Question 1

(The following data apply to Problems 136-138.) 
Zorn Corporation is deciding 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 40%. 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.
-If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?

Accepted Answer

A)   $ 8,418
B)   $ 8,861
C)   $ 9,327
D)   $ 9,818
E)   $10,309F) A) and B)
G) D) and E)

Question 2

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Accepted Answer

A)   Payments lags.
B)   Depreciation.
C)   Cumulative cash.
D)   Repurchases of common stock.
E)   Payment for plant construction.F) All of the above
G) C) and D)

Question 4

The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the average collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

Accepted Answer

A) True 
 B)False

Question 5

Nogueiras Corp's budgeted monthly sales are $5,000, and they are constant from month to month. 40% of its customers pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount. The firm has no bad debts. Purchases for next month's sales are constant at 50% of projected sales for the next month. "Other payments," which include wages, rent, and taxes, are 25% of sales for the current month. Construct a cash budget for a typical month and calculate the average net cash flow during the month.

Accepted Answer

A)   $1,092
B)   $1,150
C)   $1,210
D)   $1,271
E)   $1,334F) All of the above
G) A) and B)

Question 6

Madura Inc. wants to increase its free cash flow by $180 million during the coming year, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year: • EBIT is projected to equal $850 million.
• Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million.
• The tax rate is 40%.
• There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals.
What increase in net working capital (in millions of dollars)  would enable the firm to meet its target increase in FCF?

Accepted Answer

A)   $ 72
B)   $ 90
C)   $108
D)   $130
E)   $156F) C) and E)
G) A) and B)

Question 7

Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?

Accepted Answer

A)   $335,616
B)   $352,397
C)   $370,017
D)   $388,518
E)   $407,944F) B) and C)
G) B) and D)

Question 8

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is CORRECT?

Accepted Answer

A)   Other things held constant, the higher a firm's days sales outstanding (DSO) , the better its credit department.
B)   If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase.
C)   If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts.
D)   If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365)  would probably be lower in January than in July.
E)   If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.F) A) and C)
G) A) and D)

Question 10

(16 Intro). Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

A) True 
 B)False

Question 11

Firms generally choose to finance temporary current operating assets with short-term debt because

Accepted Answer

A)   matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
B)   short-term interest rates have traditionally been more stable than long-term interest rates.
C)   a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
D)   the yield curve is normally downward sloping.
E)   short-term debt has a higher cost than equity capital.F) A) and D)
G) None of the above

Question 12

Cass & Company has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 50 days
Average collection period = 17 days
Payables deferral period = 25 days

Accepted Answer

A)   31 days
B)   34 days
C)   38 days
D)   42 days
E)   46 daysF) B) and D)
G) A) and E)

Question 13

The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

Accepted Answer

A) True 
 B)False

Question 14

The calculated cost of trade credit can be reduced by paying late.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements is CORRECT?

Accepted Answer

A)   A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
B)   In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO)  sufficiently.
C)   Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
D)   Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
E)   Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.F) A) and B)
G) B) and C)

Question 16

The 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 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   Accruals are an expensive but commonly used way to finance working capital.
B)   A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.
C)   If a company receives trade credit under terms of 2/10 net 30, this implies that the company has 10 days of free trade credit.
D)   One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget.
E)   If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high.F) A) and C)
G) A) and B)

Question 20

Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

Accepted Answer

A)   63 days
B)   67 days
C)   70 days
D)   74 days
E)   78 daysF) C) and D)
G) A) and E)

Exam 16: Working Capital Management

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.

Correct Answer
verified

The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

Correct Answer
verified

Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

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.

Correct Answer
verified

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

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

Correct Answer
verified

(16 Intro). Net working capital is defined as current assets divided by current liabilities.

Correct Answer
verified

Cass & Company has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 50 days Average collection period = 17 days Payables deferral period = 25 days

Correct Answer
verified

Firms generally choose to finance temporary current operating assets with short-term debt because

Correct Answer
verified

Correct Answer
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Correct Answer
verified

The calculated cost of trade credit can be reduced by paying late.

Correct Answer
verified

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Correct Answer
verified

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Correct Answer
verified

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex.

Correct Answer
verified

Correct Answer
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Correct Answer
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Exam 16: Working Capital Management

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.

Correct AnswerverifiedShow Answer

The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

Correct AnswerverifiedShow Answer

Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

Correct AnswerverifiedShow Answer

(16 Intro). Net working capital is defined as current assets divided by current liabilities.

Correct AnswerverifiedShow Answer

Cass & Company has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 50 days Average collection period = 17 days Payables deferral period = 25 days

Correct AnswerverifiedShow Answer

Firms generally choose to finance temporary current operating assets with short-term debt because

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The calculated cost of trade credit can be reduced by paying late.

Correct AnswerverifiedShow Answer

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Correct AnswerverifiedShow Answer

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Correct AnswerverifiedShow Answer

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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