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Exam 21: Working Capital

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Question 41

Multiple Choice

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Sanders Enterprises arranged a revolving credit agreement of $9,000,000 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 3.25% 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?

A) $285,000
B) $300,000
C) $315,000
D) $330,750
E) $347,288

F) C) and E)
G) B) and D)

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Question 42

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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.

A) True
B) False

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Question 43

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aging schedule is a commonly used method for monitoring receivables.

Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30 The change is meant to meet competition, so no increase in sales is expected The average accounts receivable balance will probably decline as a result of this change.

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

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

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

Safety Window and Door Cobuys 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.)

What's the difference in the projected ROEs under the restricted and relaxed policies?

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?

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.

Noddings Incneeds 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.)

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

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

Whitson Cois looking for ways to shorten its cash conversion cycleIt 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.

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

average, a firm collects checks totaling $250,000 per day It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm Assume that (1) a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2) the firm could invest any additional cash generated at 6% after taxes The lockbox system would be a good buy if it costs $25,000 annually.

concept of permanent current operating assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low Thus, permanent current operating assets represent a minimum level of current assets that must be financed.

Krackle Korn Inchad 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?

relative profitability of a firm that employs an aggressive current asset financing policy will improve if the yield curve changes from upward sloping to downward sloping.