Deck 21: Working Capital Management

Question 1

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 1

current assets and current liabilities.

Question 2

TABLE 21.1
Use the information to answer following question(s).
Polaris Corporation Balance Sheet December 31, 20xx
Refer to Table 21.1. The NWC for Polaris is ________.

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

Answer 2

$45,000

Question 3

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.

Answer 3

NWC = A/R + inventory - A/P.

Question 4

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 5

Each of the following is listed by your authors as a constraint on repositioning funds by an MNE EXCEPT:

A)political constraints.
B)tax constraints.
C)transaction costs.
D)All of the above are listed by your authors.

Question 6

Political risk may motivate parent firms to require foreign subsidiaries to remit all locally generated funds above that required to internally finance growth in sales and planned capital expansions.

Question 7

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 21.1. 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 8

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 9

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 10

The accounts payable period of the operating cycle

A)is 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 11

If all investment inputs are unbundled, part of what might have been classified as residual profits may turn out to be tax-deductible expenses related to a specific purchased benefit.

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

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 14

In anticipation of a foreign exchange loss, an MNE may speed up the transfer of funds out of the company via dividends. When undertaking such an activity the MNE must be concerned with all of the following EXCEPT:

A)interest rate differences between the two countries.
B)the negative impact on host country relations.
C)defection on the part of executives in the home headquarters.
D)MNEs must be concerned with all of the above.

Question 15

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.

Question 16

TABLE 21.1
Use the information to answer following question(s).
Polaris Corporation Balance Sheet December 31, 20xx
Refer to Table 21.1. 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 17

TABLE 21.1
Use the information to answer following question(s).
Polaris Corporation Balance Sheet December 31, 20xx
Refer to Table 21.1. 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 18

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

A)Unbundling funds
B)Bundling funds
C)Coordinating funds
D)none of the above

Question 19

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 21.1. 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 20

Local liquidity needs sometimes impact a firm's worldwide optimal cash position.

Question 21

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 22

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 23

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

Question 24

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 25

Which of the following is NOT a precautionary motive for holding cash?

A)Anticipated funds to be remitted from several Middle East countries are in question due to unrest in the region.
B)The firm has several short-term obligations in unhedged foreign currency-denominated contracts.
C)The firm must pay ordinary wages in two days.
D)All are precautionary motives.

Question 26

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

Question 27

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 28

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 29

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 30

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 31

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 32

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 21.1. 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 33

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 34

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 35

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

Question 36

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 37

________ 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 38

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

Question 39

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

Question 40

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 41

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

Question 42

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