Question 1

Which of the following statements is CORRECT?

Accepted Answer

A)  A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate. 
B)  In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently. 
C)  Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales. 
D)  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. 
E)  Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio. 
A)  A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate. 
B)  In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently. 
C)  Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales. 
D)  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. 
E)  Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio. B

Question 2

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

Accepted Answer

A) True 
 B)False  True

Question 3

Singal Inc. is preparing its cash budget. It 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?

Accepted Answer

A)  $24,057 
B)  $26,730 
C)  $29,700 
D)  $33,000 
E)  $36,300 
A)  $24,057 
B)  $26,730 
C)  $29,700 
D)  $33,000 
E)  $36,300 D

Question 4

Atlanta Cement, 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?

Accepted Answer

A)  10.86% 
B)  12.07% 
C)  13.41% 
D)  14.90% 
E)  16.55% 
A)  10.86% 
B)  12.07% 
C)  13.41% 
D)  14.90% 
E)  16.55%

Question 5

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

Accepted Answer

A)  Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments. 
B)  Cash budgets do not include financial items such as interest and dividend payments. 
C)  Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. 
D)  Changes that affect the DSO do not affect the cash budget. 
E)  Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues. 
A)  Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments. 
B)  Cash budgets do not include financial items such as interest and dividend payments. 
C)  Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. 
D)  Changes that affect the DSO do not affect the cash budget. 
E)  Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.

Question 6

Shorter-term cash budgets--say a daily cash budget for the next month--are generally used for actual cash control while longer-term cash budgets--say monthly cash budgets for the next year--are generally used for planning purposes.

Accepted Answer

A) True 
 B)False

Question 7

Accruals are "spontaneous" funds arising automatically from a firm's operations, but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is NOT commonly regarded as being a credit policy variable?

Accepted Answer

A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  Payments deferral period. 
A)  Credit period. 
B)  Collection policy. 
C)  Credit standards. 
D)  Cash discounts. 
E)  Payments deferral period.

Question 9

Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Gonzales Company currently 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?

Accepted Answer

A)  $32,964 
B)  $34,699 
C)  $36,526 
D)  $38,448 
E)  $40,370 
A)  $32,964 
B)  $34,699 
C)  $36,526 
D)  $38,448 
E)  $40,370

Question 12

For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.

Accepted Answer

A) True 
 B)False

Question 13

Other things held constant, which of the following will cause an increase in net working capital?

Accepted Answer

A)  Cash is used to buy marketable securities. 
B)  A cash dividend is declared and paid. 
C)  Merchandise is sold at a profit, but the sale is on credit. 
D)  Long-term bonds are retired with the proceeds of a preferred stock issue. 
E)  Missing inventory is written off against retained earnings. 
A)  Cash is used to buy marketable securities. 
B)  A cash dividend is declared and paid. 
C)  Merchandise is sold at a profit, but the sale is on credit. 
D)  Long-term bonds are retired with the proceeds of a preferred stock issue. 
E)  Missing inventory is written off against retained earnings.

Question 14

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.)

Accepted Answer

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

Question 15

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

Accepted Answer

A) True 
 B)False

Question 16

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year. 
B)  Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected. 
C)  The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans. 
D)  If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60. 
E)  Managing working capital is important because it influences financing decisions and the firm's profitability. 
A)  A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year. 
B)  Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected. 
C)  The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans. 
D)  If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60. 
E)  Managing working capital is important because it influences financing decisions and the firm's profitability.

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Whitmer Inc. sells to customers all over the U.S., and all receipts come in to its headquarters in New York City. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm is considering setting up a regional lockbox system to speed up collections, and it believes this would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized?

Accepted Answer

A)  $29,160 
B)  $32,400 
C)  $36,000 
D)  $40,000 
E)  $44,000 
A)  $29,160 
B)  $32,400 
C)  $36,000 
D)  $40,000 
E)  $44,000

Question 20

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 365-day year.

Accepted Answer

A)  $458,160 
B)  $482,273 
C)  $507,656 
D)  $534,375 
E)  $562,500 
A)  $458,160 
B)  $482,273 
C)  $507,656 
D)  $534,375 
E)  $562,500

Which of the following statements is CORRECT?

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

Atlanta Cement, 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?

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

Shorter-term cash budgets--say a daily cash budget for the next month--are generally used for actual cash control while longer-term cash budgets--say monthly cash budgets for the next year--are generally used for planning purposes.

Accruals are "spontaneous" funds arising automatically from a firm's operations, but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Which of the following is NOT commonly regarded as being a credit policy variable?

Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.

Other things held constant, which of the following will cause an increase in net working capital?

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.)

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Which of the following statements is NOT CORRECT?

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

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 365-day year.

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Exam 17: Working Capital

Which of the following statements is CORRECT?

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

Atlanta Cement, 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?

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

Shorter-term cash budgets--say a daily cash budget for the next month--are generally used for actual cash control while longer-term cash budgets--say monthly cash budgets for the next year--are generally used for planning purposes.

Accruals are "spontaneous" funds arising automatically from a firm's operations, but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Which of the following is NOT commonly regarded as being a credit policy variable?

Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.

Other things held constant, which of the following will cause an increase in net working capital?

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.)

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Which of the following statements is NOT CORRECT?

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

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 365-day year.

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Derivatives

Multinational

Hybrid Financing

Mergers

Filters