Question 1

Which of the following is an accepted financing wisdom?

Accepted Answer

A)  The maturity of funds used to support a project should roughly match the project's duration. 
B)  Because firms can use their own equity as they choose, equity can be used to finance projects of any duration. 
C)  Any project can appropriately be supported by funding with a shorter maturity. 
D)  Any project can appropriately be supported by funding with a longer maturity. 
A)  The maturity of funds used to support a project should roughly match the project's duration. 
B)  Because firms can use their own equity as they choose, equity can be used to finance projects of any duration. 
C)  Any project can appropriately be supported by funding with a shorter maturity. 
D)  Any project can appropriately be supported by funding with a longer maturity.

Question 2

Braebner Corp. orders 500,000 microchips per year at an average cost of $130. The carrying cost of each chip is $25, and each order costs $150. Compute Braebner's EOQ.

Accepted Answer

A)  23,846 
B)  2,449 
C)  17,333 
D)  3,005 
A)  23,846 
B)  2,449 
C)  17,333 
D)  3,005

Question 3

Which of the following is a source of short-term financing?

Accepted Answer

A)  Accounts Payable 
B)  Accruals 
C)  Commercial Paper 
D)  Both a & c 
E)  All of the above 
A)  Accounts Payable 
B)  Accruals 
C)  Commercial Paper 
D)  Both a & c 
E)  All of the above

Question 4

Riordan Manufacturing has taken out an $80,000 short-term bank loan that has a 10% interest rate. The loan requires that Riordan maintain a compensating balance of 15% of the amount borrowed. Calculate the effective interest rate on the loan.

Accepted Answer

A)  10.0% 
B)  11.2% 
C)  11.8% 
D)  12.4% 
E)  12.8% 
A)  10.0% 
B)  11.2% 
C)  11.8% 
D)  12.4% 
E)  12.8%

Question 5

When a firm factors its accounts receivable as opposed to pledging them, the firm will:

Accepted Answer

A)  offer the lender the accounts receivable as collateral to the loan. 
B)  sell the accounts receivable at a discount to the lender. 
C)  in all cases, remain liable for any uncollected accounts sold to the lender. 
D)  None of the above 
A)  offer the lender the accounts receivable as collateral to the loan. 
B)  sell the accounts receivable at a discount to the lender. 
C)  in all cases, remain liable for any uncollected accounts sold to the lender. 
D)  None of the above

Question 6

A firm uses an inventory item with the following characteristics. $\begin{array}{lr}
\text {Cost per-item }&\$ 6.00\
\text { Annual consumption}&1,000\
\text { Fixed cost per order placed}&\$ 30.00 \
\text {Carying cost of inventory (as a $ \% $ of dollar value) }&25 \%\
\end{array}$
 How many times should the product be reordered each year and what are the related ordering and carrying costs of inventory?
$\text { Reorders } \quad \text { CaryingCosts } \quad \text { OrderingCosts }$

Accepted Answer

A)  5 $150 $150 
B)  3.3 $150 $150 
C)  5 $300 $150 
D)  3.3 $300 $300 
A)  5 $150 $150 
B)  3.3 $150 $150 
C)  5 $300 $150 
D)  3.3 $300 $300

Question 7

Zero balance accounts eliminate:

Accepted Answer

A)  concentration banking. 
B)  wire transfers. 
C)  preauthorized checks. 
D)  excess funds at the banks of remote divisions. 
A)  concentration banking. 
B)  wire transfers. 
C)  preauthorized checks. 
D)  excess funds at the banks of remote divisions.

Question 8

Marshall Manufacturing has an ACP of 60 days, an inventory turnover of 6, and turns its payables over once a month. How long is Marshall's cash conversion cycle? (Assume a 360-day year)

Accepted Answer

A)  30 days 
B)  60 days 
C)  90 days 
D)  120 days 
A)  30 days 
B)  60 days 
C)  90 days 
D)  120 days

Question 9

Which is the most appropriate form of funding for temporary working capital?

Accepted Answer

A)  Short-term debt 
B)  Long-term debt 
C)  Preferred stock 
D)  Common stock 
A)  Short-term debt 
B)  Long-term debt 
C)  Preferred stock 
D)  Common stock

Question 10

Supporting working capital with long-term financing is:

Accepted Answer

A)  risky, but inexpensive. 
B)  conservative, but expensive. 
C)  expensive and risky. 
D)  conservative and inexpensive. 
A)  risky, but inexpensive. 
B)  conservative, but expensive. 
C)  expensive and risky. 
D)  conservative and inexpensive.

Question 11

Under which of the following inventory financing arrangements does the borrower remain in physical control of the inventory?

