Deck 14: Working Capital Management and Policies

Question 1

Which of the following approach for determining the target cash balance assumes that the distribution of daily net cash flows is normally distributed, and allows for both cash inflows and outflows?

A) The Baumol Model
B) The Miller-Orr Model
C) The Merton Model
D) The Interbank Financial Model

Answer 1

The Miller-Orr Model

Question 2

Which of the following is NOT an example of an inventory loan?

A) blanket inventory liens
B) trust receipts
C) field warehousing financing
D) inventory factor

Answer 2

inventory factor

Question 3

Which of the following current asset financing policies reflects the firm financing the seasonally-adjusted average level of asset demand with long-term debt and equity enabling it to use both short-term financing and short-term investing as needed?

A) flexible financing policy
B) restrictive financing policy
C) compromise financing policy
D) alternative financing policy

Answer 3

compromise financing policy

Question 4

Which of the following current asset financing policies reflects the decision to finance the peaks of current assets with long-term debt and equity that provides the firm with a surplus of cash and marketable securities most of the time, except during peak asset demand?

A) flexible financing policy
B) restrictive financing policy
C) compromise financing policy
D) alternative financing policy

Question 5

Which of these is an entity who will buy accounts receivable before they are due on a discounted basis, with the spread between the discounted price and the receivable's face value providing them with the expected compensation for both the time value of money and for the expected level of defaults amongst the accounts receivable?

A) commercial bank
B) factor
C) receiver
D) blanket loaner

Question 6

To trace cash flows through the firm's operations, we must measure this. It is the time necessary to acquire raw materials, turn them into finished goods, sell them, and receive payment for them.

A) cash cycle
B) operating cycle
C) transaction cycle
D) production cycle

Question 7

This is defined as the excess amounts of a current asset kept on hand to meet unexpected shocks in demand.

A) liquid current assets
B) safety stock
C) overnight securities
D) float

Question 8

Which of the following is a money-market security, issued by large banks and medium-to-large corporations, that matures in nine months or less?

A) banker's paper
B) commercial paper
C) banker's acceptance
D) commercial acceptance

Question 9

Which of these is a short-term loan secured by a company's assets?

A) commercial loan
B) line of credit
C) asset-based loan
D) inventory loan

Question 10

For most businesses, particularly smaller ones, the most common way to cover a short-term financing need is to apply at a bank for which of the following?

A) commercial loan
B) line of credit
C) asset-based loan
D) inventory loan

Question 11

Which of the following is NOT a reason for holding cash?

A) transaction facilitation
B) compensating balances
C) investment opportunities
D) transaction opportunities

Question 12

Which of these is the requirement of the firm to keep a certain percentage of the borrowed money deposited in the firm's bank accounts, whereby the bank agrees to lend money to the firm?

A) commercial loan
B) line of credit
C) compensating balance
D) inventory loan

Question 13

Which of these is the period of time after a check has been written, but not yet cleared and deposited?

A) liquid current assets
B) safety stock
C) overnight securities
D) float

Question 14

Choosing the optimal level of investment in each current asset type involves a trade-off between carry costs and

A) opportunity costs
B) financing costs
C) safety costs
D) shortage costs

Question 15

Which of the following is NOT one of the five basic elements of the kaizen approach of productivity improvement?

A) teamwork
B) improved morale
C) quality circles
D) suggestions for personal discipline

Question 16

Operating cycle is measured as:

A) Inventory Turns minus Average Collection Period
B) Inventory Turns plus Average Collection Period
C) Days' Sales in Inventory minus Average Collection Period
D) Days' Sales in Inventory plus Average Collection Period

Question 17

Which of the following is a short-term promissory note issued by a corporation, bearing the unconditional guarantee of a major bank?

A) banker's paper
B) commercial paper
C) banker's acceptance
D) commercial acceptance

Question 18

Which of the following is NOT one of the Baumol Model's unrealistic assumptions?

