Exam 17: Working Capital Management and Short-Term Financing

Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual cost of trade credit if you pay 100 days after the purchase? (Assume a 365-day year.)

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.,after the fact) sense even though it is possible to match maturities on an expected basis.

A firm that follows an aggressive working capital financing approach is more exposed to unexpected changes in the term structure of interest rates than is a firm that follows a conservative financing policy.

Other things held constant,what happens with a short CCC?

Interest rates charged on loans vary depending on the risk of borrower,and the size of the loan,but not the economic conditions.

Shanklin Inc.purchases merchandise on terms of 2/15,net 40,and its total gross purchases (i.e.,purchases before taking off the discount) are $800,000 per year.What is the maximum amount of costly trade credit Shanklin could get,assuming it abides by the supplier's credit terms? (Assume a 365-day year.)

Why do firms generally choose to finance temporary net operating working capital with short-term debt?

Which of the following statements best describes cash flows that would be shown on a cash budget?

Which statement best describes cash budgets?

Under a revolving credit agreement,the risk to the firm of being unable to obtain funds when needed is lower than with an informal line of credit.

Discount loans are usually provided for terms of only 1 year or less.Their interest is paid together with the principal at the end of the loan.

Tareque Inc.wants to increase its free cash flow by $180 million during the coming year,which should result in a higher EVA and share price.The CFO has made these projections for the upcoming year:- EBIT is projected to be $850 million.- Gross capital expenditures are expected to total $360 million versus depreciation of $120 million,so its net capital expenditures should total $240 million.- The tax rate is 40%.- There will be no changes in cash or marketable securities,nor will there be any changes in notes payable or accruals.Which of the following actions would enable the company to achieve its goal of generating $180 million in free cash flow?

Accruals are spontaneous,but,unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption of uniform daily cash receipts and disbursements,but actual receipts are concentrated at the beginning of each month.

Since depreciation is a noncash charge,it neither appears on,nor has any effect on,the cash budget.

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 greater variability of interest costs on short-term debt.Even if its long-term prospects are good,the firm's lender may not renew a short-term loan if the firm is even temporarily unable to repay it.

The prime rate charged can vary greatly (e.g.,as much as 2 to 4 percentage points) across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles,such as making loans to specialty retailers.

Which statement best describes short-term versus long-term financing?

Margetis Inc.carries an average inventory of $1,000,000.Its annual sales are $10 million,and its receivables conversion period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days,and it pays on time.Its new CFO wants to decrease the cash conversion cycle by 10 days,based on a 365-day year.He believes he can reduce the average inventory to $863,000 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal of a 10-day reduction in the cash conversion cycle?

If a firm is offered credit terms of 2/10,net 30,on its purchases,it is in the firm's financial interest to pay as early as possible during the discount period.