Accepted Answer

A)  Blanket liens and chattel mortgage agreements 
B)  Field warehousing 
C)  Public warehousing 
D)  The borrower doesn't remain in complete physical control of the inventory under any of these arrangements. 
A)  Blanket liens and chattel mortgage agreements 
B)  Field warehousing 
C)  Public warehousing 
D)  The borrower doesn't remain in complete physical control of the inventory under any of these arrangements.

Question 12

Why might a portion of working capital be funded with long-term debt?

Accepted Answer

A)  Because it is considered temporary working capital. 
B)  Because working capital encompasses some fixed assets which tend to be long-term investments. 
C)  Because of beneficial tax breaks on the interest paid on long-term debt. 
D)  Because it is considered permanent working capital. 
A)  Because it is considered temporary working capital. 
B)  Because working capital encompasses some fixed assets which tend to be long-term investments. 
C)  Because of beneficial tax breaks on the interest paid on long-term debt. 
D)  Because it is considered permanent working capital.

Question 13

Holding cash for precautionary demand refers to:

Accepted Answer

A)  keeping cash on hand to pay for emergency needs. 
B)  holding cash to compensate banks for the services they perform. 
C)  keeping money in the bank to pay bills for the goods and services they use. 
D)  keeping cash to take advantage of unexpected opportunities. 
A)  keeping cash on hand to pay for emergency needs. 
B)  holding cash to compensate banks for the services they perform. 
C)  keeping money in the bank to pay bills for the goods and services they use. 
D)  keeping cash to take advantage of unexpected opportunities.

Question 14

Which of the following is not part of net working capital?

Accepted Answer

A)  Accounts payable 
B)  Marketable securities 
C)  Retained earnings 
D)  Inventory 
A)  Accounts payable 
B)  Marketable securities 
C)  Retained earnings 
D)  Inventory

Question 15

The cash conversion cycle measures the time:

Accepted Answer

A)  between the creation of receivables and their collection. 
B)  it takes for inventory to be turned into product and sold. 
C)  between payment for inventory and collection of cash for its subsequent sale as product. 
D)  for a check to clear the banking system. 
A)  between the creation of receivables and their collection. 
B)  it takes for inventory to be turned into product and sold. 
C)  between payment for inventory and collection of cash for its subsequent sale as product. 
D)  for a check to clear the banking system.

Question 16

Assume the following facts about a firm that borrows by pledging its receivables $\begin{array}{ll}\text { Average balance of accounts receivable }&\$50,000\
\text { Annual receivables turnover ( } 360 / \mathrm{ACP}) & 6 \mathrm{x} \
\text { Administrative fee charged on all new receivabless } & 1\% \
\text { Interest rate on outstandingloans } & 12 \% \
\text { Percent of receivables accepted } & 75 \%
\end{array}$ What is the effective cost of financing stated as an annual rate?

Accepted Answer

A)  23.5% 
B)  20.0% 
C)  13.0% 
D)  16.8% 
A)  23.5% 
B)  20.0% 
C)  13.0% 
D)  16.8%

Question 17

Lengthening the credit period is likely to result in all of the following except:

Accepted Answer

A)  higher credit sales. 
B)  more cash sales. 
C)  larger investment in receivables. 
D)  longer average collection period. 
A)  higher credit sales. 
B)  more cash sales. 
C)  larger investment in receivables. 
D)  longer average collection period.

Question 18

What is the effective rate on an 8% loan subject to a 20% minimum compensating balance?

Accepted Answer

A)  9.6% 
B)  10% 
C)  8.13% 
D)  None of the above 
A)  9.6% 
B)  10% 
C)  8.13% 
D)  None of the above

Question 19

A principal difference between a line of credit and a revolving credit agreement is that:

Accepted Answer

A)  a revolver is a legally binding commitment from the bank to lend up to a stipulated amount. 
B)  the borrower must pay a commitment fee on unborrowed money with a line of credit. 
C)  the line of credit is an informal agreement but may not be canceled due to a decline in the borrower's financial health during the relatively short period of the agreement. 
D)  the bank can cancel a revolver at any time if it refunds the commitment fee. 
A)  a revolver is a legally binding commitment from the bank to lend up to a stipulated amount. 
B)  the borrower must pay a commitment fee on unborrowed money with a line of credit. 
C)  the line of credit is an informal agreement but may not be canceled due to a decline in the borrower's financial health during the relatively short period of the agreement. 
D)  the bank can cancel a revolver at any time if it refunds the commitment fee.

