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Exam 17: Supply Chains and Working Capital Management

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Question 51

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Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

A) True
B) False

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Question 52

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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.

A) True
B) False

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Question 53

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Which of the following statements is CORRECT?

Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cash.Sales are expected to grow at a stable, steady rate of 10% annually in the future.Dimon's accounts receivable balance will remain constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant.

Noddings Inc.needs 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.)

Shorter-term cash budgets⎯say a daily cash budget for the next month⎯are generally used for actual cash control while longer-term cash budgets⎯say monthly cash budgets for the next year⎯are generally used for planning purposes.

Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Which of the following will cause an increase in net working capital, other things held constant?

For a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is essential.

Which of the following statements is CORRECT?

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

Carter & Carter is considering setting up a regional lockbox system to speed up collections.The company sells to customers all over the U.S., and all receipts come in to its headquarters in San Francisco.The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate.The firm believes this new lockbox system would reduce receivables by 20%.If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized?

Which of the following statements is CORRECT?

If a profitable firm finds that it simply must "stretch" its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.

Hardwig Inc. Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 25%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. -Refer to the data for Hardwig, Inc.What's the difference in the projected ROEs under the restricted and relaxed policies?

Accruals are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

When deciding whether or not to take a cash discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

A 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 payments are concentrated at the beginning of each month.

The maturity matching, or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates.When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs.