Deck 19: Working Capital Management

Question 1

The operating cycle begins with the quotation period and ends with the accounts payable period.

Answer 1

False

Question 2

In a country with a relatively high tax rate, it make sense the the MNE to reposition cash flows TO that country.

Answer 2

False

Question 3

Of the following, which would NOT be a significant decision-making factor in a multinational firm's repositioning decision-making?

A)the subsidiary's tax environment (high or low)
B)the stability of the local currency
C)the ability to move capital in and out of the subsidiary's country
D)All of the above are significant factors.

Answer 3

All of the above are significant factors.

Question 4

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 5

TrinityApps 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 6

The constraints on repositioning of funds that occur when exchanging one currency for another are considered to be primarily political constraints.

Question 7

________ 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 8

Typically, the inventory period and the accounts receivable period at least partially overlap in the firms operating cycle.

Question 9

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 10

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 11

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 12

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 13

Political constraints can block the transfer of funds either overtly or covertly. OVERT blockage occurs when dividends or other forms of fund remittances are severely limited, heavily taxed, or excessively delayed by the need for bureaucratic approval.

Question 14

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.

Question 15

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 16

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

Question 17

Typically, the inventory period and the accounts payable period at least partially overlap in the firms operating cycle.

Question 18

The MNE would prefer to leave capital with a firm in a country with high growth prospects over the alternative of leaving capital with a firm in a country with low growth prospects (other factors equal).

Question 19

The before-tax/after-tax distinction is quite significant to a parent company attempting to repatriate funds in the most tax-efficient method if it is attempting to manage its own foreign tax credit/deficits between foreign units.

Question 20

Unbundling of funds by an MNE may be a useful practice for which of the following reasons?

A)An increase in the funds flow (charges)in any of the before-tax categories reduces the taxable profits of the foreign subsidiary if the host-country tax authorities acknowledge the charge as a legitimate expense.
B)An item-by-item matching of remittance to input, such as royalties for intellectual property, and fees for patents and advice, is equitable to the host country and foreign investor alike.
C)Unbundling facilitates allocation of overhead from a parent''s international division, so-called shared services, to each operating subsidiary in accordance with a predetermined formula.
D)All of the reasons listed above

Question 21

The authors present empirical evidence that shows the days sales basis for working capital to be 30 days GREATER in the U.S. compared to a similar industry in Europe.

Question 22

Instruction 19.1: Use the information to answer the following question(s).
Sunny Manufacturing 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 Sunny Manufacturing is available at an annual rate of 9.6%. Sunny Manufacturing has just purchased $400,000 of plastic chips from Sun Chemical.
Refer to Instruction 19.1. Should Sunny Manufacturing take the discount offered by Sun Chemical?

A)Yes, Sunny Manufacturing 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, Sunny Manufacturing will not have to pay any interest if they just pay in 45 days.
C)Yes, Sunny Manufacturing's short term borrowing rate of 9.6% is less than Sun's offered cost of carry of 22.9%.
D)No, it costs Sunny Manufacturing 22.9% to accept the discount and they are better off paying the full amount in 45 days.

Question 23

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 24

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 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

TABLE 19.1
Use the information to answer following question(s).
TrinityApps Corporation Balance Sheet December 31, 20xx
Refer to Table 19.1. If TrinityApps 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 27

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

Question 28

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 29

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 30

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 31

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 32

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 33

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 34

TABLE 19.1
Use the information to answer following question(s).
TrinityApps Corporation Balance Sheet December 31, 20xx
Refer to Table 19.1. The NWC for TrinityApps is:

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

Question 35

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 36

Instruction 19.1: Use the information to answer the following question(s).
Sunny Manufacturing 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 Sunny Manufacturing is available at an annual rate of 9.6%. Sunny Manufacturing has just purchased $400,000 of plastic chips from Sun Chemical.
Refer to Instruction 19.1. 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 37

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 38

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

Question 39

Instruction 19.1: Use the information to answer the following question(s).
Sunny Manufacturing 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 Sunny Manufacturing is available at an annual rate of 9.6%. Sunny Manufacturing has just purchased $400,000 of plastic chips from Sun Chemical.
Refer to Instruction 19.1. What is the amount of money Sunny Manufacturing will save on accounts payable if they accept the discount?

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

Question 40

TABLE 19.1
Use the information to answer following question(s).
TrinityApps Corporation Balance Sheet December 31, 20xx
Refer to Table 19.1. NWC currently makes up what percentage of total firm value for TrinityApps?

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

Question 41

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 42

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

Question 43

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 44

A reason for holding all precautionary balances in a central pool is that the total pool, if centralized, can be reduced in size without any loss in the level of protection.

Question 45

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 46

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 47

A significant problem with centralized cash depositories is that they are isolated from the rest of the firm and tend to be at an information disadvantage.

Question 48

Regarding wire transfers, CHIPS actually clears transactions whereas SWIFT does not.

Question 49

A disadvantage of a centralized cash management system is that managers will not be able to get the lowest average rate available for the firm. Instead, it misses out on the really low borrowing rates.

Question 50

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 51

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

Question 52

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 53

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

Question 54

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 55

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

Question 56

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 57

________ 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