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Exam 21: Supply Chains and Working Capital Management

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Question 61

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Which of the following statements is CORRECT?

A) commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
B) short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.
C) commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
D) commercial paper is typically offered at a long-term maturity of at least five years.
E) trade credit is provided only to relatively large, strong firms.

F) D) and E)
G) B) and D)

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Question 62

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If a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.

A) True
B) False

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Question 63

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Determining a firm's optimal investment in working capital and deciding how that investment should be financed are critical to working capital management.

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

Baltimore Baking is preparing its cash budget and expects to have sales of $30,000 in January, $35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?

Noddings Inc. needs to raise more capital because its business is booming. The company purchases supplies on terms of 1/10 net 20, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.)

Shulman Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? $\begin{array}{lr}\text { Annual sales }= & \$ 45,000 \\\text { Annual cost of goods sold }= & \$ 30,000 \\\text { Inventory }= & \$ 4,500 \\\text { Accounts receivable }= & \$ 1,800 \\\text { Accounts payable }= & \$ 2,500\end{array}$

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.

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.

A lockbox plan is

Blueroot Inc. is considering a change in its financing policy. Currently, it uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income?

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 σ free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

Which of the following statements is CORRECT?

The aging schedule is a commonly used method for monitoring receivables.

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

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.)

Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in business operations and as compensation to banks for providing loans and services.

Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

Freeman Builders, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?