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Exam 16: Working Capital Management

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Question 31

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The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.

A) True
B) False

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Question 32

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Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive current asset financing strategy because of the inherent risks of using short-term financing.

A) True
B) False

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Question 33

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Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.

Exhibit 16.1 Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital 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 15.1.If the firm adopts a restricted policy,how much lower would its interest expense be than under the relaxed policy? ​

Desai Inc.has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle?

An increase in any current asset must be accompanied by an equal increase in some current liability.

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 than the revolving credit agreement.

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

Data on Wentz Inc.for last year are shown below,along with the payables deferral period (PDP) for the firms against which it benchmarks.The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average.If this were done,by how much would payables increase? Use a 365-day year. ​

Dyl Pickle 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?

Which of the following statements is CORRECT?

A firm 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 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 payments are concentrated at the beginning of each month.

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.

Which of the following statements is CORRECT?

Data on Shick Inc.for 2013 are shown below,along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done,by how much would receivables decline? Use a 365-day year.

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

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

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

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