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Exam 21: Supply Chains and Working Capital Management

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Question 51

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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.)

A) 14.34%
B) 15.10%
C) 15.89%
D) 16.69%
E) 17.52%

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

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Question 52

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

A) True
B) False

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Question 53

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A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

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?

The overriding goal of inventory management is to ensure that the firm never suffers a stock-out,i.e.,never runs out of an inventory item.

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

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.

Other things held constant,which of the following would tend to reduce the cash conversion cycle?

Which of the following statements is NOT CORRECT?

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

Which of the following statements is CORRECT?

As a rule,managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

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.

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

If the yield curve is upward sloping,then short-term debt will be cheaper than long-term debt.Thus,if a firm's CFO expects the yield curve to continue to have an upward slope,this would tend to cause the current ratio to be relatively low,other things held constant.

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.

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

Exhibit 21.1 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 Exhibit 21.1.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?

Taylor Textbooks Inc.buys on terms of 2/15,net 50 days.It does not take discounts,and it typically pays on time,50 days after the invoice date.Net purchases amount to $450,000 per year.On average,what is the dollar amount of costly trade credit (total credit − free credit) the firm receives during the year? (Assume a 365-day year,and note that purchases are net of discounts.)

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.)