Exam 17: Working Capital Management and Short-Term Financing

Which action would NOT be likely to shorten the length of the cash conversion cycle?

Shorter-term cash budgets,in general,are used for actual cash control,while longer-term cash budgets are used for planning purposes.

Permanent net operating working capital reflects the fact that net operating working capital does not shrink to zero even when a business is at its seasonal or cyclical low.Thus,permanent net operating working capital represents a minimum level of net operating working capital that must be financed.

Which of the following statements is NOT true?

Ski Lifts Inc.is in a highly seasonal business,and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars):What can we conclude from this data? Peak Off-Peak Cash \ 50 \ 30 Marketable securities 0 20 Accounts receivable 40 20 Inventories 100 50 Net fixed assets Total assets \ 690 \ 620 Spontaneous liabilities \ 30 \ 10 Short-term bank debt 50 0 Long-term debt 300 300 Common equity 310 310 Total claims

Due to the complexity of factoring procedures,factoring is rarely used as a source of short-term financing in Canada today.

A conservative financing approach to working capital will result in most of the permanent net operating working capital being financed by long-term securities.

Minimizing cash holdings,inventories,or receivables,and maximizing payables or accruals are the aims of relaxed working capital policies.

The maturity matching,or "self-liquidating," approach involves the financing of permanent net operating working capital with combinations of long-term capital and short-term capital that vary 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 and risk.

You were recently hired as CFO to improve the performance of Dennis Systems,which is highly profitable but has been experiencing cash shortages due to its high rate of growth.As one part of your analysis,you want to determine the firm's cash conversion cycle.Using the following information and a 365-day year,what is your estimate of the firm's present cash conversion cycle? Average inventory: \ 120,000 Annual sales: \ 600,000 Average accounts receivable: \ 160,000 Aver age accounts payable: \ 25,000 Total annual purchases: \ 365,000 Buy on net 30 days, no discounts: 30 Sell on net 50 days, no discounts: 50

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?

The inventory conversion period of the operating cycle terminates when the inventory is paid for with cash.

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

The calculated cost of trade credit for a firm that buys on terms of 2/10,net 30,is lower (other things held constant) if the firm pays in 40 days than in 30 days.

What is one of the advantages of short-term debt financing.

Bello Corp.has annual sales of $50,735,000,an average inventory level of $15,012,000,and average accounts receivable of $10,008,000.The company makes all purchases on credit and has always paid on the 30th day.However,it now plans to take full advantage of trade credit and pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000.What will be the net change in the cash conversion cycle,assuming a 365-day year?

Other things held constant,if a firm stretches its accounts payable,this will lengthen its CCC.

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to first mortgage bonds when the plant is completed would want to separate the construction loan from its other current liabilities associated with working capital management.

A large,well-established,highly rated firm needs to borrow money for the next 3 months.How would it likely get the best interest rate?

Filbeck Company buys on terms of 2/15,net 30 days.It does not take discounts,and it typically pays 30 days after the invoice date.Net purchases amount to $500,000 per year.On average,how much free trade credit does the firm receive during a 365-day year?