A) The firm has a constant, perfectly predictable distribution rate for cash.
B) No cash will come in during the period in question.
C) No allowance for any safety stock of extra cash to buffer the firm against unexpectedly high demand for cash.
D) No assumption to start from a replenishment level of cash then decline smoothly to a value of zero.

Question 19

Which of the following is NOT a fundamental factor ignored by the target cash balance models?

A) Firms have the option to borrow short-term to meet unexpected demands for cash.
B) The costs and delays of trading securities have fallen dramatically since the advent of the Internet.
C) Many large firms habitually use all or the majority of their available cash to purchase overnight securities.
D) Models take into account that many firms must keep compensating balances in their deposit accounts as part of borrowing agreements with their banks.

Question 20

Which of the following is the technique for reducing collection float by having funds sent to several geographically situated regional banks and then transferring to a main concentration account in another bank?

A) lockbox system
B) concentration banking
C) wire transfers
D) collection float

Question 21

Drawing, Inc. has sales of $860,000 and cost of goods sold of $450,000. The firm had a beginning inventory of $50,000 and an ending inventory of $59,000. What is the length of the days' sales in inventory?

A) 23.13 days
B) 44.21 days
C) 21.22 days
D) 47.86 days

Question 22

Which of the following resemble checks, but differ in that they are payable by the firm issuing them rather than payable by a bank?

A) drafts
B) concentration banking
C) wire transfers
D) zero-balance account

Question 23

Which of the following describes the place over which the bank-to-bank transfers are conducted within the United States?

A) lockbox system
B) concentration banking
C) wire transfers
D) Fedwire

Question 24

If a firm has a cash cycle of 39 days and an operating cycle of 88 days, what is its average payment period?

A) 39 days
B) 49 days
C) 88 days
D) 127 days

Question 25

If a firm has a cash cycle of 25 days and an operating cycle of 57 days, what is its average payment period?

A) 25 days
B) 32 days
C) 57 days
D) 82 days

Question 26

Team Sports Industries has a cash balance of $60,000; accounts payable of $40,000; inventory of $100,000; accounts receivable of $110,000; notes payable of $80,000; and accrued wages and taxes of $10,000. How much net working capital does the firm need to fund?

A) $140,000
B) $130,000
C) $150,000
D) $210,000

Question 27

Scribble, Inc. has sales of $80,000 and cost of goods sold of $64,000. The firm had a beginning inventory of $10,000 and an ending inventory of $12,000. What is the length of the days' sales in inventory?

A) 13.75 days
B) 45.63 days
C) 17.19 days
D) 68.44 days

Question 28

Elle Mae Industries has a cash balance of $50,000; accounts payable of $150,000; inventory of $190,000; accounts receivable of $250,000; notes payable of $210,000; and accrued wages and taxes of $40,000. How much net working capital does the firm need to fund?

A) $50,000
B) $90,000
C) $110,000
D) $130,000

Question 29

If a firm has a cash cycle of 25 days and an operating cycle of 80 days, what is its payables turnover?

A) 14.6
B) 4.56
C) 6.64
D) 55

Question 30

If a firm has a cash cycle of 47 days and an operating cycle of 92 days, what is its average payment period?

A) 45
B) 47
C) 92
D) 139

Question 31

If a firm has a cash cycle of 10 days and an operating cycle of 43 days, what is its average payment period?

A) 10
B) 33
C) 43
D) 53

Question 32

Painting, Inc. has sales of $400,000 and cost of goods sold of $275,000. The firm had a beginning inventory of $42,000 and an ending inventory of $38,000. What is the length of the days' sales in inventory?

A) 53.09 days
B) 36.50 days
C) 38.33 days
D) 50.44 days

Question 33

If a firm has a cash cycle of 25 days and an operating cycle of 80 days, what is its average payment period?

