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Exam 21: Working Capital

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Question 51

Multiple Choice

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lockbox plan is

A) used to identify inventory safety stocks.
B) used to slow down the collection of checks our firm writes.
C) used to speed up the collection of checks received.
D) used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
E) used to protect cash, i.e., to keep it from being stolen.

F) B) and D)
G) A) and B)

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Question 52

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"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique.

A) True
B) False

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Question 53

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a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.

Which of the following statements concerning the cash budget is CORRECT?

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.

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

Which of the following statements is CORRECT?

Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

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

is often referred to as a "non-earning" asset Thus, one goal of cash management is to minimize the amount of cash necessary for conducting a firm's normal business activities.

informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.

firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year) The company carries average inventory of $750,000Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion periodThe firm buys on terms of net 30 days, and it pays on timeThe CFO believes he can reduce the average inventory to $647,260 with no effect on salesBy how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

Howes Incpurchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50 If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)

Hinkle Corporation buys on terms of 2/15, net 60 days It does not take discounts, and it typically pays on time, 60 days after the invoice date Net purchases amount to $550,000 per year On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

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

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?

Loans from commercial banks generally appear on balance sheets as notes payable A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Newsome Incbuys on terms of 3/15, net 45 It does not take the discount, and it generally pays after 60 days What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?