Exam 14: Working Capital and Current Assets Management

Match each marketable security with its description. (a) Eurodollar deposit (b) Banker's acceptance (c) Federal agency issue (d) Commercial paper (e) Repurchase agreement (f) Treasury bill (g) Money market mutual fund (h) Negotiable certificate of deposit (i) Treasury note 1. _____ A short term, unsecured promissory note issued by a corporation. 2. _____ An obligation of the U.S. Treasury with common maturities of 91 to 182 days. 3. _____ A portfolio of marketable securities. 4. _____ An arrangement whereby a bank or securities dealer sells specific marketable securities to a firm and agrees to purchase them in the future. 5. _____ An obligation of the U.S. Treasury with mutual maturities of between one and seven years. 6. _____ Negotiable instrument evidencing the deposit of a certain number of dollars in a commercial bank. 7. _____ An instrument issued by the Federal National Mortgage Association. 8. _____ Funds deposited in banks located outside the U.S. and denominated in U.S. dollars. 9. _____ Short term credit arrangement used by businesses to finance transactions with foreign countries or firms with unknown credit capacities.

Only the firm's permanent financing requirement (and not the seasonal requirement) is financed with ________ in the aggressive financing strategy.

Danny's Distributing, Inc. has completed an analysis of check-clearing times of five key suppliers. On a weekly basis, the firm has a $50,000 check disbursed to each of these suppliers, totaling $250,000. In examining the check-clearing times of each supplier, the firm revealed: Given this information, what recommendation would you give the firm with respect to paying its suppliers weekly? Explain.

Taizhou Products uses 800 units of a product per year on a continuous basis. The product has carrying costs of $50 per unit per year and order costs of $300 per order. It takes 30 days to receive a shipment after an order is placed and the firm requires a safety stock of 5 days usage in inventory. (a) Calculate the economic order quantity (EOQ). (b) Determine the reorder point.

A firm's credit selection is the process of determining the minimum requirements for extending credit to a customer.

In theory, the conservative financing strategy ignores

Table 14.6 A breakdown of Teffan, Inc.'s outstanding accounts receivable dated June 30, 2003 on the basis of the month in which the credit sale was initially made follows. The firm extends 30-day credit terms. -An evaluation of the firm's collection efforts based on the aging schedule would suggest ________. (See Table 14.6)

Mail float is the delay between the deposit of a check by a payee and the actual availability of the funds.

The conservative financing strategy results in financing all projected funds requirements with ________ funds and use of ________ funds in the event of an unexpected cash outflow.

Table 14.7 Dizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750 per film, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. -What is the net result of increasing the cash discount? (See Table 14.7)

The most stringent step in the collection process is

The turnover of accounts receivable can be calculated by dividing annual sales by accounts receivable.

Under conservative financing strategy, short-term financing is used only to finance an emergency, an unexpected outflow of funds, and the variable portion of the firm's current assets.

A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30 days to 45 days. This will result in a(n) ________ in the cash conversion cycle of ________ days.

The major external sources of credit information are all of the following EXCEPT

Table 14.1 Irish Air Services has determined several factors relative to its asset and financing mix. (a) The firm earns 10 percent annually on its current assets. (b) The firm earns 20 percent annually on its fixed assets. (c) The firm pays 13 percent annually on current liabilities. (d) The firm pays 17 percent annually on long-term funds. (e) The firm's monthly current, fixed and total asset requirements for the previous year are summarized in the table below: -The firm's initial ratio of current to total asset is ________. (See Table 14.1)

The ________ of a firm is the amount of time that elapses from the point when the firm makes an outlay to purchase raw materials to the point when cash is collected from the sale of the finished good.

Since Treasury bills are issued in bearer form, they are considered to be virtually risk-free.

When implementing the cash management strategies, a firm should take care to avoid having a large number of inventory stockouts, to avoid losing the use of its cash by collecting its accounts receivable using high-pressure collection techniques, and to avoid damaging the firm's credit rating by overstretching accounts payable.

One major risk a firm assumes in an aggressive financing strategy is