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Exam 16: Supply Chains and Working Capital Management

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Question 1

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Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.

A) True
B) False

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Question 2

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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.

A) True
B) False

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Question 3

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Shulman Inc.has the following data, in thousands.Assuming a 365-day year, what is the firm's cash conversion cycle? $\begin{array} { l r } \text { Annual sales } = & \$ 45,000 \\\text { Annual cost of goods sold } = & \$ 30,000 \\\text { Inventory } = & \$ 4,500 \\\text { Accounts receivable } & \$ 1,800 \\\text { Accounts payable } = & \$ 2,500\end{array}$

Which of the following is NOT commonly regarded as being a credit policy variable?

Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

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.

Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

Which of the following statements is CORRECT?

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

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.)

Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days.Your firm is not taking discounts, but is paying after 25 days instead of waiting until Day 30.You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%.But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost (not the nominal cost) of its costly trade credit, using a 365-day year?

Whitson Co.is looking for ways to shorten its cash conversion cycle.It has annual sales of $36,500,000, or $100,000 a day on a 365-day basis.The firm's cost of goods sold is 75% of sales.On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

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

Data on Nathan Enterprises for the most recent year are shown below, along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done, by how much would receivables decline? Use a 365-day year. $\begin{array} { l r } \text { Sales } & \$ 110,000 \\\text { Accounts receivable } & \$ 16,000 \\\text { Days sales outstanding (DSO) } & 53.09 \\\text { Benchmark days sales outstanding (DSO) } & 20.00\end{array}$

Pascarella Inc.is revising its payables policy.It has annual sales of $50,735,000, an average inventory level of $15,012,000, and average accounts receivable of $10,008,000.The firm's cost of goods sold is 85% of sales.The company makes all purchases on credit and has always paid on the 30th day.However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000.What will be the net change in the cash conversion cycle, assuming a 365-day year?

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.Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same.In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?

Which of the following statements is CORRECT?

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

The aging schedule is a commonly used method for monitoring receivables.

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.