A) 25
B) 80
C) 55
D) 105

Question 34

Which of the following is NOT one of the "five C's" of credit analysis?

A) Capacity
B) Character
C) Collateral
D) Collectability

Question 35

If a firm has a cash cycle of 30 days and an operating cycle of 64 days, what is its average payment period?

A) 30 days
B) 34 days
C) 64 days
D) 94 days

Question 36

If a firm has a cash cycle of 18 days and an operating cycle of 29 days, what is its payables turnover?

A) 11
B) 18
C) 29
D) 33.18

Question 37

Daisy D Industries has a cash balance of $75,000; accounts payable of $140,000; inventory of $300,000; accounts receivable of $350,000; notes payable of $145,000; and accrued wages and taxes of $80,000. How much net working capital does the firm need to fund?

A) $285,000
B) $60,000
C) $440,000
D) $360,000

Question 38

If a firm has a cash cycle of 10 days and an operating cycle of 43 days, what is its payables turnover?

A) 11.06
B) 36.5
C) 8.48
D) 33

Question 39

If a firm has a cash cycle of 32 days and an operating cycle of 67 days, what is its payables turnover?

A) 5.45
B) 10.43
C) 11.41
D) 35

Question 40

Which of the following is a checking account that the firm sets up so that the bank agrees to automatically transfer funds from an interest-bearing account to pay off any checks presented?

A) lockbox system
B) concentration banking
C) wire transfers
D) zero-balance account

Question 41

Suppose that Darlene's Donuts has annual sales of $200,000; cost of goods sold of $90,000; average inventories of $4,000; average accounts receivable of $10,000; and an average accounts payable balance of $7,000. Assuming that all of Darlene's sales are on credit, what will be the firm's cash cycle?

A) 6.08
B) 28.39
C) 34.47
D) 62.86

Question 42

KJ Enterprises estimates that it takes, on average, 3 days for their customers' payments to reach them, 1 day for the payments to be processed and deposited by their bookkeeping department, and 2 more days for the checks to clear once they're deposited. What is their collection float?

A) 1 days
B) 2 days
C) 3 days
D) 6 days

Question 43

CM Enterprises estimates that it takes, on average, 7 days for their customers' payments to reach them, 1 day for the payments to be processed and deposited by their bookkeeping department, and 3 more days for the checks to clear once they're deposited. What is their collection float?

A) 7 days
B) 8 days
C) 10 days
D) 11 days

Question 44

Would it be worth it to incur a compensating balance of $9,000 in order to get a .70-percent-lower interest rate on a 1-year, pure discount loan of $250,000?

A) yes
B) no
C) not enough information is given to determine The repayment on the $250,000 loan without the compensating balance would be $250,000 x (1 + i), vs. $259,000 x (1 + [i - .007]):
$250,000 x (1 + i) > $259,000 x (1 + [i - .007])
($250,000/$259,000) x (1 + i) > (1 + [i -.007])
)9653 + .9653i > 1 + i - .007
-)0347i > .0277
I < -.7983
In other words, only if the rate is less than - 79.83%. Since this is not likely to happen, the lower rate associated with the compensating balance isn't worth it.

Question 45

Would it be worth it to incur a compensating balance of $15,000 in order to get a 2-percent-lower interest rate on a 1-year, pure discount loan of $1,000,000?

A) yes
B) no
C) not enough information is given to determine It depends upon whether $1,000,000 x (1 + i) or $1,015,000 x (1 + [i - .02]) is larger. The compensating balance for the lower loan rate will make sense if:
$1,000,000 x (1 + i) > $1,015,000 x (1 + [i - .02])
($1,000,000/$1,015,000) x (1 + i) > (1 + [i - .02])
)9852 + .9852i > 1 + i - .02
-)0148i > -.0052
I < .35135
In other words, only if the rate is less than 35.14%. Since this is likely to happen, the lower rate associated with the compensating balance is worth it.

