Question 1

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 2

An 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.

Accepted Answer

A) True 
 B)False

Question 3

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 E)
G) C) and D)

Question 4

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 ex ante (expected) basis.

Accepted Answer

A) True 
 B)False

Question 5

Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cash.Sales are expected to grow at a stable, steady rate of 10% annually in the future.Dimon's accounts receivable balance will remain constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant.

Accepted Answer

A) True 
 B)False

Question 6

Thornton Universal Sales' cost of goods sold (COGS)  average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year, what is its inventory conversion period?

Accepted Answer

A)   11.7 days
B)   13.0 days
C)   14.4 days
D)   15.2 days
E)   16.7 daysF) None of the above
G) A) and E)

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

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 9

A lockbox plan is

Accepted Answer

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) None of the above
G) A) and B)

Question 10

Which of the following statements is CORRECT?

Accepted Answer

A)   If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase.
B)   If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts.
C)   If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365)  would probably be lower in January than in July.
D)   If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.
E)   Other things held constant, the higher a firm's days sales outstanding (DSO) , the better its credit department.F) A) and B)
G) C) and D)

Question 11

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) C) and D)

Question 12

During the coming year, Gold & Gold wants to increase its free cash flow by $180 million, which should result in a higher stock price.The CFO has made these projections for the upcoming year: ∙
EBIT is projected to equal $852 million.
∙
Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million.
∙
The tax rate is 25%.
∙
There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals.
What increase in net working capital (in millions of dollars)  would enable the firm to meet its target increase in FCF?

Accepted Answer

A)   $175
B)   $219
C)   $263
D)   $316
E)   $379F) D) and E)
G) C) and D)

Question 13

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
B)   The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
C)   If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60.
D)   Managing working capital is important because it influences financing decisions and the firm's profitability.
E)   A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.F) A) and B)
G) A) and E)

Question 14

Hardwig Inc.
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 25%.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.What's the difference in the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)   1.50%
B)   1.88%
C)   2.25%
D)   2.70%
E)   3.24%F) B) and C)
G) C) and D)

Question 15

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

Accepted Answer

A) True 
 B)False

Question 16

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Accepted Answer

A) True 
 B)False

Question 17

Because money has time value, a cash sale is always more profitable than a credit sale.

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

Krackle Korn 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) C) and D)
G) All of the above

Question 20

Fontana Painting had the following data for the most recent year (in millions) .The new CFO believes that the company could improve its working capital management sufficiently to bring its NWC and CCC up to the benchmark companies' level without affecting either sales or the costs of goods sold.Fontana finances its net working capital with a bank loan at an 8% annual interest rate, and it uses a 365-day year.If these changes had been made, by how much would the firm's pre-tax income have increased?   Original Benchmark Data‾ Related CCC‾CCC‾ Sales $100,000 Cost of goods sold $80,000 Inventory (ICP)  $20,00091.2538.00 Receivables (DSO)  $16,00058.4020.00 Payables (PDP)  $5,00022.8130.00126.84‾28.00‾\begin{array}{lc} &	ext { Original}&	ext { Benchmark}\ & \underline{	ext { Data} }&\underline{	ext { Related } \mathrm{CCC} }& \underline{\mathrm{CCC}} \	ext { Sales } & \$ 100,000 \	ext { Cost of goods sold } & \$ 80,000 \	ext { Inventory (ICP)  } & \$ 20,000 &91.25&38.00\	ext { Receivables (DSO)  } & \$ 16,000&58.40&20.00 \	ext { Payables (PDP)  } & \$ 5,000&22.81&30.00\&&\underline{126.84}&\underline{28.00}\end{array} Sales  Cost of goods sold  Inventory (ICP)   Receivables (DSO)   Payables (PDP)  ​ Original Data​$100,000$80,000$20,000$16,000$5,000​ Benchmark Related CCC​91.2558.4022.81126.84​​CCC​38.0020.0030.0028.00​​

Accepted Answer

A)   1,901
B)   2,092
C)   2,301
D)   2,531
E)   2,784 F) B) and E)
G) B) and C)

Exam 16: Supply Chains and Working Capital Management

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

Thornton Universal Sales' cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year, what is its inventory conversion period?

Correct Answer
verified

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

Correct Answer
verified

An 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.

Correct Answer
verified

Which of the following statements is NOT CORRECT?

Correct Answer
verified

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Correct Answer
verified

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

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

Correct Answer
verified

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

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 ex ante (expected) basis.

Correct Answer
verified

Which of the following statements is CORRECT?

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

Krackle Korn 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

A lockbox plan is

Correct Answer
verified

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
verified

Because money has time value, a cash sale is always more profitable than a credit sale.

Correct Answer
verified

Correct Answer
verified

Exam 16: Supply Chains and Working Capital Management

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Thornton Universal Sales' cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times.Using a 365-day year, what is its inventory conversion period?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

An 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.

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

Correct AnswerverifiedShow Answer

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Correct AnswerverifiedShow Answer

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

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

Correct AnswerverifiedShow Answer

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

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 ex ante (expected) basis.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

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

Krackle Korn 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

A lockbox plan is

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

Because money has time value, a cash sale is always more profitable than a credit sale.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified