Question 1

What's the difference in the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)  1.20% 
B)  1.50% 
C)  1.80% 
D)  2.16% 
E)  2.59% 
A)  1.20% 
B)  1.50% 
C)  1.80% 
D)  2.16% 
E)  2.59%

Question 2

Net operating working capital, defined as current assets minus the difference between current liabilities and notes payable, is equal to the current ratio minus the quick ratio.

Accepted Answer

A) True 
 B)False

Question 3

Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

Accepted Answer

A)  11.7 days 
B)  13.0 days 
C)  14.4 days 
D)  15.2 days 
E)  16.7 days 
A)  11.7 days 
B)  13.0 days 
C)  14.4 days 
D)  15.2 days 
E)  16.7 days

Question 4

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

Accepted Answer

A)  Payments lags. 
B)  Depreciation. 
C)  Cumulative cash. 
D)  Repurchases of common stock. 
E)  Payment for plant construction. 
A)  Payments lags. 
B)  Depreciation. 
C)  Cumulative cash. 
D)  Repurchases of common stock. 
E)  Payment for plant construction.

Question 5

Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)  2.24% 
B)  2.46% 
C)  2.70% 
D)  2.98% 
E)  3.27% 
A)  2.24% 
B)  2.46% 
C)  2.70% 
D)  2.98% 
E)  3.27%

Question 6

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 7

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

Question 8

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

Accepted Answer

A)  consist mainly of long-term securities because they pay higher rates. 
B)  consist mainly of short-term securities because they pay higher rates. 
C)  consist mainly of U.S. Treasury securities to minimize interest rate risk. 
D)  consist mainly of short-term securities to minimize interest rate risk. 
E)  be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates. 
A)  consist mainly of long-term securities because they pay higher rates. 
B)  consist mainly of short-term securities because they pay higher rates. 
C)  consist mainly of U.S. Treasury securities to minimize interest rate risk. 
D)  consist mainly of short-term securities to minimize interest rate risk. 
E)  be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.

Question 9

Kirk Development buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60 days after the invoice date. Net purchases amount to $550,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-day year, and note that purchases are net of discounts.)

Accepted Answer

A)  $ 90,411 
B)  $ 94,932 
C)  $ 99,678 
D)  $104,662 
E)  $109,895 
A)  $ 90,411 
B)  $ 94,932 
C)  $ 99,678 
D)  $104,662 
E)  $109,895

Question 10

If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?

Accepted Answer

A)  $ 8,418 
B)  $ 8,861 
C)  $ 9,327 
D)  $ 9,818 
E)  $10,309 
A)  $ 8,418 
B)  $ 8,861 
C)  $ 9,327 
D)  $ 9,818 
E)  $10,309

Question 11

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 12

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.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following statements is CORRECT?

Accepted Answer

A)  Accruals are an expensive but commonly used way to finance working capital. 
B)  A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds. 
C)  If a company receives trade credit under terms of 2/10, net 30, this implies that the company has 10 days of free trade credit. 
D)  One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget. 
E)  If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high. 
A)  Accruals are an expensive but commonly used way to finance working capital. 
B)  A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds. 
C)  If a company receives trade credit under terms of 2/10, net 30, this implies that the company has 10 days of free trade credit. 
D)  One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget. 
E)  If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high.

Question 14

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 15

Which of the following statements is CORRECT?

Accepted Answer

A)  Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 - T) + Depreciation - [Capital expenditures + NOWC]), hence depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget. 
C)  Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
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)  If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August. 
A)  Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 - T) + Depreciation - [Capital expenditures + NOWC]), hence depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget. 
C)  Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
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)  If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August.

Question 16

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Accepted Answer

A)  The firm must make a known future payment, such as paying for a new plant that is under construction. 
B)  The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline. 
C)  The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases. 
D)  The firm has just sold long-term securities and has not yet invested the proceeds in operating assets. 
E)  The firm just won a product liability suit one of its customers had brought against it. 
A)  The firm must make a known future payment, such as paying for a new plant that is under construction. 
B)  The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline. 
C)  The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases. 
D)  The firm has just sold long-term securities and has not yet invested the proceeds in operating assets. 
E)  The firm just won a product liability suit one of its customers had brought against it.

Question 17

Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

Accepted Answer

A)  $260,642 
B)  $274,360 
C)  $288,800 
D)  $304,000 
E)  $320,000 
A)  $260,642 
B)  $274,360 
C)  $288,800 
D)  $304,000 
E)  $320,000

Question 18

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.

Accepted Answer

A) True 
 B)False

Question 19

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 20

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

Accepted Answer

A) True 
 B)False

What's the difference in the projected ROEs under the restricted and relaxed policies?

Net operating working capital, defined as current assets minus the difference between current liabilities and notes payable, is equal to the current ratio minus the quick ratio.

Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

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

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.

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?

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

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.

Which of the following statements 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.

Which of the following statements is CORRECT?

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.

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.

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

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Exam 16: Working Capital

What's the difference in the projected ROEs under the restricted and relaxed policies?

Net operating working capital, defined as current assets minus the difference between current liabilities and notes payable, is equal to the current ratio minus the quick ratio.

Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

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

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.

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?

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

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.

Which of the following statements 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.

Which of the following statements is CORRECT?

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.

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.

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

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Interest Rates

Bonds

Risk and Return

Stocks

Cost of Capital

Capital Budgeting

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Forecasting

Derivatives

Multinational

Hybrid Financing

Mergers

Filters