Deck 18: Working Capital Management

Question 1

The proper order of events for the operating cycle is

A)input serving period, accounts receivable period, inventory period, quotation period.
B)quotation period, accounts receivable period, inventory period, input servicing period.
C)quotation period, input servicing period, inventory period, accounts receivable period.
D)accounts receivable period, input servicing period, quotation period, inventory period.

Answer 1

quotation period, input servicing period, inventory period, accounts receivable period.

Question 2

Working capital management involves the management of

A)current and long-term assets.
B)current assets and current liabilities.
C)current liabilities and long-term assets.
D)current liabilities and long-term debt and equity.

Answer 2

current assets and current liabilities.

Question 3

Because they are direct payments,dividends are among the most efficient way for foreign subsidiaries to remit funds back to the parent.

Answer 3

False

Question 4

Which of the following would most likely NOT be considered an after-tax cost in the host country when unbundling cash flows from a subsidiary to a foreign parent?

A)payments of interest to a parent for intrafirm debt
B)payments to parent for goods or services
C)payments of dividends to the parent
D)payments for copyrights or trademarks

Question 5

Unbundling may facilitate allocation of overhead from a parent's international division,so-called shared services,to each operating subsidiary in accordance with a predetermined formula.

Question 6

Which of the following statements is true?

A)A/R provide part of the funding for inventory.
B)A/P provide part of the funding for A/R and inventory.
C)Inventory pays for A/R and A/P.
D)None of the above is true.

Question 7

The cash conversion cycle

A)is a subset of the operating cycle.
B)occurs in the latter stages of the operating cycle.
C)is a subset of the accounts receivable period.
D)all of the above.

Question 8

The accounts payable period of the operating cycle

A)may be equal to the inventory period.
B)may run concurrently but shorter than the inventory period.
C)may run concurrently but longer than the inventory period.
D)any one of the above may be true.

Question 9

Which of the following actions will result in an increase in NWC?

A)an increase in A/P that exceeds an increase in A/R
B)a reduction in inventory
C)a reduction in A/P plus a smaller reduction in A/R
D)an increase in A/P and a smaller reduction in inventory

Question 10

________ are compensation for the use of intellectual property belonging to some other party.

A)Royalty fees
B)License fees
C)Remittance fees
D)Repositioning fees

Question 11

Which of the following payments to the parent company is NOT considered a before-tax cash flow payment in the host country?

A)distribution of dividends to parent
B)payment of interest to the parent
C)payments for trademarks or technology
D)payments to parent for goods or services

Question 12

The period in the cash cycle where the customer places the order,and the firm determines what materials for manufacture are not in inventory is called the ________ period.

A)quotation
B)input sourcing
C)accounts payable
D)accounts receivable

Question 13

One possible definition of net working capital (NWC)provided by your authors is

A)NWC = A/R + inventory - A/P.
B)NWC = cash +A/P - inventory.
C)NWC = A/P + A/R - short-term loans.
D)NWC = A/R + inventory - long-term debt.

Question 14

The advantages to unbundling of cash flows from a subsidiary to a parent include all of the following EXCEPT:

A)items that may have been classified as residual profits are viewed as tax-deductible expenses.
B)the facilitation of allocating shared-services (i.e., overhead).
C)the facilitation of local capital into joint-venture projects.
D)All of the above are legitimate reasons for unbundling cash flows between a parent and subsidiary.

Question 15

Even though dividends are cash payments,firms typically must consider both cash flow and net income when making dividend distribution decisions.

Question 16

Dividends are the most tax-efficient way to repatriate funds because they are distributed on an after-tax basis.

Question 17

For the MNE a repositioning of profits helps the firm realize greater after-tax profits from the same amount of sales.

Question 18

Polaris Corporation (US)has bid a price on a project for a Korean firm,but the Korean firm has not yet placed an order.This portion of the operating cycle is best described as the

A)quotation period.
B)input sourcing period.
C)cash conversion cycle.
D)accounts payable cycle.

Question 19

Unbundling allows a multinational firm to recover funds from subsidiaries without piquing host country sensitivities over large dividend drains.

Question 20

In principle,the firm tries to minimize its NWC balance.

Question 21

Firms whose currency is prime for devaluation may choose to purchase extra inventory from foreign sources before the devaluation occurs.Which of the following is NOT a potential problem associated with such a practice?

A)As a result of holding extra inventory, the firm now has extra sales.
B)As a result of devaluation, the local government may freeze the price at which the firm can sell its inventory.
C)The devaluation doesn't occur and the firm now experiences additional storage costs.
D)All of the above are potential problems.