Question 46

Suppose that Freddy's Fries has annual sales of $500,000, cost of goods sold of $375,000, average inventories of $9,000, and average accounts receivable of $25,000. Assuming that all of Freddy's sales are on credit, what will be the firm's operating cycle?

A) 27.01
B) 18.25
C) 8.76
D) 9.49

Question 47

Suppose that Jamie's Jams has annual sales of $900,000; cost of goods sold of $600,000; average inventories of $11,000; average accounts receivable of $50,000; and an average accounts payable balance of $30,000. Assuming that all of Jamie's sales are on credit, what will be the firm's cash cycle?

A) 45.22
B) 8.72
C) 18.25
D) 26.97

Question 48

PNB Cos. has sales of $250,000 and cost of goods sold of $120,000. The firm had a beginning inventory of $19,000 and an ending inventory of $13,000. What is the length of the days' sales in inventory?

A) 27.74 days
B) 57.79 days
C) 18.98 days
D) 39.54 days

Question 49

Suppose that Tucker Industries has annual sales of $5 million, cost of goods sold of $2.78 million, average inventories of $1,125,000, and average accounts receivable of $500,000. Assuming that all of Tucker's sales are on credit, what will be the firm's operating cycle?

A) 147.71
B) 111.21
C) 184.21
D) 36.5

Question 50

Suppose that Freddie's Fries has annual sales of $500,000; cost of goods sold of $375,000; average inventories of $9,000; average accounts receivable of $25,000; and an average accounts payable balance of $20,000. Assuming that all of Freddie's sales are on credit, what will be the firm's cash cycle?

A) 46.48
B) 1.22
C) 7.54
D) 27.01

Question 51

Suppose that Farrah's Hair Care has annual sales of $100,000, cost of goods sold of $65,000, average inventories of $2,000, and average accounts receivable of $5,000. Assuming that all of Farrah's sales are on credit, what will be the firm's operating cycle?

A) 7.02
B) 11.23
C) 18.25
D) 29.48

Question 52

MC Enterprises estimates that it takes, on average, 7 days for their customers' payments to reach them, 2 day for the payments to be processed and deposited by their bookkeeping department, and 3 more days for the checks to clear once they're deposited. What is their collection float?

A) 12 days
B) 10 days
C) 9 days
D) 7 days

Question 53

Would it be worth it to incur a compensating balance of $2,000 in order to get a 1.5-percent-lower interest rate on a 1-year, pure discount loan of $100,000?

A) yes
B) no
C) not enough information is given to determine It depends upon whether $100,000 x (1 + i) or $102,000 x (1 + [i - .015]) is larger. The compensating balance for the lower loan rate will make sense if:
$100,000 x (1 + i) > $102,000 x (1 + [i - .015])
($100,000/$102,000) x (1 + i) > (1 + [i - .015])
)9804 + .9804i > 1 + i - .015
-)0196i > .0046
I < -.234694
In other words, only if the rate is less than - 23.47%. Since this is not likely to happen, the lower rate associated with the compensating balance isn't worth it.

Question 54

B&O Cos. has sales of $850,000 and cost of goods sold of $490,000. The firm had a beginning inventory of $69,000 and an ending inventory of $54,000. What is the length of the days' sales in inventory?

A) 40.22 days
B) 51.40 days
C) 23.19 days
D) 29.63 days

Question 55

Would it be worth it to incur a compensating balance of $10,000 in order to get a 1-percent-lower interest rate on a 1-year, pure discount loan of $500,000?

A) yes
B) no
C) not enough information is given to know It depends upon whether $500,000 x (1 + i) or $510,000 x (1 + [i -.01]) is larger. The compensating balance for the lower loan rate will make sense if:
$500,000 x (1 + i ) > $510,000 x (1 + [i -.01])
($500,000/$510,000) x (1 + i) > (1 + [i - .01])
)9804 + .9804i > 1 + i - .01
-)0196i > .0096
I < -.4697959
In other words, only if the rate is less than -46.98%. Since this is not likely to happen, the lower rate associated with the compensating balance isn't worth it.

