Question 1

Helena Furnishings wants to reduce its cash conversion cycle sharply.Which action should it take?

Accepted Answer

A) The company should increase its average inventory without increasing its sales. 
B) The company should reduce its DSO. 
C) The company should start paying its bills sooner, which reduces its average accounts payable without reducing its sales. 
D) The company should increase its DSO. 
A) The company should increase its average inventory without increasing its sales. 
B) The company should reduce its DSO. 
C) The company should start paying its bills sooner, which reduces its average accounts payable without reducing its sales. 
D) The company should increase its DSO.

Question 2

If a firm is involuntarily stretching its accounts payable,then this is probably a sign that it is undercapitalized,that is,that it needs more working capital to support its operations.

Accepted Answer

A) True 
 B)False

Question 3

Your firm needs $630 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?

Accepted Answer

A) $693.00 
B) $700.00 
C) $705.60 
D) $715.91 
A) $693.00 
B) $700.00 
C) $705.60 
D) $715.91

Question 4

A firm needs $45,000 to purchase inventory.The bank requires a 5% compensating balance.With a stated interest rate of 15%,what is the effective interest rate?

Accepted Answer

A) 14.25% 
B) 15.00% 
C) 15.79% 
D) 16.67% 
A) 14.25% 
B) 15.00% 
C) 15.79% 
D) 16.67%

Question 5

Which statement best describes working capital financing policy?

Accepted Answer

A) Net working capital may be defined as current assets minus current liabilities, and an 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 of using short-term financing. 
C) If a company follows a policy of "matching maturities," this means that it matches its use of common shares with its use of long-term debt as opposed to short-term debt. 
A) Net working capital may be defined as current assets minus current liabilities, and an 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 of using short-term financing. 
C) If a company follows a policy of "matching maturities," this means that it matches its use of common shares with its use of long-term debt as opposed to short-term debt.

Question 6

The cost of an installment loan is always slightly less than twice the stated annual rate.

Accepted Answer

A) True 
 B)False

Question 7

XYZ Inc.is planning a $200,000 90-day commercial paper issue.The issue is sold for $193,500.There is a flotation cost of $1,500.The corporate tax rate is 35%.(Assume a 365-day year.) Which of the following statements is correct?

Accepted Answer

A) The before-tax cost is 16.77%. 
B) The before-tax cost is 15.71%. 
C) The after-tax cost is 10.21%. 
D) The after-tax cost is 10.06%. 
A) The before-tax cost is 16.77%. 
B) The before-tax cost is 15.71%. 
C) The after-tax cost is 10.21%. 
D) The after-tax cost is 10.06%.

Question 8

Which of the following methods CANNOT be employed by lenders to control inventory that has been used as security for a loan?

Accepted Answer

A) blanket liens 
B) trust receipts 
C) warehousing 
D) compensating balance 
A) blanket liens 
B) trust receipts 
C) warehousing 
D) compensating balance

Question 9

Determining a firm's optimal investment in net operating working capital and how that investment is financed are elements of working capital policy.

Accepted Answer

A) True 
 B)False

Question 10

One of the effects of not taking trade credit discounts when offered is that the firm's use of accounts payable rises.

Accepted Answer

A) True 
 B)False

Question 11

Cyree Inc.has annual sales of $80,000,000,its average inventory is $20,000,000,and its average accounts receivable is $16,000,000.The firm buys all raw materials on terms of net 35 days,and it pays on time.The firm is searching for ways to shorten the cash conversion cycle.If sales can be maintained at existing levels while lowering inventory by $4,000,000 and accounts receivable by $2,000,000,by how many days would the cash conversion cycle be changed? Use a 365-day year.

Accepted Answer

A) -27.4 
B) -28.7 
C) -30.2 
D) -31.7 
A) -27.4 
B) -28.7 
C) -30.2 
D) -31.7

Question 12

Offering trade credit discounts is costly and,as a result,firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

Accepted Answer

A) True 
 B)False

Question 13

If a firm takes actions that reduce its DSO,then,other things held constant,this will lengthen its CCC.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following are included in the cash conversion cycle?

