Question 1

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 2

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk stems from greater variability of interest costs on short-term debt. Even if its long-term prospects are good, the firm's lender may not renew a short-term loan if the firm is even temporarily unable to repay it.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

Which of the following statements is most correct?

Accepted Answer

A)  Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation); hence, depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows from collections occur in equal daily amounts but most payments are made regularly on the 10th of each month, then it is not necessary to use a daily cash budget. A cash budget focused on the end of the month will suffice. 
C)  Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
D)  The cash flows shown on the cash budget are the actual cash inflows and outflows and thus different from the firm's free cash flows, because FCF reflects after-tax operating income and the investments required to maintain future operations. 
A)  Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation); hence, depreciation is set forth on a separate line in the cash budget. 
B)  If cash inflows from collections occur in equal daily amounts but most payments are made regularly on the 10th of each month, then it is not necessary to use a daily cash budget. A cash budget focused on the end of the month will suffice. 
C)  Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 
D)  The cash flows shown on the cash budget are the actual cash inflows and outflows and thus different from the firm's free cash flows, because FCF reflects after-tax operating income and the investments required to maintain future operations.

Question 5

Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions. Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

Accepted Answer

A) True 
 B)False

Question 6

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 7

You receive some goods on April 1 with the following terms: 3/20, net 30, June 1 dating. This means that you will receive a 3% discount if the bill is paid on or before June 20 and also that the full amount must be paid 30 days after receipt of the goods.

Accepted Answer

A) True 
 B)False

Question 8

The trade credit that a firm receives during the discount period is referred to as free trade credit.

Accepted Answer

A) True 
 B)False

Question 9

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 10

A firm is offered trade credit terms of 2/8, net 45 days. The firm does not take the discount, and it pays after 58 days. What is the effective annual cost of not taking this discount? (Assume a 365-day year.)

Accepted Answer

A)  13.35% 
B)  14.70% 
C)  15.89% 
D)  18.70% 
A)  13.35% 
B)  14.70% 
C)  15.89% 
D)  18.70%

Question 11

Shahrokhi Enterprises follows a moderate current asset investment policy, but it is now considering whether to shift to a restricted or perhaps to a relaxed policy. The firm's annual sales are $400,000, its fixed assets are $100,000, its target capital structure calls for 50% debt and 50% equity, its EBIT is $35,000, the interest rate on its debt is 10%, and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?

Accepted Answer

A)  4.3% 
B)  4.7% 
C)  5.3% 
D)  5.8% 
A)  4.3% 
B)  4.7% 
C)  5.3% 
D)  5.8%

Question 12

Accruals are "free" capital in the sense that no explicit interest must be paid on accruals.

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 statements is most correct?

Accepted Answer

A)  Accruals are an expensive way to finance working capital. 
B)  A conservative financing policy is one in which the firm finances all of its fixed assets with long-term capital and part of its permanent net operating working capital with short-term, nonspontaneous credit. 
C)  If a company receives trade credit under terms 2/10, net 30, this implies the company has 10 days of free trade credit. 
D)  A firm following an aggressive financing policy would finance all its permanent NOWC with long-term capital. 
A)  Accruals are an expensive way to finance working capital. 
B)  A conservative financing policy is one in which the firm finances all of its fixed assets with long-term capital and part of its permanent net operating working capital with short-term, nonspontaneous credit. 
C)  If a company receives trade credit under terms 2/10, net 30, this implies the company has 10 days of free trade credit. 
D)  A firm following an aggressive financing policy would finance all its permanent NOWC with long-term capital.

Question 15

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 16

Which statement best describes compensating balances?

Accepted Answer

A)  Compensating balance requirements apply only to businesses, not to individuals. 
B)  Compensating balances are essentially costless to most firms, because those firms would normally have such funds on hand to meet transactions needs anyway. 
C)  If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is increased. 
D)  Banks are prohibited from earning interest on the compensating balances they hold. 
A)  Compensating balance requirements apply only to businesses, not to individuals. 
B)  Compensating balances are essentially costless to most firms, because those firms would normally have such funds on hand to meet transactions needs anyway. 
C)  If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is increased. 
D)  Banks are prohibited from earning interest on the compensating balances they hold.

Question 17

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 18

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? (Assume a 365-day year.)

Accepted Answer

A)  $223,333 
B)  $374,951 
C)  $457,443 
D)  $562,500 
A)  $223,333 
B)  $374,951 
C)  $457,443 
D)  $562,500

Question 19

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?

Accepted Answer

A)  -14.0 days 
B)  -18.8 days 
C)  -25.6 days 
D)  -38.0 days 
A)  -14.0 days 
B)  -18.8 days 
C)  -25.6 days 
D)  -38.0 days

Question 20

Durham Cement, Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit? (Assume a 365-day year.)

Accepted Answer

A)  15.73% 
B)  16.55% 
C)  17.38% 
D)  18.25% 
A)  15.73% 
B)  16.55% 
C)  17.38% 
D)  18.25%

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

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

Which of the following statements is most correct?

Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions. Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

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.

You receive some goods on April 1 with the following terms: 3/20, net 30, June 1 dating. This means that you will receive a 3% discount if the bill is paid on or before June 20 and also that the full amount must be paid 30 days after receipt of the goods.

The trade credit that a firm receives during the discount period is referred to as free trade credit.

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

A firm is offered trade credit terms of 2/8, net 45 days. The firm does not take the discount, and it pays after 58 days. What is the effective annual cost of not taking this discount? (Assume a 365-day year.)

Accruals are "free" capital in the sense that no explicit interest must be paid on accruals.

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

Which of the following statements is most correct?

Which statement best describes compensating balances?

Which statement best describes working capital financing policy?

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? (Assume a 365-day year.)

Durham Cement, Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit? (Assume a 365-day year.)

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

Decision Trees, Real Options, and Other Capital Budgeting Topics

Derivatives and Risk Management

International Financial Management

Corporate Valuation, Value-Based Management, and Corporate Governance

Mergers, Acquisitions, and Restructuring

Filters

Exam 17: Working Capital Management and Short-Term Financing

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

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

Which of the following statements is most correct?

Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions. Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

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.

You receive some goods on April 1 with the following terms: 3/20, net 30, June 1 dating. This means that you will receive a 3% discount if the bill is paid on or before June 20 and also that the full amount must be paid 30 days after receipt of the goods.

The trade credit that a firm receives during the discount period is referred to as free trade credit.

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

A firm is offered trade credit terms of 2/8, net 45 days. The firm does not take the discount, and it pays after 58 days. What is the effective annual cost of not taking this discount? (Assume a 365-day year.)

Accruals are "free" capital in the sense that no explicit interest must be paid on accruals.

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

Which of the following statements is most correct?

Which statement best describes compensating balances?

Which statement best describes working capital financing policy?

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? (Assume a 365-day year.)

Durham Cement, Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit? (Assume a 365-day year.)

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

Decision Trees, Real Options, and Other Capital Budgeting Topics

Derivatives and Risk Management

International Financial Management

Corporate Valuation, Value-Based Management, and Corporate Governance

Mergers, Acquisitions, and Restructuring

Filters