Exam 16: Managing Short-Term Liabilities Financing

A firm has a daily average collection of checks equal to $250,000.It takes the firm approximately 4 days to convert the funds into usable cash.Assume (1) a lockbox system could be employed which would reduce the cash conversion procedure to 21/2 days, and (2) the firm could invest any additional cash received at 6 percent after taxes.The lockbox system would be a good buy if it costs only $23,000 annually.

Which of the following is not a reason for a firm to hold cash balances?

Which of the following statements is correct?

Which of the following would cause average inventory holdings to decrease, other things held constant?

Aberwald Corporation Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360-day year.) -Refer to Aberwald Corporation.How many orders should Aberwald place during the year?

The ABC method of inventory classification helps management concentrate resources on those inventory items that are most critical to the firm's operations.

Which of the following actions in managing the cash account would, in general, either not be feasible or else not be consistent with the firm's wealth maximization objective?

If you receive some goods on April 1 with the terms 3/20, net 30, June 1 dating, it means that you will receive a 3 percent discount if the bill is paid on or before June 20 and that the full amount must be paid 30 days after receipt of the goods.

Which of the following statements is correct?

Aberwald Corporation Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360-day year.) -Refer to Aberwald Corporation.If Aberwald holds a safety stock equal to a 30-day supply of chips, what is Aberwald's minimum cost of ordering and carrying inventory?

Generally, ordering costs are the single most important cost element in inventory management, because they are greater in magnitude than carrying costs.

If there are large fluctuations in a firm's cash flows, or if there are large costs associated with selling securities, then the firm should hold relatively small average cash balances.

The benefits of a sound cash management program are not sensitive to interest rates.

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e., runs out of an inventory item).

Fixed dividend preferred stock is a good candidate for marketable security holdings designed to provide liquidity because 70 percent of the dividends are excludable from taxable income, hence the preferred would provide a relatively high after-tax rate of return.

East Lansing Appliances East Lansing Appliances (ELA) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Since ELA wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent. -Refer to East Lansing Appliances.What are the incremental pre-tax profits from this proposal?

Which of the following statements concerning the cash budget is true?

Aberwald Corporation Aberwald Corporation expects to order 126,000 memory chips for inventory during the coming year, and it will use this inventory at a constant rate. Fixed ordering costs are $200 per order; the purchase price per chip is $25; and the firm's inventory carrying cost is equal to 20 percent of the purchase price. (Assume a 360-day year.) -Refer to Aberwald Corporation.What is the economic ordering quantity for chips?

What type of system allows a customer's bank to periodically transfer funds from its account to a selling firm's bank account for payment of bills?