Accepted Answer

A) inventory conversion period, the receivables collection period, and the payables deferral period 
B) inventory conversion period, the receivables collection period, and the long-term assets cycle 
C) acid test period, the receivables collection period, and the payables deferral period 
D) the inventory conversion period and the payables deferral period 
A) inventory conversion period, the receivables collection period, and the payables deferral period 
B) inventory conversion period, the receivables collection period, and the long-term assets cycle 
C) acid test period, the receivables collection period, and the payables deferral period 
D) the inventory conversion period and the payables deferral period

Question 15

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

Accepted Answer

A) 2.24% 
B) 1.50% 
C) 1.00% 
D) 0.50% 
A) 2.24% 
B) 1.50% 
C) 1.00% 
D) 0.50%

Question 16

Short-term financing is riskier than long-term financing since,during periods of tight credit,the firm may not be able to rollover (renew) its debt.This is especially true if the funds are used to finance long-term rather than short-term assets.

Accepted Answer

A) True 
 B)False

Question 17

Which factor is typically NOT considered when constructing a cash budget?

Accepted Answer

A) payments lag 
B) payment for plant construction 
C) cumulative cash 
D) writing off bad debts 
A) payments lag 
B) payment for plant construction 
C) cumulative cash 
D) writing off bad debts

Question 18

Pledging of receivables involves the sale of accounts receivable.

Accepted Answer

A) True 
 B)False

Question 19

An informal line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank.

Accepted Answer

A) True 
 B)False

Question 20

Stretching accounts payable is a widely accepted and costless financing technique.

Accepted Answer

A) True 
 B)False

Exam 17: Working Capital Management and Short-Term Financing

Helena Furnishings wants to reduce its cash conversion cycle sharply.Which action should it take?

If a firm is involuntarily stretching its accounts payable,then this is probably a sign that it is undercapitalized,that is,that it needs more working capital to support its operations.

Your firm needs $630 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?

A firm needs $45,000 to purchase inventory.The bank requires a 5% compensating balance.With a stated interest rate of 15%,what is the effective interest rate?

Which statement best describes working capital financing policy?

The cost of an installment loan is always slightly less than twice the stated annual rate.

XYZ Inc.is planning a $200,000 90-day commercial paper issue.The issue is sold for $193,500.There is a flotation cost of $1,500.The corporate tax rate is 35%.(Assume a 365-day year.) Which of the following statements is correct?

Which of the following methods CANNOT be employed by lenders to control inventory that has been used as security for a loan?

Determining a firm's optimal investment in net operating working capital and how that investment is financed are elements of working capital policy.

One of the effects of not taking trade credit discounts when offered is that the firm's use of accounts payable rises.

Offering trade credit discounts is costly and,as a result,firms that offer trade discounts are usually those that are performing poorly and need cash quickly.

If a firm takes actions that reduce its DSO,then,other things held constant,this will lengthen its CCC.

Which of the following are included in the cash conversion cycle?

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

Short-term financing is riskier than long-term financing since,during periods of tight credit,the firm may not be able to rollover (renew) its debt.This is especially true if the funds are used to finance long-term rather than short-term assets.

Which factor is typically NOT considered when constructing a cash budget?

Pledging of receivables involves the sale of accounts receivable.

An informal line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank.

Stretching accounts payable is a widely accepted and costless financing technique.

An Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Financial Planning and Forecasting Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Cash Flow Estimation and Risk Analysis

Capital Structure Decisions

Distributions to Shareholders: Dividends and Repurchases

Initial Public Offerings Investment Banking and Financial Restructuring

Lease Financing

Capital Market Financing: Hybrid and Other Securities

Current Asset Management

Financial Options and Applications in Corporate Finance

Enterprise Risk Management

International Financial Management

Corporate Valuation and Governance

Mergers,Acquisitions,and Restructuring

Decision Trees,real Options and Other Capital Budgeting Techniques

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