Question 22

The Europeans have a popular liquid discountable bill originating with the Code Napoleon and backed by accounts receivable called

A)banker's acceptances.
B)self-liquidating bills.
C)commercial paper.
D)negotiable certificates of deposit.

Question 23

Use the information to answer the following question(s).
SureDrip Irrigation Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to SureDrip is available at an annual rate of 9.6%. SureDrip has just purchased $400,000 of plastic chips from Sun Chemical.
Refer to Instruction 18.1.Should SureDrip take the discount offered by Sun Chemical?

A)Yes, SureDrip will get to use their raw materials 35 days earlier than if they waited to pay at the end of the 45 days.
B)No, SureDrip will not have to pay any interest if they just pay in 45 days.
C)Yes, SureDrip's short term borrowing rate of 9.6% is less than Sun's offered cost of carry of 22.9%.
D)No, it costs SureDrip 22.9% to accept the discount and they are better off paying the full amount in 45 days.

Question 24

In an inflationary economy,demand for credit usually exceeds supply.

Question 25

Amundsen of Norway receives raw materials from their corporate parent in the U.S.with payment terms of net 60 days.Most of their sales are to firms in Norway where normal payment terms are net 30 days.This causes a problem for the subsidiary with working capital management because

A)accounts receivable are so much longer than accounts payable.
B)accounts payable are so much longer than accounts receivable.
C)accounts receivable and accounts payable are equal.
D)this doesn't really cause a problem; in fact it is to the benefit of the Norwegian subsidiary.

Question 26

For disbursement purposes,it is to the benefit of the firm to minimize float.

Question 27

Free-trade zones may take the form of

A)warehouses for imported goods.
B)assembly plants for imported parts.
C)manufacturing plants for re-export.
D)all of the above.

Question 28

Japanese markets are noted for their short maturity payment terms (less than 20 days),and the general reluctance of the manufacturer to supply any type of credit to customers.

Question 29

Domestic sales are almost always denominated in the local currency,but international sales may be denominated in

A)the exporter's currency.
B)the importer's currency.
C)a third country's currency.
D)any of the above.

Question 30

Use the information to answer the following question(s).
SureDrip Irrigation Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to SureDrip is available at an annual rate of 9.6%. SureDrip has just purchased $400,000 of plastic chips from Sun Chemical.
Refer to Instruction 18.1.What is the effective annual interest cost of supplier financing offered by Sun Chemical?

A)7.3%
B)9.5%
C)10.4%
D)22.9%

Question 31

Days working capital is equal to

A)days payables + days receivables - days inventory.
B)days inventory + days receivables - days payables.
C)days payables + days inventory + days receivables.
D)none of the above.

Question 32

________ may determine the currency used for transactions in international sales?

A)Custom
B)Competition
C)Bargaining and negotiation
D)Any of the above

Question 33

TABLE 18.1
Use the information to answer the following question(s).
Polaris Corporation Balance Sheet December 31, 20xx

Refer to Table 18.1.If Polaris increases inventory by $10,000 and A/P also by $10,000,the net change in NWC is ________.

A)$20,000
B)$10,000
C)$0
D)none of the above

Question 34

Firms might be tempted to order ________ inventory from foreign sources if they thought the foreign currency was about to be ________.

A)less; devalued
B)extra; revalued
C)extra; devalued
D)none of the above

Question 35

Other things equal,managers prefer a lower "days working capital" to a higher one.

Question 36

Use the information to answer the following question(s).
SureDrip Irrigation Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to SureDrip is available at an annual rate of 9.6%. SureDrip has just purchased $400,000 of plastic chips from Sun Chemical.
Refer to Instruction 18.1.What is the amount of money SureDrip will save on accounts payable if they accept the discount?

A)$400,000
B)$8,000
C)$33,333
D)$20,000

Question 37

Use the information to answer the following question(s).
SureDrip Irrigation Systems Inc. is supplied with plastic chips for their plastic injection molding manufacturing process. Their supplier, Sun Chemical, Inc. offers financing terms of a 2% discount if the accounts payable are paid in 10 days or less with the full balance due in 45 days. Short-term financing available to SureDrip is available at an annual rate of 9.6%. SureDrip has just purchased $400,000 of plastic chips from Sun Chemical.
Refer to Table 18.1.NWC currently makes up what percentage of total firm value for Polaris?

A)6.6%
B)5.1%
C)11.8%
D)9.2%

Question 38

TABLE 18.1
Use the information to answer the following question(s).
Polaris Corporation Balance Sheet December 31, 20xx

Refer to Table 18.1.The NWC for Polaris is ________.

A)$80,000
B)$680,000
C)$35,000
D)$45,000

Question 39

Other things equal,a firm would rather have ________ in a depreciating currency,and ________ in an appreciating currency.

