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Exam 16: Supply Chains and Working Capital Management

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Question 51

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Tierney Enterprises is constructing its cash budget.Its budgeted monthly sales are $5,000, and they are constant from month to month.40% of its customers pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount.The firm has no bad debts.Purchases for next month's sales are constant at 50% of projected sales for the next month."Other payments," which include wages, rent, and taxes, are 25% of sales for the current month.Construct a cash budget for a typical month and calculate the average net cash flow during the month.

A) $1,092
B) $1,150
C) $1,210
D) $1,271
E) $1,334

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

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Question 52

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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.

A) True
B) False

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Question 53

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The maturity matching, or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates.When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs.

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

The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer.Still, suppliers have some flexibility in the credit terms they offer.If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.

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

Which of the following statements is most consistent with efficient inventory management? The firm has a

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.

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

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 25%.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?

On 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.

Fireside Inc.has the following data.What is the firm's cash conversion cycle? $\begin{array}{ll}\text { Inventory conversion period }= & 38 \text { days } \\\text { Average collection period }= & 19 \text { days } \\\text { Payables deferral period }= & 20 \text { days }\end{array}$

Howes Inc.purchases $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.)

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.

The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

A revolving credit agreement is a formal line of credit.The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Kiley Corporation had the following data for the most recent year (in millions) .The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000.Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold.If these changes were made, by how many days would the cash conversion cycle be lowered? $\begin{array}{lrr}&\text { Original } & \text { Revised } \\\text { Annual sales: unchanged } & \$ 110,000 & \$ 110,000 \\\text { Cost of goods sold: unchanged } & \$ 80,000 & \$ 80,000 \\\text { Average inventory: lowered by } \$ 4,000 & \$ 20,000 & \$ 16,000 \\\text { Average receivables: lowered by } \$ 2,000 & \$ 16,000 & \$ 14,000 \\\text { Average payables: increased by } \$ 2,000 & \$ 10,000 & \$ 12,000 \\\text { Days in year } & 365 & 365\end{array}$

If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.