Question 1

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption of uniform daily cash receipts and disbursements,but actual receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 2

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt.Added risk stems from greater variability of interest costs on short-term debt.Even if its long-term prospects are good,the firm's lender may not renew a short-term loan if the firm is even temporarily unable to repay it.

Accepted Answer

A) True 
 B)False

Question 3

A firm that follows an aggressive working capital financing approach is more exposed to unexpected changes in the term structure of interest rates than is a firm that follows a conservative financing policy.

Accepted Answer

A) True 
 B)False  True

Question 4

Interest rates charged on loans vary depending on the risk of borrower,and the size of the loan,but not the economic conditions.

Accepted Answer

A) True 
 B)False

Question 5

Which statement best describes cash budgets?

Accepted Answer

A)  Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual cash control.
B)  The cash budget and the capital budget are planned separately and although they are both important to the firm, they are independent of each other.
C)  Since depreciation is a noncash charge, it does not appear on nor have an effect on the cash budget.
D)  The typical actual cash budget will reflect interest on loans and income from investment of surplus cash. These numbers are expected values and actual results might vary from budgeted results.E) A) and B)
F) C) and D)

Question 6

Discount loans are usually provided for terms of only 1 year or less.Their interest is paid together with the principal at the end of the loan.

Accepted Answer

A) True 
 B)False

Question 7

Since depreciation is a noncash charge,it neither appears on,nor has any effect on,the cash budget.

Accepted Answer

A) True 
 B)False

Question 8

Margetis Inc.carries an average inventory of $1,000,000.Its annual sales are $10 million,and its receivables conversion period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days,and it pays on time.Its new CFO wants to decrease the cash conversion cycle by 10 days,based on a 365-day year.He believes he can reduce the average inventory to $863,000 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal of a 10-day reduction in the cash conversion cycle?

Accepted Answer

A)  $0
B)  $101,900
C)  $136,986
D)  $333,520E) B) and C)
F) A) and C)

Question 9

Tareque Inc.wants to increase its free cash flow by $180 million during the coming year,which should result in a higher EVA and share price.The CFO has made these projections for the upcoming year:- EBIT is projected to be $850 million.- Gross capital expenditures are expected to total $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.Which of the following actions would enable the company to achieve its goal of generating $180 million in free cash flow?

Accepted Answer

A)  accounts receivable increase by $470 million, inventory increases by $230 million, and accounts payable increase by $790 million
B)  accounts receivable increase by $470 million, inventory increases by $230 million, and accounts payable increase by $610 million
C)  accounts receivable decrease by $500 million, inventory increases by $480 million, and accounts payable decline by $80 million
D)  accounts receivable decrease by $400 million, inventory increases by $480 million, and accounts payable increase by $80 millionE) All of the above
F) B) and C)

Question 10

Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual cost of trade credit if you pay 100 days after the purchase? (Assume a 365-day year.)

Accepted Answer

A)  20.64%
B)  21.73%
C)  22.81%
D)  23.95%E) All of the above
F) B) and D) B

Question 11

Which statement best describes short-term versus long-term financing?

Accepted Answer

A)  Flexibility is an advantage of short-term credit, but this is somewhat offset by the high flotation costs associated with the need to repeatedly renew short-term credit.
B)  A short-term loan can usually be obtained more quickly than a long-term loan, but the penalty for early repayment of a short-term loan is normally significantly higher than that for a long-term loan.
C)  The flexibility, cost, and riskiness of short-term versus long-term credit are dependent on the type of credit that is actually used.
D)  Short-term debt is often less costly than long-term debt, and the major reason for this is that short-term debt exposes the borrowing firm to much less risk than long-term debt.E) A) and C)
F) B) and C)

Question 12

If a firm is offered credit terms of 2/10,net 30,on its purchases,it is in the firm's financial interest to pay as early as possible during the discount period.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements best describes cash flows that would be shown on a cash budget?

Accepted Answer

A)  Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation) ; hence, depreciation is set forth on a separate line in the cash budget.
B)  If cash inflows from collections occur in equal daily amounts but most payments are made regularly on the 10th of each month, then it is not necessary to use a daily cash budget. A cash budget focused on the end of the month will suffice.
C)  Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales.
D)  The cash flows shown on the cash budget are the actual cash inflows and outflows and thus different from the firm's free cash flows, because FCF reflects after-tax operating income and the investments required to maintain future operations.E) A) and B)
F) A) and C)

Question 14

Other things held constant,what happens with a short CCC?

Accepted Answer

A)  The firm's working capital management is more effective.
B)  The firm's working capital management is less effective.
C)  The firm's inventory management is more effective..
D)  The firm's administrative costs are more effective.E) C) and D)
F) B) and C)

Question 15

Why do firms generally choose to finance temporary net operating working capital with short-term debt?

