Question 1

concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

Accepted Answer

A) True 
 B)False

Question 2

Safety Window and Door Cobuys on terms of 2/15, net 60 days It does not take discounts, and it typically pays on time, 60 days after the invoice date Net purchases amount to $450,000 per year On average, how much "free" trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)  $18,493 
B)  $19,418 
C)  $20,389 
D)  $21,408 
E)  $22,479

Question 3

relative profitability of a firm that employs an aggressive current asset financing policy will improve if the yield curve changes from upward sloping to downward sloping.

Accepted Answer

A) True 
 B)False

Question 4

What's the difference in the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)  1.20% 
B)  1.50% 
C)  1.80% 
D)  2.16% 
E)  2.59%

Question 5

Noddings Incneeds to raise more capital because its business is booming The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount One way of getting the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)

Accepted Answer

A)  10.59% 
B)  11.15% 
C)  11.74% 
D)  12.36% 
E)  13.01%

Question 6

Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30 The change is meant to meet competition, so no increase in sales is expected The average accounts receivable balance will probably decline as a result of this change.

Accepted Answer

A) True 
 B)False

Question 7

a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Accepted Answer

A) True 
 B)False

Question 8

Krackle Korn Inchad credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days What was its average receivables balance, based on a 365-day year?

Accepted Answer

A)  $335,616 
B)  $352,397 
C)  $370,017 
D)  $388,518 
E)  $407,944

Question 9

Whitson Cois looking for ways to shorten its cash conversion cycleIt has annual sales of $36,500,000, or $100,000 a day on a 365-day basis The firm's cost of goods sold is 75% of sales On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

Accepted Answer

A)  -26 days 
B)  -22 days 
C)  -18 days 
D)  -14 days 
E)  -11 days

Question 10

Buchholz Corporation follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40% With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales What is the difference in the projected ROEs between the restricted and relaxed policies?

Accepted Answer

A)  4.25% 
B)  4.73% 
C)  5.25% 
D)  5.78% 
E)  6.35%

Question 11

Which of the following is NOT commonly regarded as being a credit policy variable?

Accepted Answer

A)  Collection policy. 
B)  Credit standards. 
C)  Cash discounts. 
D)  Payments deferral period. 
E)  Credit period.

Question 12

a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A) True 
 B)False

Question 13

firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 14

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A) True 
 B)False

Question 15

Which of the following actions would be likely to shorten the cash conversion cycle?

Accepted Answer

A)  Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50. 
B)  Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30. 
C)  Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days. 
D)  Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60. 
E)  Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.

Question 16

aging schedule is a commonly used method for monitoring receivables.

Accepted Answer

A) True 
 B)False

Question 17

Sanders Enterprises arranged a revolving credit agreement of $9,000,000 with a group of banks The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis The prime rate was 3.25% during the year If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver?

Accepted Answer

A)  $285,000 
B)  $300,000 
C)  $315,000 
D)  $330,750 
E)  $347,288

Question 18

Fairweather Corporation purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off the discount) are $800,000 per year What is the maximum dollar amount of costly trade credit the firm could get, assuming it abides by the supplier's credit terms? (Assume a 365-day year.)

Accepted Answer

A)  $53,699 
B)  $56,384 
C)  $59,203 
D)  $62,163 
E)  $65,271

Question 19

average, a firm collects checks totaling $250,000 per day It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm Assume that (1) a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes The lockbox system would be a good buy if it costs $25,000 annually.

Accepted Answer

A) True 
 B)False

Question 20

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

Accepted Answer

A) True 
 B)False

Exam 21: Working Capital

concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

relative profitability of a firm that employs an aggressive current asset financing policy will improve if the yield curve changes from upward sloping to downward sloping.

What's the difference in the projected ROEs under the restricted and relaxed policies?

Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30 The change is meant to meet competition, so no increase in sales is expected The average accounts receivable balance will probably decline as a result of this change.

a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Krackle Korn Inchad credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days What was its average receivables balance, based on a 365-day year?

Which of the following is NOT commonly regarded as being a credit policy variable?

a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Which of the following actions would be likely to shorten the cash conversion cycle?

aging schedule is a commonly used method for monitoring receivables.

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.