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Exam 16: Supply Chains and Working Capital Management

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Question 51

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A lockbox plan is

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) C) and D)

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Question 52

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Pascarella Inc.is revising its payables policy.It has annual sales of $50,735,000,an average inventory level of $15,012,000,and average accounts receivable of $10,008,000.The firm's cost of goods sold is 85% of sales.The company makes all purchases on credit and has always paid on the 30th day.However,it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000.What will be the net change in the cash conversion cycle,assuming a 365-day year?

A) −26.6 days
B) −29.5 days
C) −32.8 days
D) −36.4 days
E) −40.5 days

F) A) and E)
G) A) and B)

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Question 53

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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?

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.

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.

A firm's collection policy,i.e. ,the procedures it follows to collect accounts receivable,plays an important role in keeping its average collection period short,although too strict a collection policy can reduce profits due to lost sales.

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?

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 $850 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 40%. ∙ 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?

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.

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.

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.

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?

Since receivables and payables both result from sales transactions,a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.

Changes in a firm's collection policy can affect sales,working capital,and profits.

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.

Which of the following statements is NOT CORRECT?

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.

If a profitable firm finds that it simply must "stretch" its accounts payable,then this suggests that it is undercapitalized,i.e. ,that it needs more working capital to support its operations.

Data on Liu Inc.for the most recent year are shown below,along with the inventory conversion period (ICP) of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average.If this were done,by how much would inventories decline? Use a 365-day year. Cost of goods sold = $85,000 Inventory = $20,000 Inventory conversion period (ICP) = 85) 88 Benchmark inventory conversion period (ICP) = 38) 00

Marshall Inc.recently hired your consulting firm to improve the company's performance.It has been highly profitable but has been experiencing cash shortages due to its high growth rate.As one part of your analysis,you want to determine the firm's cash conversion cycle.Using the following information and a 365-day year,what is the firm's present cash conversion cycle? Average inventory = $75,000 Annual sales = $600,000 Annual cost of goods sold = $360,000 Average accounts receivable = $160,000 Average accounts payable = $25,000