Exam 17: Working Capital Management and Short-Term Financing

Long-term loan agreements always contain provisions,or covenants,that constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

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 working capital financing strategy because of the inherent risks of using short-term financing.

Which statement best describes compensating balances?

Under a public warehouse agreement,the inventory used as collateral for the loan is stored on the premises of a third party.

Which of the following statements best describes alternatives to short-term financing policies?

Ferson Inc.has annual sales of $36,500,000,or $100,000 a day on a 365-day basis.On average,the company has $12,000,000 in inventory and $8,000,000 in accounts receivable.The firm is looking for ways to shorten its cash conversion cycle,which is calculated on a 365-day basis.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivables.She also anticipates that these policies would reduce sales by 10%,while accounts payable would remain unchanged.What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

Which of the following borrowers benefits the most from a revolving line of credit?

Because money has time value,cash sales are always more profitable than credit sales.

If a firm's customers is stretching its accounts payable,this may be a nuisance,but it does not represent a real financial cost to the firm as long as the customer periodically pays off its entire balance.

Schoof Inc.expects to have sales of $30,000 in January,$35,000 in February,and $40,000 in March.If 20% of sales are for cash,40% are credit sales paid in the month following the sale,and another 40% are credit sales paid 2 months following the sale,what are the cash receipts for the firm in March?

Canada Corp.,needs $16,000 for one quarter to finance a deficit.Interest charges are 4% per quarter.Your bank requires an 8% compensating balance.How much must your firm borrow in order to obtain the needed funds?

When the accounts receivable turnover and payables deferral period are decreased,a firm's cash conversion cycle will be lengthened.

Nagel Corporation's budgeted monthly sales are $5,000,and they are constant from month to month.Its customers pay as follows: 40% pay in the first month and take the 2% discount,while the remaining 60% pay in the month following the sale and do not receive a discount.The firm has no bad debts.Purchases for next month's sales are constant at 50% of projected sales for the next month."Other payments," which include payments for wages,rent,and taxes,are 25% of sales for the month.Construct a cash budget for a typical month.What is the average cash gain or loss during the month?

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 costs of credit from other sources.

A firm has a serious cash shortage due to the growing investment in accounts receivable.If this firm is incapable of dealing with such a high level of receivables,how would it likely benefit most?

The fact that no explicit interest is paid on accruals,and that the firm can vary the level of these accounts,makes accruals an attractive and flexible source of funding to meet increased working capital needs.

The blanket inventory lien gives the lender a lien against all inventories of the borrower.However,the borrower is free to sell them.

BC Corp.,needs $10,000 for one quarter to finance a deficit.Interest charges are 2% per quarter.Your bank requires a 10% compensating balance.How much must your firm borrow in order to obtain the needed funds?

The firm's total capital requirement grows over time with amounts including the base level of fixed assets and current assets.There exists seasonal variation around the trend showing the required temporary working capital.

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