Question 1

A firm wants to reduce its cash conversion cycle. Which of the following actions will reduce its cash conversion cycle?

Accepted Answer

A)   The firm reduces its DSO.
B)   The firm increases its inventory.
C)   The firm reduces its accounts payable.
D)   All of these. A

Question 2

Drawing, Inc. has sales of $860,000 and cost of goods sold of $450,000. The firm had a beginning inventory of $50,000 and an ending inventory of $59,000. What is the length of the days' sales in inventory?

Accepted Answer

A)   23.13 days
B)   44.21 days
C)   21.22 days
D)   47.86 days D

Question 3

What is the difference between a lockbox system and concentration banking?

Accepted Answer

A)   In concentration banking, both physical collection and processing take place close to the customer but in a lockbox system, neither the collections nor processing take place close to the customer.
B)   In a lockbox system, customers' payments are physically collected close to them and much of the processing takes place close to the bank, but in concentration banking both physical collection and processing take place close to the bank.
C)   Concentration banking involves using several banks to fund a large loan and lockbox systems deal with the ability to speed up collections.
D)   None of these D

Question 4

If a firm has a cash cycle of 25 days and an operating cycle of 57 days, what is its average payment period?

Accepted Answer

A)   25 days
B)   32 days
C)   57 days
D)   82 days

Question 5

For most businesses, particularly smaller ones, the most common way to cover a short-term financing need is to apply at a bank for which of the following?

Accepted Answer

A)   commercial loan
B)   line of credit
C)   asset-based loan
D)   inventory loan

Question 6

B&O Cos. has sales of $850,000 and cost of goods sold of $490,000. The firm had a beginning inventory of $69,000 and an ending inventory of $54,000. What is the length of the days' sales in inventory?

Accepted Answer

A)   40.22 days
B)   51.40 days
C)   23.19 days
D)   29.63 days

Question 7

Would it be worth it to incur a compensating balance of $2,000 in order to get a 1.5-percent-lower interest rate on a 1-year, pure discount loan of $100,000?

Accepted Answer

A)   yes
B)   no
C)   not enough information is given to determine It depends upon whether $100,000 x (1 + i)  or $102,000 x (1 + [i - .015])  is larger. The compensating balance for the lower loan rate will make sense if:$100,000 x (1 + i)  > $102,000 x (1 + [i - .015]) ($100,000/$102,000)  x (1 + i)  > (1 + [i - .015]) ) 9804 + .9804i > 1 + i - .015-) 0196i > .0046I In other words, only if the rate is less than - 23.47%. Since this is not likely to happen, the lower rate associated with the compensating balance isn't worth it.

Question 8

HotFoot Shoes would like to maintain their cash account at a minimum level of $35,000, but expect the standard deviation in net daily cash flows to be $2,000; the effective annual rate on marketable securities to be 5 percent per year; and the trading cost per sale or purchase of marketable securities to be $210 per transaction. What will be their optimal cash return point?

Accepted Answer

A)   $41,899.45
B)   $45,901.75
C)   $51,752.46
D)   $56,780.25

Question 9

If a firm has a cash cycle of 25 days and an operating cycle of 80 days, what is its payables turnover?

Accepted Answer

A)   14.6
B)   4.56
C)   6.64
D)   55

Question 10

Elle Mae Industries has a cash balance of $50,000; accounts payable of $150,000; inventory of $190,000; accounts receivable of $250,000; notes payable of $210,000; and accrued wages and taxes of $40,000. How much net working capital does the firm need to fund?

Accepted Answer

A)   $50,000
B)   $90,000
C)   $110,000
D)   $130,000

Question 11

MC Enterprises estimates that it takes, on average, 7 days for their customers' payments to reach them, 2 day for the payments to be processed and deposited by their bookkeeping department, and 3 more days for the checks to clear once they're deposited. What is their collection float?

Accepted Answer

A)   12 days
B)   10 days
C)   9 days
D)   7 days

Question 12

Which of the following is the technique for reducing collection float by having funds sent to several geographically situated regional banks and then transferring to a main concentration account in another bank?

Accepted Answer

A)   lockbox system
B)   concentration banking
C)   wire transfers
D)   collection float

Question 13

Suppose your firm is seeking a 3-year, amortizing $300,000 loan with annual payments and your bank is offering you the choice between a $305,000 loan with a $5,000 compensating balance and a $300,000 loan without a compensating balance. If the interest rate on the $300,000 loan is 8 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

Accepted Answer

A)   8%
B)   7.09%
C)   1.67%
D)   7.98%

Question 14

Rose Axels faces a smooth annual demand for cash of $8 million; incurs transaction costs of $200 every time they sell marketable securities; and can earn 3.8 percent on their marketable securities. What will be their optimal cash replenishment level?

Accepted Answer

A)   $264,583.03
B)   $278,997.38
C)   $290,190.50
D)   $313,809.26

Question 15

Imagine a firm has a temporary surplus of cash meant to fund an expansion project in the next 9 months. Which of the following statements is correct?

Accepted Answer

A)   The firm will probably want to invest this preferred stock.
B)   The firm will probably want to invest this surplus in U.S. Treasury bonds.
C)   The firm will probably want to invest this surplus in U.S. Treasury bills.
D)   The firm will probably want to invest this surplus in whichever security yields the highest return.

Question 16

Which of the following actions will cause a firm's net working capital to decrease?

Accepted Answer

A)   The firm relaxes its credit policy.
B)   The firm increases its usage of accruals.
C)   The firm pays off a short-term bank loan with cash.
D)   None of these will cause a firm's net working capital to decrease.

Question 17

Suppose that Jamie's Jams has annual sales of $900,000; cost of goods sold of $600,000; average inventories of $11,000; average accounts receivable of $50,000; and an average accounts payable balance of $30,000. Assuming that all of Jamie's sales are on credit, what will be the firm's cash cycle?

Accepted Answer

A)   45.22
B)   8.72
C)   18.25
D)   26.97

Question 18

If a firm has a cash cycle of 39 days and an operating cycle of 88 days, what is its average payment period?

Accepted Answer

A)   39 days
B)   49 days
C)   88 days
D)   127 days

Question 19

The operating cycle will increase with all of the following changes except ____________.

Accepted Answer

A)   The cost of goods sold increases
B)   The level of accounts receivable increases
C)   The level of inventory increases
D)   All of these will increase the operating cycle

Question 20

If a firm's inventory ratio increases, what will happen to the firm's cash cycle?

Accepted Answer

A)   It will increase.
B)   It will decrease.
C)   It will increase and then slowly decrease back to the initial level.
D)   It will decrease and the slowly increase back to the initial level.

Exam 14: Working Capital Management and Policies