Accepted Answer

A)  Matching the maturities of assets and liabilities reduces risk.
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 has traditionally been downward sloping.E) B) and C)
F) A) and B)

Question 16

Shanklin Inc.purchases merchandise on terms of 2/15,net 40,and its total gross purchases (i.e.,purchases before taking off the discount)  are $800,000 per year.What is the maximum amount of costly trade credit Shanklin could get,assuming it abides by the supplier's credit terms? (Assume a 365-day year.)

Accepted Answer

A)  $53,699
B)  $56,384
C)  $59,203
D)  $62,163E) A) and B)
F) A) and D)

Question 17

Under a revolving credit agreement,the risk to the firm of being unable to obtain funds when needed is lower than with an informal line of credit.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.,after the fact) sense even though it is possible to match maturities on an expected basis.

Accepted Answer

A) True 
 B)False  True

Question 20

The prime rate charged can vary greatly (e.g.,as much as 2 to 4 percentage points) across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles,such as making loans to specialty retailers.

Accepted Answer

A) True 
 B)False

Exam 17: Working Capital Management and Short-Term Financing

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption of uniform daily cash receipts and disbursements,but actual receipts are concentrated at the beginning of each month.

Correct Answer
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Correct Answer
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A firm that follows an aggressive working capital financing approach is more exposed to unexpected changes in the term structure of interest rates than is a firm that follows a conservative financing policy.

Correct Answer
verified
True

Interest rates charged on loans vary depending on the risk of borrower,and the size of the loan,but not the economic conditions.

Correct Answer
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Which statement best describes cash budgets?

Correct Answer
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Discount loans are usually provided for terms of only 1 year or less.Their interest is paid together with the principal at the end of the loan.

Correct Answer
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Since depreciation is a noncash charge,it neither appears on,nor has any effect on,the cash budget.

Correct Answer
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Correct Answer
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Correct Answer
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Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual cost of trade credit if you pay 100 days after the purchase? (Assume a 365-day year.)

Correct Answer
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B

Which statement best describes short-term versus long-term financing?

Correct Answer
verified

If a firm is offered credit terms of 2/10,net 30,on its purchases,it is in the firm's financial interest to pay as early as possible during the discount period.

Correct Answer
verified

Which of the following statements best describes cash flows that would be shown on a cash budget?

Correct Answer
verified

Other things held constant,what happens with a short CCC?

Correct Answer
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Why do firms generally choose to finance temporary net operating working capital with short-term debt?

Correct Answer
verified

Correct Answer
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Under a revolving credit agreement,the risk to the firm of being unable to obtain funds when needed is lower than with an informal line of credit.

Correct Answer
verified

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

Correct Answer
verified

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.,after the fact) sense even though it is possible to match maturities on an expected basis.

Correct Answer
verified
True

The prime rate charged can vary greatly (e.g.,as much as 2 to 4 percentage points) across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles,such as making loans to specialty retailers.

Correct Answer
verified

Exam 17: Working Capital Management and Short-Term Financing

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption of uniform daily cash receipts and disbursements,but actual receipts are concentrated at the beginning of each month.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A firm that follows an aggressive working capital financing approach is more exposed to unexpected changes in the term structure of interest rates than is a firm that follows a conservative financing policy.

Correct AnswerverifiedTrue

Interest rates charged on loans vary depending on the risk of borrower,and the size of the loan,but not the economic conditions.

Correct AnswerverifiedShow Answer

Which statement best describes cash budgets?

Correct AnswerverifiedShow Answer

Discount loans are usually provided for terms of only 1 year or less.Their interest is paid together with the principal at the end of the loan.

Correct AnswerverifiedShow Answer

Since depreciation is a noncash charge,it neither appears on,nor has any effect on,the cash budget.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual cost of trade credit if you pay 100 days after the purchase? (Assume a 365-day year.)

Correct AnswerverifiedB

Which statement best describes short-term versus long-term financing?

Correct AnswerverifiedShow Answer

If a firm is offered credit terms of 2/10,net 30,on its purchases,it is in the firm's financial interest to pay as early as possible during the discount period.

Correct AnswerverifiedShow Answer

Which of the following statements best describes cash flows that would be shown on a cash budget?

Correct AnswerverifiedShow Answer

Other things held constant,what happens with a short CCC?

Correct AnswerverifiedShow Answer

Why do firms generally choose to finance temporary net operating working capital with short-term debt?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Under a revolving credit agreement,the risk to the firm of being unable to obtain funds when needed is lower than with an informal line of credit.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.,after the fact) sense even though it is possible to match maturities on an expected basis.

Correct AnswerverifiedTrue

The prime rate charged can vary greatly (e.g.,as much as 2 to 4 percentage points) across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles,such as making loans to specialty retailers.

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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True

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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B

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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True

Correct Answer
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