The supplier may choose to discontinue business with delinquent customers. 
D)  The firm's credit rating may be damaged. 
A)  Delaying payment can increase the effective cost of credit in some circumstances. 
B)  The supplier may demand COD or CBD in the future. 
C)  The supplier may choose to discontinue business with delinquent customers. 
D)  The firm's credit rating may be damaged.

Question 5

Trade credit should always be used when it is offered.

Accepted Answer

A) True 
 B)False

Question 6

What is collection float?

Accepted Answer

Collection float is the amount

Question 7

Which of the following statements is FALSE?

Accepted Answer

A)  Firms may hold inventory because factors such as seasonality in demand mean that customer purchases do not perfectly match the most efficient production cycle. 
B)  Inventory helps minimize the risk that the firm will not be able to obtain an input it needs for production. 
C)  If a firm holds too much inventory, stock-outs, the situation when a firm runs out of product, may occur, leading to lost sales. 
D)  Because excessive inventory uses cash, efficient management of inventory increases firm value. 
A)  Firms may hold inventory because factors such as seasonality in demand mean that customer purchases do not perfectly match the most efficient production cycle. 
B)  Inventory helps minimize the risk that the firm will not be able to obtain an input it needs for production. 
C)  If a firm holds too much inventory, stock-outs, the situation when a firm runs out of product, may occur, leading to lost sales. 
D)  Because excessive inventory uses cash, efficient management of inventory increases firm value.

Question 8

Which of the following statements is FALSE?

Accepted Answer

A)  After a firm decides on its credit standards, it must next establish its credit terms. 
B)  The decision of how much credit risk to assume plays a large role in determining how much money a firm ties up in its payables. 
C)  Knowledge of the payments pattern is also useful for forecasting the firm's working capital requirements. 
D)  An aging schedule categorizes accounts by the number of days they have been on the firm's books. 
A)  After a firm decides on its credit standards, it must next establish its credit terms. 
B)  The decision of how much credit risk to assume plays a large role in determining how much money a firm ties up in its payables. 
C)  Knowledge of the payments pattern is also useful for forecasting the firm's working capital requirements. 
D)  An aging schedule categorizes accounts by the number of days they have been on the firm's books.

Question 9

A firm has an average accounts payable balance of $180,000. Its average daily cost of goods sold is $12,000. What is the average number of days that the firm takes to pay its debt?

Accepted Answer

A)  2 days 
B)  8 days 
C)  15 days 
D)  21 days 
A)  2 days 
B)  8 days 
C)  15 days 
D)  21 days

Question 10

What is a precautionary balance?

Accepted Answer

A)  the cash a firm holds to counter the uncertainty surrounding its future cash needs 
B)  the cash a firm places into short-term investments 
C)  the cash a firm holds in order to pay its bills 
D)  the cash a firm holds to gain tax advantages 
A)  the cash a firm holds to counter the uncertainty surrounding its future cash needs 
B)  the cash a firm places into short-term investments 
C)  the cash a firm holds in order to pay its bills 
D)  the cash a firm holds to gain tax advantages

Question 11

ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. What was its average days of inventory?

Accepted Answer

A)  43.8 days 
B)  36.5 days 
C)  73.0 days 
D)  9.1 days 
A)  43.8 days 
B)  36.5 days 
C)  73.0 days 
D)  9.1 days

Question 12

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 Accounts Payable days is closest to ________.

Accepted Answer

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

Question 13

Collection float is made up of all of the following EXCEPT ________.

Accepted Answer

A)  disbursement float 
B)  processing float 
C)  mail float 
D)  availability float 
A)  disbursement float 
B)  processing float 
C)  mail float 
D)  availability float

Question 14

What is meant by the term 1.5/14 net 30?

Accepted Answer

A)  If the invoice is paid within 14 days, a discount of 1.5 percent can be taken; otherwise the invoice is due in 30 days. 
B)  If the invoice is paid within 30 days, a discount of 14 percent can be taken; otherwise the invoice is due 14 days after that day. 
C)  If the invoice is paid within 1.5 days, a discount of 14 percent can be taken; otherwise the invoice is due in 30 days. 
D)  If the invoice is paid right away, a discount of 14 percent can be taken; otherwise a discount of 1.5 percent can be taken if paid within the next 30 days. 
A)  If the invoice is paid within 14 days, a discount of 1.5 percent can be taken; otherwise the invoice is due in 30 days. 
B)  If the invoice is paid within 30 days, a discount of 14 percent can be taken; otherwise the invoice is due 14 days after that day. 
C)  If the invoice is paid within 1.5 days, a discount of 14 percent can be taken; otherwise the invoice is due in 30 days. 
D)  If the invoice is paid right away, a discount of 14 percent can be taken; otherwise a discount of 1.5 percent can be taken if paid within the next 30 days.

