Exam 18: Working Capital Management

If revenues can be forecast to fall within a tight range of outcomes, then the ratio of cash and near-cash to total assets will be greater for the firm than if the prospective cash inflows might be expected to vary over a wide range.

The major difference between the current ratio and net working is?

Briefly describe at least three useful tools for maintaining control over accounts receivable.

A disadvantage involved in investing in marketable securities is that

With respect to working capital policy, firms most often employ

Which of the following would NOT be considered an unsecured loan?

The balance sheet for Peterson Manufacturing Company is presented below. Peterson Mfg. Co. Balance Sheet December 31, 1995 Cash $32,000 Current liabilities $72,000 Accounts receivable 40,000 Long-term liabilities 48,000 Inventories 48,000 Common equity 120,000 Total current assets $120,000 Net fixed assets 120,000 Total $240,000 Total $240,000 During 2009, the firm earned $28,000 after taxes based on net sales of $480,000. a. Calculate Peterson's current ratio and net working capital. b. Assume that Peterson's uses $20,000 of its cash to reduce current liabilities. Recompute the current ratio and net working capital. c. What effect, if any, does the change proposed in question b have on Peterson's liquidity.

Prior to establishing trade credit, the firm is required to make extended formal agreements with the company.

Which of the following is an advantage of using commercial paper for short-term credit?

A banker's acceptance is a draft drawn on a specific bank by an exporter in order to obtain payment for goods that he has shipped to a customer who maintains an account with that specific bank.

Investing in additional marketable securities and inventories creates higher profitability and lower liquidity.

Lightbulbs.com sells industrial and institutional lighting supplies through its website. It sells directly to businesses and organizations such as universities and hospitals on terms of net 90. To finance its rather large investments in receivables and inventory, the firm has an average need for $2,000,000 in short-term loans. It is choosing between 3 alternative arrangements: Converse Bank offers a 4.75% APR with interest and principal paid at the end of the year. Guaranty Bank offers a rate of 4.5% with interest discounted at the time of the loan. County Bank offers 4.25% with a 10% compensating balance. Which bank offers the APR when all terms of the loan are considered? You may assume that required amounts are borrowed for the full year.

Which of the following is an advantage of trade credit?

The principle of maturity matching suggests that

Prince Co.'s inventory turnover ratio is 30.4. It's inventory conversion period is

Which of the following is NOT considered a permanent source of financing?

Spontaneous sources of debt

The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank. The bank will charge Stoney River 4.5 % on a discounted basis. What is the annual percentage rate (APR) to Stoney River (round to the nearest .1 percent)?

Marketable securities are near-cash assets because they can be converted into cash quickly.

Fibercom Inc. needs $500,000 for one year. If the loan takes the form of a discounted note at a stated rate of 4%, how much will Fibercom actually need to borrow?