Question 1

Vega Music's projected net income and free cash flows are given above in thousands of dollars.Vega expects their net income and increases in net working capital to increase by 5% per year.If Vega were able to reduce its annual increase in working capital by 10% without affecting any other part of the business adversely,what would be the effect of this reduction on Vega's value,given a cost of capital of 13%?

Accepted Answer

A) an increase of $500,000 
B) an increase of $1,370,000 
C) an increase of $2,500,000 
D) an increase of $3,800,000 
E) an increase of $350,000

Question 2

Commercial Supply Corp.bills its accounts on terms of 2/10 net 30.The firm's accounts receivable include $200,000 that has been outstanding for ten or fewer days,$126,000 outstanding for 11 to 30 days,$98,000 outstanding for 31 to 40 days,$12,000 outstanding for 41 to 50 days,$20,000 outstanding for 51 to 60 days,and $7000 outstanding for more than 60 days.Is the aging schedule for Commercial Supply Corp.bottom heavy?

Accepted Answer

A) No,since 70% of the outstanding sales are on time and the percentage of long-term outstanding payments are low. 
B) Yes,since the percentage of payments that are late is greater than the percentage of payments that are on time. 
C) No,since since the percentage of payments that are late are greater than the percentage of payments that are on time. 
D) Yes,since the percentage of payments that are on time are greater than the percentage of payments that are late. 
E) No,since the percentage of payments that are on time is equal to the percentage of payments that are late.

Question 3

Cooper Copper,a manufacturer of copper piping,buys copper on credit on March 10.It processes this copper to make pipes on March 25 and pays cash for the copper on April 9.On April 14 it sells the pipes to a construction company,and on May 14 receives cash payment for this sale.What is the length of the cash cycle in this case?

Accepted Answer

A) 15 days 
B) 20 days 
C) 65 days 
D) 30 days 
E) 35 days

Question 4

Franklin Industries has a current net working capital of $1 million.It expects that this will grow at a rate of 3% annually forever.What growth rate in working capital would the firm require in order to achieve a $2 million increase in firm value,given that it has a cost of capital of 7%?

Accepted Answer

A) 2% 
B) 2.7% 
C) 3.3% 
D) 1.4% 
E) 4%

Question 5

Use the table for the question(s)below.
Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006.
A simplified balance sheet for the firm appears below:
  
-Luther's Inventory days is closest to:

Accepted Answer

A) 32 days 
B) 59 days 
C) 39 days 
D) 42 days 
E) 47 days

Question 6

ABX corporation had sales of $47.6 million this year and an average accounts receivable of $6.3 million per day.Its credit terms specify "1/10 net 30." On average,how long does it take to collect on its sales?

Accepted Answer

A) 7.56 days 
B) 12.17 days 
C) 18.25 days 
D) 21.49 days 
E) 48.31 days

Question 7

The difference between a firm's operating cycle and its cash cycle is:

Accepted Answer

A) its account receivable days. 
B) its accounts payable days. 
C) its inventory days. 
D) how inventory is calculated. 
E) how sales are calculated.

Question 8

What is the collection float?

Accepted Answer

The answer of What is the collection float?...

Question 9

Which of the following would decrease a firm's cash conversion cycle?

Accepted Answer

A) increase the inventory days 
B) increase the accounts receivable days 
C) increase the accounts payable days 
D) increase the cash days 
E) decrease the average daily sales

Question 10

Your firm purchases goods from its supplier with a discount of 2%,and a credit period of 30 days.If the effective annual cost of forgoing the discount is 63.49%,what is the length of the discount period?

Accepted Answer

A) 15 days 
B) 25 days 
C) 35 days 
D) 40 days 
E) 50 days

Question 11

LeokLee Industries has an average accounts payable balance of $720,000.Its average annual cost of goods sold is $8,760,000.It receives terms of 1/10 net 30 from its suppliers.Is LeokLee managing its accounts payables well?

Accepted Answer

A) Yes,since it,on average,chooses not to take the discount,but pays when payment is due. 
B) Yes,since it,on average,takes the discount,and pays at the end of the discount period. 
C) Yes,since it,on average,stretches payment beyond the due payment date. 
D) No,since it,on average,does not take advantage of the discount period and pays well before payment is due. 
E) No,since it,on average,does not make payment before it is due.

Question 12

Ally Manufacturing has an average accounts payable balance of $420,000.Its average annual cost of goods sold is $10,220,000.It receives terms of 2/15 net 30 from its suppliers.Is Ally managing its accounts payables well?

Accepted Answer

A) Yes,since it,on average,chooses not to take the discount,but pays when payment is due. 
B) Yes,since it,on average,takes the discount,and pays at the end of the discount period. 
C) Yes,since it,on average,stretches payment beyond the due payment date. 
D) No,since it,on average,does not take advantage of the discount period and pays well before payment is due. 
E) No,since it,on average,does not make payment before it is due.