Question 56

Suppose your firm is seeking a 5-year, amortizing $900,000 loan with annual payments and your bank is offering you the choice between a $950,000 loan with a $50,000 compensating balance and a $900,000 loan without a compensating balance. If the interest rate on the $900,000 loan is 9.5 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

A) 9.5%
B) 5.56%
C) 7.43%
D) not enough information is given to determine

Question 57

Suppose that Mack Industries has annual sales of $10 million, cost of goods sold of $6.5 million, average inventories of $1 million, and average accounts receivable of $600,000. Assuming that all of Mack's sales are on credit, what will be the firm's operating cycle?

A) 34.25
B) 21.9
C) 56.15
D) 78.05

Question 58

Suppose that Sam Industries has annual sales of $2 million, cost of goods sold of $950,000, average inventories of $45,000, and average accounts receivable of $90,000. Assuming that all of Sam's sales are on credit, what will be the firm's operating cycle?

A) 0.85
B) 16.43
C) 17.29
D) 33.72

Question 59

Suppose your firm is seeking a 7-year, amortizing $100,000 loan with annual payments and your bank is offering you the choice between a $110,000 loan with a $10,000 compensating balance and a $100,000 loan without a compensating balance. If the interest rate on the $100,000 loan is 7 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

A) 7%
B) 10%
C) 4.34%
D) not enough information is given to know

Question 60

Would it be worth it to incur a compensating balance of $4,000 in order to get a 1.5-percent-lower interest rate on a 1-year, pure discount loan of $300,000?

A) yes if the interest rate is less than 13.64%
B) no if the interest rate is less than 13.64%
C) yes if the interest rate is more than 1.5%
D) not enough information is given to determine

Question 61

Happy Feet would like to maintain their cash account at a minimum level of $75,000, but expects the standard deviation in net daily cash flows to be $5,000; the effective annual rate on marketable securities to be 7 percent per year; and the trading cost per sale or purchase of marketable securities to be $150 per transaction. What will be their optimal upper cash limit?

A) $80,000.00
B) $99,755.64
C) $76,593.42
D) $149,266.92

Question 62

Dandee Lions, Inc. has a cash balance of $105,000; accounts payable of $290,000; inventory of $213,000; accounts receivable of $310,000; notes payable of $95,000; and accrued wages and taxes of $65,000. How much net working capital does the firm need to fund?

A) $8,000
B) $83,000
C) $178,000
D) $18,000

Question 63

Suppose your firm is seeking a 3-year, amortizing $300,000 loan with annual payments and your bank is offering you the choice between a $305,000 loan with a $5,000 compensating balance and a $300,000 loan without a compensating balance. If the interest rate on the $300,000 loan is 8 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

A) 8%
B) 7.09%
C) 1.67%
D) 7.98%

Question 64

If a firm has a cash cycle of 71 days and an operating cycle of 139 days, what is its average payment period?

A) 210 days
B) 68 days
C) 53 days
D) 41 days

Question 65

If a firm has a cash cycle of 75 days and an operating cycle of 120 days, what is its payables turnover?

A) 8.11x
B) 7.19x
C) 5.97x
D) 6.73x

Question 66

Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000; the effective annual rate on marketable securities to be 6 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal upper cash limit?

A) $59,094.77
B) $69,588.47
C) $108,765.41
D) $54,000.00

Question 67

Rose N More Resources faces a smooth annual demand for cash of $50 million; incurs transaction costs of $350 every time they sell marketable securities, and can earn 5.2 percent on their marketable securities. What will be their optimal cash replenishment level?

