Exam 17: Working Capital Management and Short-Term Financing

Pledging of receivables involves the sale of accounts receivable.

Miletkov Company's total assets fluctuate between $320,000 and $410,000, while its fixed assets remain constant at $260,000. If the firm follows a maturity matching, or moderate, working capital financing policy, what is the likely level of its long-term debt and equity financing?

When the accounts receivable turnover and payables deferral period are decreased, a firm's cash conversion cycle will be lengthened.

Which of the following statements is NOT true?

An informal line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank.

One of the advantages of short-term debt financing is that firms can obtain short-term credit more quickly than long-term credit.

If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy?

Ski Lifts Inc. is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars): Peak Off-peak Cash $ 50 $ 30 Marketable securities 0 20 Accounts receivable 40 20 Inventories 100 50 Net fixed assets 500 500 Total assets $690 $620 Spontaneous liabilities $ 30 $ 10 Short-term bank debt 50 0 Long-term debt 300 300 Common equity 310 310 Total claims $690 $620 What can we conclude from this data?

The prime rate charged can vary greatly (for example, as much as 2 to 4 percentage points) across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles, such as making loans to specialty retailers.

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the costs of credit from other sources.

Tareque Inc. wants to increase its free cash flow by $180 million during the coming year, which should result in a higher EVA and share price. The CFO has made these projections for the upcoming year: - EBIT is projected to be $850 million. - Gross capital expenditures are expected to total $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. - The tax rate is 40%. - There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals. Which of the following actions would enable the company to achieve its goal of generating $180 million in free cash flow?

Your firm needs $630 for one quarter to finance a deficit. Interest charges are 2% per quarter. Your bank requires a 10% compensating balance. How much must your firm borrow in order to obtain the needed funds?

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 working capital financing strategy because of the inherent risks of using short-term financing.

Filbeck Company buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 30 days after the invoice date. Net purchases amount to $500,000 per year. On average, how much free trade credit does the firm receive during a 365-day year?

A firm buys on terms of 3/15, net 45 days. It does not take the discount, and it generally pays after 65 days. What is the nominal annual cost of its non-free trade credit, based on a 365-day year?

Which of the following borrowers benefits the most from a revolving line of credit?

Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

The inventory conversion period of the operating cycle terminates when the inventory is paid for with cash.

Discount loans are usually provided for terms of only 1 year or less. Their interest is paid together with the principal at the end of the loan.