Exam 17: Working Capital Management and Short-Term Financing

Which statement best describes cash budgets?

The relative profitability of a firm that employs an aggressive working capital financing policy will improve when the yield curve changes from upward sloping to downward sloping.

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

The cash budget and the capital budget are handled separately and, although they are both important, they are developed independently of one another.

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?

LMN Co. plans to enter into a secured term loan by assigning its receivables of $600,000 with an average maturity date of 30 days. The finance company will loan 75% of the receivables value at 11% interest plus a service fee of 0.05% of the total receivables pledged. What is the total cost of this financing arrangement?

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

Other things held constant, which strategy would tend to reduce the cash conversion cycle?

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

While the maturity of most bank loans is short term, they are frequently repaid on demand rather than on a specific maturity date.

Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience, your firm is not taking discounts, but is paying after 25 days, instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%. But since your firm is not taking discounts and is paying on Day 25, what is the effective annual cost (NOT the nominal cost) of your firm's current practice, using a 365-day year?

Your company has been offered credit terms of 4/30, net 90 days. What will the nominal annual cost of trade credit be if you pay 100 days after the purchase? (Assume a 365-day year.)

Which of the following statements is NOT true?

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.

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?

Generally, the longer the normal inventory holding period of customers, the longer the credit period. One effect of lengthening the credit period to match the customer's merchandise holding period is to increase the payables deferral period, which shortens the customer's cash conversion cycle.

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption of uniform daily cash receipts and disbursements, but actual receipts are concentrated at the beginning of each month.

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex.

Net working capital is defined as current assets minus current liabilities.

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