Question 13

What is a firm's cash cycle?

Accepted Answer

The answer of What is a firm's cash cycle?...

Question 14

If a supplier is offering trade credit of 1/10 net 30,and a buyer chooses not to take the discount,when should they pay,assuming that they wish to stay on good terms with the supplier?

Accepted Answer

A) anytime before day 10 
B) on day 10 
C) on day 30 
D) any time after day 30 
E) any time between day 10 and day 30

Question 15

Which of the following short-term securities would a firm invest in if they wanted to invest cash for a term of only a few days?

Accepted Answer

A) Treasury bills 
B) repurchase agreements 
C) banker's acceptances 
D) commercial paper 
E) term deposits

Question 16

Brilliant Balloons,a party balloon manufacturer,buys latex on credit on September 1.It processes this latex to make balloons on September 6 and pays cash for the latex on September 14.On September 19 it sells the balloons to a party supply retailer,and on October 5 receives cash payment for this sale.What is the length of the cash cycle in this case?

Accepted Answer

A) 21 days 
B) 34 days 
C) 5 days 
D) 18 days 
E) 13 days

Question 17

A situation in which a firm runs out of inventory is called a(n):

Accepted Answer

A) inventory shortage. 
B) fire sale. 
C) bankruptcy. 
D) stock-out. 
E) inventory loss.

Question 18

A firm has average accounts receivable of $2 million,and,on average,takes 39 days to collect on its sales.What is the total amount of the firm's sales?

Accepted Answer

A) $2 million 
B) $4.7 million 
C) $18.7 million 
D) $78 million 
E) $19.5 million

Question 19

Cooper Copper,a manufacturer of copper piping,buys copper on credit on March 10.It processes this copper to make pipes on March 25 and pays cash for the copper on April 9.On April 14 it sells the pipes to a construction company,and on May 14 receives cash payment for this sale.What is the length of the operating cycle in this case?

Accepted Answer

A) 15 days 
B) 20 days 
C) 65 days 
D) 30 days 
E) 35 days

Question 20

What is the meaning of the term 2/10 net 30?

Accepted Answer

A) If the invoice is paid within 10 days a 2% discount can be taken.If the invoice is paid between 11 and 29 days a 1% discount can be taken.After 30 days the full invoice is due. 
B) If the invoice is paid within 2 days a 10% discount can be taken,otherwise the full invoice is due in 30 days. 
C) If the invoice is paid within 2 days a 10% discount can be taken,otherwise a 2% discount can be taken if the invoice is paid in 30 days. 
D) If the invoice is paid within 10 days a 2% discount can be taken,otherwise the full invoice is due in 30 days. 
E) If the invoice is paid within 2 days a 30% discount can be taken,otherwise the full invoice is due in 10 days.

Exam 19: Working Capital Management

Franklin Industries has a current net working capital of $1 million.It expects that this will grow at a rate of 3% annually forever.What growth rate in working capital would the firm require in order to achieve a $2 million increase in firm value,given that it has a cost of capital of 7%?

Use the table for the question(s) below. Luther Industries had sales of $980 million and a cost of goods sold of $560 million in 2006. A simplified balance sheet for the firm appears below: -Luther's Inventory days is closest to:

ABX corporation had sales of $47.6 million this year and an average accounts receivable of $6.3 million per day.Its credit terms specify "1/10 net 30." On average,how long does it take to collect on its sales?

The difference between a firm's operating cycle and its cash cycle is:

What is the collection float?

Which of the following would decrease a firm's cash conversion cycle?

Your firm purchases goods from its supplier with a discount of 2%,and a credit period of 30 days.If the effective annual cost of forgoing the discount is 63.49%,what is the length of the discount period?

LeokLee Industries has an average accounts payable balance of $720,000.Its average annual cost of goods sold is $8,760,000.It receives terms of 1/10 net 30 from its suppliers.Is LeokLee managing its accounts payables well?

Ally Manufacturing has an average accounts payable balance of $420,000.Its average annual cost of goods sold is $10,220,000.It receives terms of 2/15 net 30 from its suppliers.Is Ally managing its accounts payables well?

What is a firm's cash cycle?

If a supplier is offering trade credit of 1/10 net 30,and a buyer chooses not to take the discount,when should they pay,assuming that they wish to stay on good terms with the supplier?

Which of the following short-term securities would a firm invest in if they wanted to invest cash for a term of only a few days?

A situation in which a firm runs out of inventory is called a(n) :

A firm has average accounts receivable of $2 million,and,on average,takes 39 days to collect on its sales.What is the total amount of the firm's sales?

What is the meaning of the term 2/10 net 30?