Exam 17: Working Capital Management and Short-Term Financing

Shorter-term cash budgets, in general, are used for actual cash control, while longer-term cash budgets are used for planning purposes.

Firms must have high credit quality in order to issue commercial paper; therefore, all commercial papers are equally risky.

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

The effect of compensating balances is to decrease the effective interest rate of a loan.

Which statement concerning commercial paper is NOT true?

The fact that no explicit interest is paid on accruals, and that the firm can vary the level of these accounts, makes accruals an attractive and flexible source of funding to meet increased working capital needs.

On average, Bragg Inc. has sales of $2,000,000 per month. It keeps inventory equal to 50% of its monthly sales on hand at all times. Based on using a 365-day year, what is the inventory conversion period?

Interest rates charged on loans vary depending on the risk of borrower, and the size of the loan, but not the economic conditions.

Schoof Inc. expects to have sales of $30,000 in January, $35,000 in February, and $40,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month following the sale, and another 40% are credit sales paid 2 months following the sale, what are the cash receipts for the firm in March?

Nagel Corporation's budgeted monthly sales are $5,000, and they are constant from month to month. Its customers pay as follows: 40% pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount. The firm has no bad debts. Purchases for next month's sales are constant at 50% of projected sales for the next month. "Other payments," which include payments for wages, rent, and taxes, are 25% of sales for the month. Construct a cash budget for a typical month. What is the average cash gain or loss during the month?

The factoring of receivables involves the specific use of receivables as collateral for the loan.

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

Permanent net operating working capital reflects the fact that net operating working capital does not shrink to zero even when a business is at its seasonal or cyclical low. Thus, permanent net operating working capital represents a minimum level of net operating working capital that must be financed.

Westley Company's average age of accounts receivable is 50 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

An increase in the holding of marketable securities must be accompanied by a corresponding increase in the net operating working capital.

When deciding whether or not to take a trade discount, the cost of borrowing from a bank should be compared to the cost of trade credit to determine if the cash discount should be taken.

Since depreciation is a noncash charge, it neither appears on, nor has any effect on, the cash budget.

Which item should a company report directly in its monthly cash budget?

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.

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm pays in 40 days than in 30 days.