Question 1

facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.

Accepted Answer

A) True 
 B)False

Question 2

Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)  2.24% 
B)  2.46% 
C)  2.70% 
D)  2.98% 
E)  3.27%

Question 3

Howes Incpurchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50 If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

Accepted Answer

A)  20.11% 
B)  21.17% 
C)  22.28% 
D)  23.45% 
E)  24.63%

Question 4

is often referred to as a "non-earning" asset Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

Accepted Answer

A) True 
 B)False

Question 5

of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise, other things held constant.

Accepted Answer

A) True 
 B)False

Question 6

lockbox plan is

Accepted Answer

A)  used to identify inventory safety stocks. 
B)  used to slow down the collection of checks our firm writes. 
C)  used to speed up the collection of checks received. 
D)  used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks. 
E)  used to protect cash, i.e., to keep it from being stolen.

Question 7

Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year)The company carries average inventory of $750,000Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion periodThe firm buys on terms of net 30 days, and it pays on timeThe CFO believes he can reduce the average inventory to $647,260 with no effect on salesBy how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

Accepted Answer

A)  $123,630 
B)  $130,137 
C)  $136,986 
D)  $143,836 
E)  $151,027

Question 8

Loans from commercial banks generally appear on balance sheets as notes payable A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Accepted Answer

A) True 
 B)False

Question 9

Newsome Incbuys on terms of 3/15, net 45 It does not take the discount, and it generally pays after 60 days What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accepted Answer

A)  25.09% 
B)  27.59% 
C)  30.35% 
D)  33.39% 
E)  36.73%

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)  Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. 
B)  If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
C)  Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased. 
D)  If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt. 
E)  Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.

Question 11

Hinkle Corporation buys 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 $550,000 per year On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)  $ 90,411 
B)  $ 94,932 
C)  $ 99,678 
D)  $104,662 
E)  $109,895

Question 12

a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.

Accepted Answer

A) True 
 B)False

Question 13

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

Accepted Answer

A) True 
 B)False

Question 14

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

Accepted Answer

A) True 
 B)False

Question 15

informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Accepted Answer

A) True 
 B)False

Question 16

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

Accepted Answer

A) True 
 B)False

Question 17

firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

Accepted Answer

A) True 
 B)False

Question 18

four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements concerning the cash budget is CORRECT?

Accepted Answer

A)  Cash budgets do not include financial items such as interest and dividend payments. 
B)  Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. 
C)  Changes that affect the DSO do not affect the cash budget. 
D)  Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues. 
E)  Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments.

Question 20

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

Accepted Answer

A)  Take steps to reduce the DSO. 
B)  Start paying its bills sooner, which would reduce the average accounts payable but not affect sales. 
C)  Sell common stock to retire long-term bonds. 
D)  Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock. 
E)  Increase average inventory without increasing sales.

Exam 21: Working Capital

facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.

Howes Incpurchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50 If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

is often referred to as a "non-earning" asset Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise, other things held constant.

lockbox plan is

Loans from commercial banks generally appear on balance sheets as notes payable A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Newsome Incbuys on terms of 3/15, net 45 It does not take the discount, and it generally pays after 60 days What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Which of the following statements is CORRECT?

a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current operating asset financing strategy because of the inherent risks of using short-term financing.

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy.

Which of the following statements concerning the cash budget is CORRECT?

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?