Question 1

Firms are often known to pay commitment fees to banks for the privilege of receiving a line of credit.Does it make sense for a firm to pay for something that,at least at the present time,it does not know whether it will use?

Accepted Answer

It may make perfect sense for managers to pay in advance for the comfort of knowing that they can obtain up to a certain amount of funds automatically.This would especially make sense if the firm currently practiced the "relaxed" strategy of long- and short-term funding.For this firm the fee may be less than the amount of the permanent interest expense.This practice can be equally effective for other funding strategies.Thus,if an explicit payment "up front" can reduce either explicit or implicit costs of later borrowing,the practice makes sense.Of course,another way of analyzing the fee is that it may be unavoidable,and therefore a moot point.

Question 2

Which of the following would not be included in a cash budget?

Accepted Answer

A)   income tax payments
B)   cash receipts
C)   dividend payments
D)   depreciation D

Question 3

Permanent working capital requirements can be financed using commercial paper.

Accepted Answer

A) True 
 B)False  False

Question 4

Which of the following is least likely to be correct for a firm that repeatedly stretches its payables?

Accepted Answer

A)   the firm may receive more favourable status from suppliers due to its volume of purchases
B)   the firm may reduce its explicit short-term interest expense
C)   the cost of forgone discounts may exceed the cost of bank credit
D)   the firm may be labeled as a credit risk

Question 5

A firm sells its $1,000,000 receivables to a factor for $960,000.Average collection period is one month.The effective annual rate is:

Accepted Answer

A)   27.43%
B)   48.00%
C)   60.10%
D)   63.21%

Question 6

A credit card company charges its customers an annual interest of 21.0% on the outstanding monthly balance.The effective annual rate for the customer will be:

Accepted Answer

A)   21.00%
B)   21.20%
C)   23.14%
D)   37.93%

Question 7

Ignoring defaults,what is the approximate effective cost of factoring if receivables are sold at a 4% discount and the average collection period is 2 months?

Accepted Answer

A)   19.40%
B)   24.00%
C)   26.53%
D)   27.75%

Question 8

How does long-term financing policy affect short-term financing requirements?

Accepted Answer

The answer of How does long-term financing policy affect short-term...

Question 9

Keeping a large surplus of cash and investing it in Treasury bills will bring positive NPV to a firm.

Accepted Answer

A) True 
 B)False

Question 10

Calculate the effective rate of 12% compounded quarterly.

Accepted Answer

A)   11.55%
B)   12.55%
C)   13.55%
D)   14.55%

Question 11

The time interval between paying for raw materials and collecting on sales of finished goods is known as the:

Accepted Answer

A)   inventory cycle
B)   matching cycle
C)   cash conversion cycle
D)   accounts receivable cycle

Question 12

The goal of managing working capital,such as inventory,should be to minimize the:

Accepted Answer

A)   costs of carrying inventory
B)   opportunity cost of capital
C)   aggregate of carrying and shortage costs
D)   amount of spoilage or pilferage

Question 13

Optimizing cash balances involves the equating of:

Accepted Answer

A)   total benefits and total opportunity costs
B)   average benefits and average opportunity costs
C)   accounts receivable and accounts payable
D)   marginal benefits and marginal opportunity costs

Question 14

If a firm decided to speed up its collection from its customers by reducing the receivables period and kept the inventory period and payable period the same,then:

Accepted Answer

A)   Cash conversion cycle will increase
B)   Cash conversion cycle will decrease
C)   The firm's investment in working capital will be minimized
D)   Investment in working capital will be maximized

Question 15

During the year the following changes were observed. (I.)Inventory period increased by 12 days
(II))Receivables period decreased by 6 days
(III.)Accounts payable period increased by 4 days
Find the net change in cash conversion cycle.

Accepted Answer

A)   -10 days
B)   +2 days
C)   +10 days
D)   +14 days

Question 16

A firm borrows $100,000 from the bank,but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded monthly?

Accepted Answer

A)   12.03%
B)   13.00%
C)   14.05%
D)   16.08%

Question 17

What is the cash conversion cycle for a firm with a receivables period of 40 days,a payables period of 30 days,and an inventory period of 60 days?

Accepted Answer

A)   10 days
B)   50 days
C)   70 days
D)   130 days

Question 18

A firm's inventory period can be estimated by the ratio of average inventory to daily output.

Accepted Answer