A) $18,708.29
B) $187,082.87
C) $82,041.27
D) $820,412.65

Question 68

JohnBoy Industries has a cash balance of $59,000; accounts payable of $139,000; inventory of $115,000; accounts receivable of $220,000; notes payable of $175,000; and accrued wages and taxes of $23,000. How much net working capital does the firm need to fund?

A) $140,000
B) $34,000
C) -$25,000
D) $57,000

Question 69

B&B Cos. has sales of $732,000 and cost of goods sold of $323,000. The firm had a beginning inventory of $48,000 and an ending inventory of $39,000. What is the length of the days' sales in inventory?

A) 37.79 days
B) 31.84 days
C) 44.07 days
D) 49.02 days

Question 70

BOGO Shoes would like to maintain their cash account at a minimum level of $100,000, but expects the standard deviation in net daily cash flows to be $7,000; the effective annual rate on marketable securities to be 6.5 percent per year; and the trading cost per sale or purchase of marketable securities to be $175 per transaction. What will be their optimal cash return point?

A) $107,000
B) $133,374.63
C) $144,266.52
D) $101,859.65

Question 71

Joe's Burgers would like to maintain their cash account at a minimum level of $300,000, but expects the standard deviation in net daily cash flows to be $20,000; the effective annual rate on marketable securities to be 5.2 percent per year; and the trading cost per sale or purchase of marketable securities to be $22.55 per transaction. What will be their optimal upper cash limit?

A) $320,000.00
B) $336,492.68
C) $409,478.04
D) $1,009,478.04

Question 72

Happy Feet would like to maintain their cash account at a minimum level of $75,000, but expects the standard deviation in net daily cash flows to be $5,000; the effective annual rate on marketable securities to be 7 percent per year; and the trading cost per sale or purchase of marketable securities to be $150 per transaction. What will be their optimal cash return point?

A) $80,000.00
B) $99,755.64
C) $76,593.42
D) $82,548.18

Question 73

What must the rate be less than to be worth it to incur a compensating balance of $20,000 in order to get a 2-percent-lower interest rate on a 1-year, pure discount loan of $200,000?

A) The rate must be less than 78%.
B) The rate must be greater than 78%.
C) The rate must be greater than -78%.
D) The rate must be less than -78%.

Question 74

Reese's Resources faces a smooth annual demand for cash of $15 million; incurs transaction costs of $125 every time they sell marketable securities, and can earn 4.5 percent on their marketable securities. What will be their optimal cash replenishment level?

A) $28,867.51
B) $288,675.13
C) $61,237.24
D) $6,123.72

Question 75

CM Enterprises estimates that it takes, on average, 7 days for their customers' payments to reach them, 1 day for the payments to be processed and deposited by their bookkeeping department, and 3 more days for the check to clear once they're deposited. What is their collection float?

A) 11 days
B) 10 days
C) 8 days
D) 7 days

Question 76

Stellar Shoes would like to maintain their cash account at a minimum level of $25,000, but expects the standard deviation in net daily cash flows to be $2,000; the effective annual rate on marketable securities to be 5 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal upper cash limit?

A) $27,000
B) $38,092.34
C) $114,277.02
D) $64,277.02

Question 77

Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000; the effective annual rate on marketable securities to be 6 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal cash return point?

A) $59,094.77
B) $69,588.47
C) $181,131.66
D) $54,000.00

Question 78

Rose Resources faces a smooth annual demand for cash of $10 million; incurs transaction costs of $325 every time they sell marketable securities; and can earn 3.9 percent on their marketable securities. What will be their optimal cash replenishment level?

A) $28,867.51
B) $288,675.13
C) $40,824.83
D) $408,248.29

Question 79

If a firm has a cash cycle of 38 days and an operating cycle of 82 days, what is its payables turnover?

A) 8.79x
B) 8.30x
C) 9.53x
D) 10.89x

Question 80

If a firm has a cash cycle of 41 days and an operating cycle of 76 days, what is its average payment period?

A) 52 days
B) 29 days
C) 117 days
D) 35 days