Question 1

Which of the following statements is CORRECT?

Accepted Answer

A) 	Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased. 
B) 	Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. 
C) 	If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
D) 	Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased. 
E) 	If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt. 
A) 	Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased. 
B) 	Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. 
C) 	If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. 
D) 	Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased. 
E) 	If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt. B

Question 2

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.

Accepted Answer

A) True 
 B)False  True

Question 3

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

Accepted Answer

A) True 
 B)False  True

Question 4

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

A) True 
 B)False

Question 8

An increase in any current asset must be accompanied by an equal increase in some current liability.

Accepted Answer

A) True 
 B)False

Question 9

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 payments are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False

Question 10

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)  Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk. 
B)  Conservative firms generally use no short-term debt and thus have zero current liabilities. 
C)  A short-term loan can usually be obtained more quickly than a long- term loan, but the cost of short-term debt is normally higher than that of long-term debt. 
D)  If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet. 
E)  If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance. 
A)  Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk. 
B)  Conservative firms generally use no short-term debt and thus have zero current liabilities. 
C)  A short-term loan can usually be obtained more quickly than a long- term loan, but the cost of short-term debt is normally higher than that of long-term debt. 
D)  If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet. 
E)  If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.

Question 12

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

Accepted Answer

A) True 
 B)False

Question 13

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.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer. Still, suppliers have some flexibility in the credit terms they offer. If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

Accepted Answer

A) True 
 B)False

Question 16

Dyl Pickle 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?

Accepted Answer

A)  $335,616 
B)  $352,397 
C)  $370,017 
D)  $388,518 
E)  $407,944 
A)  $335,616 
B)  $352,397 
C)  $370,017 
D)  $388,518 
E)  $407,944

Question 17

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 18

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

Accepted Answer

A) True 
 B)False

Question 19

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

Accepted Answer

A) True 
 B)False

Question 20

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

Exam 16: Working Capital Management

Which of the following statements is CORRECT?

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.

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

A firm that follows an aggressive current asset financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.

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.

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

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.

An increase in any current asset must be accompanied by an equal increase in some current liability.

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 payments are concentrated at the beginning of each month.

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

Which of the following statements is CORRECT?

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

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.

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

Dyl Pickle 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?

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

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds, Bond Valuation, and Interest Rates

Risks and Rates of Return

Stocks and Their Valuation

Financial Options and Applications in Corporate Finance

The Cost of Capital

The Basics of Capital Budgeting

Cash Flow Estimation and Risk Analysis

Financial Planning and Forecasting Financial Statements

Corporate Valuation, Value-Based Management, and Corporate Governance

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Multinational Financial Management

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Initial Public Offerings, Investment Banking, and Financial Restructuring

Mergers, Lbos, Divestitures, and Holding Companies

Bankruptcy, Reorganization, and Liquidation

Derivatives and Risk Management

Portfolio Theory, Asset Pricing Models, and Behavioral Finance

Real Options

Analysis of Capital Structure Theory

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Pension Plan Management

Financial Management in Not-For-Profit Businesses

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