Question 20

Methods used by lenders who advance funds with the borrower's inventory as collateral involve varying amounts of administration, attention, and cost. They do not include:

Accepted Answer

A)  trust receipts or chattel mortgage agreements whereby the inventory is specifically identified by serial number and cannot be sold without the lender's permission. 
B)  warehousing the collateralized inventory at the lender's facility. 
C)  a blanket lien granting the lender a collateral position in all of the borrower's inventory, which is physically maintained at the borrower's facility. 
D)  using public or field warehousing facilities. 
A)  trust receipts or chattel mortgage agreements whereby the inventory is specifically identified by serial number and cannot be sold without the lender's permission. 
B)  warehousing the collateralized inventory at the lender's facility. 
C)  a blanket lien granting the lender a collateral position in all of the borrower's inventory, which is physically maintained at the borrower's facility. 
D)  using public or field warehousing facilities.

Which of the following is an accepted financing wisdom?

Braebner Corp. orders 500,000 microchips per year at an average cost of $130. The carrying cost of each chip is $25, and each order costs $150. Compute Braebner's EOQ.

Which of the following is a source of short-term financing?

Riordan Manufacturing has taken out an $80,000 short-term bank loan that has a 10% interest rate. The loan requires that Riordan maintain a compensating balance of 15% of the amount borrowed. Calculate the effective interest rate on the loan.

When a firm factors its accounts receivable as opposed to pledging them, the firm will:

Zero balance accounts eliminate:

Marshall Manufacturing has an ACP of 60 days, an inventory turnover of 6, and turns its payables over once a month. How long is Marshall's cash conversion cycle? (Assume a 360-day year)

Which is the most appropriate form of funding for temporary working capital?

Supporting working capital with long-term financing is:

Under which of the following inventory financing arrangements does the borrower remain in physical control of the inventory?

Why might a portion of working capital be funded with long-term debt?

Holding cash for precautionary demand refers to:

Which of the following is not part of net working capital?

The cash conversion cycle measures the time:

Lengthening the credit period is likely to result in all of the following except:

What is the effective rate on an 8% loan subject to a 20% minimum compensating balance?

A principal difference between a line of credit and a revolving credit agreement is that:

Methods used by lenders who advance funds with the borrower's inventory as collateral involve varying amounts of administration, attention, and cost. They do not include:

Foundations

Financial Background: a Review of Accounting, Financial Statements, and Taxes

Cash Flows and Financial Analysis

Financial Planning

The Financial System, Corporate Governance, and Interest

Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

Risk and Return

Capital Budgeting

Cash Flow Estimation

Risk Topics and Real Options in Capital Budgeting

Cost of Capital

Capital Structure and Leverage

Dividends

The Management of Working Capital

Corporate Restructuring

International Finance

Filters

Exam 16: The Management of Working Capital Multiple Choice Questions

Which of the following is an accepted financing wisdom?

Braebner Corp. orders 500,000 microchips per year at an average cost of $130. The carrying cost of each chip is $25, and each order costs $150. Compute Braebner's EOQ.

Which of the following is a source of short-term financing?

Riordan Manufacturing has taken out an $80,000 short-term bank loan that has a 10% interest rate. The loan requires that Riordan maintain a compensating balance of 15% of the amount borrowed. Calculate the effective interest rate on the loan.

When a firm factors its accounts receivable as opposed to pledging them, the firm will:

Zero balance accounts eliminate:

Marshall Manufacturing has an ACP of 60 days, an inventory turnover of 6, and turns its payables over once a month. How long is Marshall's cash conversion cycle? (Assume a 360-day year)

Which is the most appropriate form of funding for temporary working capital?

Supporting working capital with long-term financing is:

Under which of the following inventory financing arrangements does the borrower remain in physical control of the inventory?

Why might a portion of working capital be funded with long-term debt?

Holding cash for precautionary demand refers to:

Which of the following is not part of net working capital?

The cash conversion cycle measures the time:

Lengthening the credit period is likely to result in all of the following except:

What is the effective rate on an 8% loan subject to a 20% minimum compensating balance?

A principal difference between a line of credit and a revolving credit agreement is that:

Methods used by lenders who advance funds with the borrower's inventory as collateral involve varying amounts of administration, attention, and cost. They do not include:

Foundations

Financial Background: a Review of Accounting, Financial Statements, and Taxes

Cash Flows and Financial Analysis

Financial Planning

The Financial System, Corporate Governance, and Interest

Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

Risk and Return

Capital Budgeting

Cash Flow Estimation

Risk Topics and Real Options in Capital Budgeting

Cost of Capital

Capital Structure and Leverage

Dividends

The Management of Working Capital

Corporate Restructuring

International Finance

Filters