Question 15

ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. The average days of inventory in the industry is 65 days. What would ALT's average inventory need to be so that it would meet the industry average?

Accepted Answer

A)  $4.45 million 
B)  $3.65 million 
C)  $3.33 million 
D)  $2.67 million 
A)  $4.45 million 
B)  $3.65 million 
C)  $3.33 million 
D)  $2.67 million

Question 16

Franklin Industries has a current net working capital of $2.5 million. It expects that this will grow at a rate of 3.5% annually forever. If it could slow that growth to 3% per year, how would that affect the value of the firm, given that it has a cost of capital of 11%?

Accepted Answer

A)  a decrease of $2.22 million 
B)  an increase of $12,500 
C)  an increase of $0.78 million 
D)  an increase of $2.08 million 
A)  a decrease of $2.22 million 
B)  an increase of $12,500 
C)  an increase of $0.78 million 
D)  an increase of $2.08 million

Question 17

A firm's credit terms specify "1/10 net 30" and the accounts receivable days outstanding is 32 days. Which of the following can be concluded on the basis of this information?

Accepted Answer

A)  Most customers pay on time. 
B)  The average customer pays two days late. 
C)  All customers have paid within 32 days of purchase. 
D)  All customers pay late. 
A)  Most customers pay on time. 
B)  The average customer pays two days late. 
C)  All customers have paid within 32 days of purchase. 
D)  All customers pay late.

Question 18

Firms typically would prefer a positive cash conversion cycle versus a negative cash conversion cycle.

Accepted Answer

A) True 
 B)False

Question 19

Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to ________.

Accepted Answer

A)  20.1% 
B)  15.9% 
C)  13.0% 
D)  11.1% 
A)  20.1% 
B)  15.9% 
C)  13.0% 
D)  11.1%

Question 20

Which of the following firms would be expected to need the most cash to conduct its daily operations?

Accepted Answer

A)  a retail grocery store that sells on a cash only basis 
B)  an electronics manufacturer that only assemble its goods once they have been paid for 
C)  an airline that has many of its fares pre-paid by cash or credit card 
D)  an aircraft manufacturer with large inventory and long development and sales cycles 
A)  a retail grocery store that sells on a cash only basis 
B)  an electronics manufacturer that only assemble its goods once they have been paid for 
C)  an airline that has many of its fares pre-paid by cash or credit card 
D)  an aircraft manufacturer with large inventory and long development and sales cycles

Exam 19: Working Capital Management

What should a firm do after establishing a credit policy?

Which of the following statements is FALSE?

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

Which of the following is NOT a reason why a firm may typically choose not to stretch its accounts payable?

Trade credit should always be used when it is offered.

What is collection float?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A firm has an average accounts payable balance of $180,000. Its average daily cost of goods sold is $12,000. What is the average number of days that the firm takes to pay its debt?

What is a precautionary balance?

ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. What was its average days of inventory?

Collection float is made up of all of the following EXCEPT ________.

What is meant by the term 1.5/14 net 30?

ALT had $25 million in sales last year. Its cost of goods sold was $15 million and its average inventory balance was $3 million. The average days of inventory in the industry is 65 days. What would ALT's average inventory need to be so that it would meet the industry average?

Franklin Industries has a current net working capital of $2.5 million. It expects that this will grow at a rate of 3.5% annually forever. If it could slow that growth to 3% per year, how would that affect the value of the firm, given that it has a cost of capital of 11%?

A firm's credit terms specify "1/10 net 30" and the accounts receivable days outstanding is 32 days. Which of the following can be concluded on the basis of this information?

Firms typically would prefer a positive cash conversion cycle versus a negative cash conversion cycle.

Your firm purchases goods from its supplier on terms of 2/10, net 40. The effective annual cost to your firm if it chooses not to take advantage of the trade discount offered and stretches the accounts payable to 60 days is closest to ________.

Which of the following firms would be expected to need the most cash to conduct its daily operations?

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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