Question 1

A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

Accepted Answer

A)   14.34%
B)   15.10%
C)   15.89%
D)   16.69%
E)   17.52%F) A) and D)
G) B) and C)

Question 2

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period  =41= \quad 41=41  days
Receivables collection period  =31= \quad 31=31  days
Payables deferral period  === 38 days

Accepted Answer

A)   31 days
B)   34 days
C)   37 days
D)   41 days
E)   45 days F) B) and E)
G) B) and D)

Question 3

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 3 day year.

Accepted Answer

A)   $458,160
B)   $482,273
C)   $507,656
D)   $534,375
E)   $562,500F) A) and E)
G) None of the above

Question 4

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

Accepted Answer

A)   consist mainly of long-term securities because they pay higher rates.
B)   consist mainly of short-term securities because they pay higher rates.
C)   consist mainly of U.S. Treasury securities to minimize interest rate risk.
D)   consist mainly of short-term securities to minimize interest rate risk.
E)   be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.F) A) and D)
G) C) and D)

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Weiss Inc. arranged a $9,000,000 revolving credit agreement with a group of banks. The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment. On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis. The prime rate was 9% during the year. If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver?

Accepted Answer

A)   $612,750
B)   $645,000
C)   $677,250
D)   $711,113
E)   $746,668F) A) and B)
G) A) and C)

Question 7

A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Accepted Answer

A) True 
 B)False

Question 8

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Which of the following items should a company report directly in its monthly cash budget?

Accepted Answer

A)   Its monthly depreciation expense.
B)   Cash proceeds from selling one of its divisions.
C)   Accrued interest on zero coupon bonds that it issued.
D)   New shares issued in a stock split.
E)   New shares issued in a stock dividend.F) C) and D)
G) B) and E)

Question 11

Edison Inc. 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. The firm is looking for ways to shorten its cash conversion cycle. 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.

Accepted Answer

A)   −26 days
B)   −22 days
C)   −18 days
D)   −14 days
E)   −11 daysF) All of the above
G) A) and E)

Question 12

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.

Accepted Answer

A) True 
 B)False

Question 13

Net working capital is defined as current assets divided by current liabilities.

Accepted Answer

A) True 
 B)False

Question 14

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease other things held constant.

Accepted Answer

A) True 
 B)False

Question 15

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Accepted Answer

A) True 
 B)False

Question 16

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 asset financing strategy because of the inherent risks of using short- term financing.

Accepted Answer

A) True 
 B)False

Question 17

If a firm buys on terms of 2/10, net 30, it should pay as early as possible during the discount period to lower its cost of trade credit.

Accepted Answer

A) True 
 B)False

Question 18

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) All of the above
G) None of the above

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A)   Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased.
B)   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 strategy because of the inherent risks associated with using short-term financing.
C)   If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
D)   Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased.
E)   If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.F) A) and B)
G) C) and D)

Question 20

Changes in a firm's collection policy can affect sales, working capital, and profits.

Accepted Answer

A) True 
 B)False

Exam 15: Working Capital Management

If a firm buys on terms of 2/10, net 30, it should pay as early as possible during the discount period to lower its cost of trade credit.

Correct Answer
verified

A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

Correct Answer
verified

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease other things held constant.

Correct Answer
verified

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Correct Answer
verified

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct Answer
verified

Correct Answer
verified

Changes in a firm's collection policy can affect sales, working capital, and profits.

Correct Answer
verified

Net working capital is defined as current assets divided by current liabilities.

Correct Answer
verified

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

Correct Answer
verified

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 asset financing strategy because of the inherent risks of using short- term financing.

Correct Answer
verified

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period $= \quad 41$ days Receivables collection period $= \quad 31$ days Payables deferral period $=$ 38 days

Correct Answer
verified

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Correct Answer
verified

Which of the following items should a company report directly in its monthly cash budget?

Correct Answer
verified

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 3 day year.

Correct Answer
verified

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

Exam 15: Working Capital Management

If a firm buys on terms of 2/10, net 30, it should pay as early as possible during the discount period to lower its cost of trade credit.

Correct AnswerverifiedShow Answer

A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

Correct AnswerverifiedShow Answer

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease other things held constant.

Correct AnswerverifiedShow Answer

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC).

Correct AnswerverifiedShow Answer

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Changes in a firm's collection policy can affect sales, working capital, and profits.

Correct AnswerverifiedShow Answer

Net working capital is defined as current assets divided by current liabilities.

Correct AnswerverifiedShow Answer

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

Correct AnswerverifiedShow Answer

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 asset financing strategy because of the inherent risks of using short- term financing.

Correct AnswerverifiedShow Answer

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period =41= \quad 41=41 days Receivables collection period =31= \quad 31=31 days Payables deferral period === 38 days

Correct AnswerverifiedShow Answer

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Correct AnswerverifiedShow Answer

Which of the following items should a company report directly in its monthly cash budget?

Correct AnswerverifiedShow Answer

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 3 day year.

Correct AnswerverifiedShow Answer

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

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Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period $= \quad 41$ days Receivables collection period $= \quad 31$ days Payables deferral period $=$ 38 days

Correct Answer
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