A)accounts receivable; accounts payable
B)accounts receivable; accounts receivable
C)accounts payable; accounts receivable
D)none of the above

Question 40

Increases to cash flows can be anticipated if which of the following occurs?

A)A receivables contract is denominated in an appreciating foreign currency.
B)Sales are less than anticipated.
C)Days in accounts receivable increase by 15 days.
D)None of the above.

Question 41

A/An ________ is a locally incorporated bank owned in part but not necessarily controlled by a foreign parent.

A)banking affiliate
B)Edge Act Corporation
C)international branch bank
D)bank subsidiary

Question 42

Your authors identify four constraints on repositioning funds.Identify and describe three of these constraints.

Question 43

A cash pool is

A)excess cash held centrally for a set of affiliates, in order to be invested on more favorable terms.
B)cash held in a pooling-of-interest bank account.
C)the currency used for functional reporting.
D)cash routed through two or more affiliates to avoid taxes.

Question 44

International dividend remittances incorporates tax considerations,political risk,and foreign exchange risk.Discuss how each of these considerations weigh on the decision to remit dividends to the parent firm.

Question 45

An Edge Act corporation is a subsidiary of a U.S.bank located outside of the U.S.and incorporated to engage in international banking and financing operations.

Question 46

The Clearing House Interbank Payment System (CHIPS)is

A)the largest publicly operated payments system in the world.
B)owned and operated by the world's seven largest central banks.
C)a computerized network that connects banks globally.
D)none of the above.

Question 47

The Society for Worldwide Financial Telecommunications (SWIFT)is an interbank communications system that carries over 1.0 billion messages per year.

Question 48

________ is the process that cancels via offset all,or part,of the debt owed by one entity to another related entity.

A)Syndicated banking
B)Centralized depositing
C)Multilateral netting
D)Debt cancellation

Question 49

________ is NOT an advantage provided to MNEs by a central depository.

A)Obtaining information
B)Holding precautionary cash balances
C)Reducing interest rate costs
D)All of the above are advantages.

Question 50

Which of the following is NOT a correspondent banking service?

A)accepting bank drafts
B)honoring letters of credit
C)furnishing credit informational
D)All of the above are correspondent bank activities.

Question 51

In a two-country,two-currency international operation,an affiliate in country "A" needing more of its own currency can

A)borrow locally.
B)export to an affiliate and receive funds from that affiliate.
C)obtain funds from a central pool, which in turn might borrow any of several currencies and exchange them for currency "A."
D)all of the above.

Question 52

Which of the following is NOT a function covered by international cash management?

A)maximizing interest earned on idle international cash balances
B)manipulating transfer prices
C)repositioning of funds within the multinational firm
D)investing surplus cash held within the system

Question 53

What are the advantages to the parent firm of unbundling the remittance of profits?

Question 54

A foreign banking office that is separately incorporated in the host country is

A)a correspondent bank.
B)a representative office.
C)a bank subsidiary.
D)an Edge Act corporation.

Question 55

A precautionary cash balance

A)is used to replace spoiled or damaged inventory.
B)is held to facilitate cash disbursements when receipts slow down.
C)is used for normal day-to-day operations.
D)is held for the benefit of a sister affiliate.

Question 56

A free-trade zone allows the user to

A)avoid paying import duties.
B)reduce net cash flow exposed due to netting of funds between affiliates.
C)reduce tax and tariff bills because of reinvoicing.
D)postpone import duties.

Question 57

A centralized depository benefits the firm primarily by

A)reducing the cost of repatriating funds.
B)positioning profits where taxes are lowest.
C)reducing the total amount of capital employed within the total firm.
D)earning a higher rate of return than in domestic banking deposits.

Question 58

An organizational structure employed by an MNE to reduce its use of bank lending for the support of operations is

A)a centralized depository.
B)a reinvoicing center.
C)a cost center.
D)a syndicated bank.

Question 59

Identify and explain the five parts of a operating cycle as suggested by the authors.

Question 60

An in-house bank

A)is a separate bank chartered to operate within a business firm.
B)is in fact a set of functions performed by the firm's existing treasury department.
C)assesses the credit standing of the bank's customers.
D)provides banking services for employees.

Question 61

The MNE enjoys a much greater choice of banking sources to fund its working capital needs than do domestic firms.Banking sources available to MNEs include in-house banks funded by unrepatriated capital,international banks,and local banks where subsidiaries are located.Describe how an in-house bank works to finance working capital needs.

Question 62

Central depositories are used for international cash management.What is a central depository? Identify and provide examples of at least three advantages to MNEs of having a central depository.

Question 63

What is a free-trade zone? Identify three techniques and provide examples of how firms and countries can benefit from having free trade zones.