Question 1

A lockbox plan is most beneficial to firms that

Accepted Answer

A)   have widely dispersed manufacturing facilities.
B)   have a large marketable securities portfolio and cash to protect.
C)   receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
D)   have customers who operate in many different parts of the country.
E)   have suppliers who operate in many different parts of the country.F) A) and B)
G) C) and D)

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

Accepted Answer

A) True 
 B)False

Question 4

Albrecht Inc. is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate)  working capital financing policy, what is the most likely total of long-term debt plus equity capital?

Accepted Answer

A)   $260,642
B)   $274,360
C)   $288,800
D)   $304,000
E)   $320,000F) A) and C)
G) B) and C)

Question 5

Marshall Inc. recently hired your consulting firm to improve the company's performance. It has been highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle? 
  Average inventory =$75,000 Annual sales =$600,000 Annual cost of goods sold =$360,000 Average accounts receivable =$160,000 Average accounts payable =$25,000\begin{array}{lr}	ext { Average inventory }= & \$ 75,000 \	ext { Annual sales }= & \$ 600,000 \	ext { Annual cost of goods sold }= & \$ 360,000 \	ext { Average accounts receivable }= & \$ 160,000 \	ext { Average accounts payable }= & \$ 25,000\end{array} Average inventory = Annual sales = Annual cost of goods sold = Average accounts receivable = Average accounts payable =​$75,000$600,000$360,000$160,000$25,000​

Accepted Answer

A)   120.6 days
B)   126.9 days
C)   133.6 days
D)   140.6 days
E)   148.0 days F) B) and C)
G) B) and E)

Question 6

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

Accepted Answer

A)   cash proceeds from selling one of its divisions.
B)   accrued interest on zero coupon bonds that it issued.
C)   new shares issued in a stock split.
D)   new shares issued in a stock dividend.
E)   its monthly depreciation expense.F) C) and D)
G) None of the above

Question 7

Which of the following actions would be likely to shorten the cash conversion cycle?

Accepted Answer

A)   change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
B)   begin to take cash discounts on inventory purchases; the terms are 2/10 net 30.
C)   adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
D)   change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
E)   adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.F) B) and C)
G) D) and E)

Question 8

Andrews Corporation 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) B) and C)
G) C) and E)

Question 9

Buchholz Corporation follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?

Accepted Answer

A)   4.25%
B)   4.73%
C)   5.25%
D)   5.78%
E)   6.35%F) None of the above
G) A) and B)

Question 10

Safety Window and Door Co. 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 $450,000 per year. On average, how much "free" trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)   $18,493
B)   $19,418
C)   $20,389
D)   $21,408
E)   $22,479F) A) and B)
G) A) and E)

Question 11

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 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.
-Refer to the data for Hardwig Inc. 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) B) and C)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   the cash budget and the capital budget are developed separately, and although they are both important to the firm, one does not affect the other.
B)   since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.
C)   the target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm's operations.
D)   the typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. these numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts.
E)   shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual cash control.F) B) and C)
G) C) and D)

Question 13

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)   depreciation.
B)   cumulative cash.
C)   repurchases of common stock.
D)   payment for plant construction.
E)   payments lags.F) B) and D)
G) B) and C)

Question 14

Shorter-term cash budgetsσsay a daily cash budget for the next month-are generally used for actual cash control while longer-term cash budgets-say monthly cash budgets for the next year-are generally used for planning purposes.

Accepted Answer

A) True 
 B)False

Question 15

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Accepted Answer

A) True 
 B)False

Question 16

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.

Accepted Answer

A) True 
 B)False

Question 17

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

Accepted Answer

A)   short-term interest rates have traditionally been more stable than long-term interest rates.
B)   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.
C)   the yield curve is normally downward sloping.
D)   short-term debt has a higher cost than equity capital.
E)   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.F) All of the above
G) A) and C)

Question 18

Which of the following statements is CORRECT?

Accepted Answer

A)   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.
B)   because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
C)   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.
D)   other things held constant, if a firm can shorten its dso, this will lead to a higher current ratio.
E)   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.F) C) and E)
G) B) and C)

Question 19

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 receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 20

Data on Liu Inc. for the most recent year are shown below, along with the inventory conversion period (ICP)  of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year. 
  Cost of goods sold =$85,000 Inventory =$20,000 Inventory conversion period (ICP)  =85.88 Benchmark inventory conversion period (ICP) =38.00\begin{array}{lr}	ext { Cost of goods sold }= & \$ 85,000 \	ext { Inventory }= & \$ 20,000 \	ext { Inventory conversion period (ICP)  }= & 85.88 \	ext { Benchmark inventory conversion period }(\mathrm{ICP}) = & 38.00\end{array} Cost of goods sold = Inventory = Inventory conversion period (ICP)  = Benchmark inventory conversion period (ICP) =​$85,000$20,00085.8838.00​

Accepted Answer

A)   $7,316
B)   $8,129
C)   $9,032
D)   $10,036
E)   $11,151 F) B) and C)
G) A) and B)

Exam 21: Supply Chains and Working Capital Management

If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

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

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

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

Correct Answer
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Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Correct Answer
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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.

Correct Answer
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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 receipts are concentrated at the beginning of each month.

Correct Answer
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Correct Answer
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Correct Answer
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Which of the following statements is CORRECT?

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

Correct Answer
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Correct Answer
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Which of the following actions would be likely to shorten the cash conversion cycle?

Correct Answer
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Correct Answer
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Shorter-term cash budgetsσsay a daily cash budget for the next month-are generally used for actual cash control while longer-term cash budgets-say monthly cash budgets for the next year-are generally used for planning purposes.

Correct Answer
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A lockbox plan is most beneficial to firms that

Correct Answer
verified

Exam 21: Supply Chains and Working Capital Management

If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Andrews Corporation 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

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

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability.

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

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 receipts are concentrated at the beginning of each month.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following actions would be likely to shorten the cash conversion cycle?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Shorter-term cash budgetsσsay a daily cash budget for the next month-are generally used for actual cash control while longer-term cash budgets-say monthly cash budgets for the next year-are generally used for planning purposes.

Correct AnswerverifiedShow Answer

A lockbox plan is most beneficial to firms that

Correct AnswerverifiedShow Answer

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