Deck 20: Short-Term Financial Planning

Question 1

Company that pays $5,000 previously owed to one of its suppliers will see no change in its net working capital.

Answer 1

True

Question 2

An increase in long-term assets is a source of cash.

Answer 2

False

Question 3

If a firm increases its accounts payable period,other things equal,it increases the cash conversion cycle.

Answer 3

False

Question 4

Company which sees a customer pay a $2,500 bill resulting from a previous sale will see no change in its net working capital.

Question 5

The lower the average level of inventory,the more profitable the firm.

Question 6

Company which sees a customer pay a $2,500 bill resulting from a previous sale will see a $2,500 increase in cash.

Question 7

Working capital,correctly defined,includes both current assets and current liabilities.

Question 8

A firm can reduce the cash conversion cycle by selling fewer goods on credit.

Question 9

Keeping a large surplus of cash and investing it in Treasury bills will bring positive NPV to a firm.

Question 10

Company which borrows $1 million long-term and invests the proceeds in inventory will see a $1 million increase in its net working capital.

Question 11

An increase in current liabilities is a source of cash for the firm.

Question 12

Net working capital will decrease when a firm buys raw materials on credit.

Question 13

Carrying costs are the cost of holding inventory.

Question 14

A reduction in inventory levels from year-end to year-end would be considered a source of cash.

Question 15

A firm's inventory period can be estimated by the ratio of average inventory to daily output.

Question 16

An increase in short-term interest rates will increase the carrying costs of the firm.

Question 17

When accounts payable exceed the sum of inventory and accounts receivable,net working capital is negative.

Question 18

Permanent working capital requirements can be financed using commercial paper.

Question 19

Company that pays $5,000 previously owed to one of its suppliers will see a $5,000 decrease in cash.

Question 20

An increase in accounts payable is a source of cash.

Question 21

Changing the method of depreciation from straight line to MACRS is a source of cash for the firm.

Question 22

During the year the following changes were observed. (I.)Inventory period increased by 12 days
(II))Receivables period decreased by 6 days
(III.)Accounts payable period increased by 4 days
Find the net change in cash conversion cycle.

A) -10 days
B) +2 days
C) +10 days
D) +14 days

Question 23

The cost of issuing commercial paper is generally lower than that of a line of credit.

Question 24

When a loan is secured by receivables,the firm assigns the receivables to the bank.If the firm fails to repay the loan,the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.

Question 25

Once the firm has sold its receivables,the non-recourse factors bear all the responsibility for collecting on the account.

Question 26

A firm borrows $100,000 from the bank,but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded quarterly?

A) 12.03%
B) 13.00%
C) 14.05%
D) 15.87%

Question 27

A firm borrows $200,000 from the bank,but has to maintain a compensating balance of $15,000 with the bank.The annual interest rate for the loan is 13%.What is the effective annual rate if the interest is compounded annually?

A) 12.03%
B) 13.00%
C) 14.05%
D) 14.41%

Question 28

With a line of credit,a firm can borrow and repay whenever it wants so long as the balance does not exceed the credit limit.

Question 29

A firm borrows $100,000 from the bank,but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded semi-annually?

A) 12.03%
B) 13.00%
C) 14.05%
D) 15.56%

Question 30

If the effective rate of interest if 15.55% based on monthly compounding,determine the nominal rate of interest.

A) 17.54%
B) 16.54%
C) 15.54%
D) 14.54%

Question 31

Calculate the effective rate of 12% compounded quarterly.

A) 11.55%
B) 12.55%
C) 13.55%
D) 14.55%

Question 32

A firm has $50 million and $60 million credit sales during the first two quarters of the year.Eighty percent of the receivables are collected in the same quarter and the balance in the next quarter.What will be the total collection for the firm in the second quarter?

A) $55 million
B) $58 million
C) $88 million
D) $98 million

Question 33

What was the sales volume in the current quarter if beginning accounts receivable,at $5,000,was $1,000 higher than ending,and $20,000 was collected?

A) $19,000
B) $20,000
C) $21,000
D) $24,000

Question 34

What is the annual cost of goods for a firm,with accounts payable period of 35 days and average accounts payable of $600,000.

A) $5,753,425
B) $6,171,429
C) $6,257,143
D) $17,142,857

Question 35

How high can accounts receivable be allowed to grow before the firm's receivables period exceeds 50 days if annual sales equal $5 million and the cash conversion cycle equals 75 days?

A) $342,466
B) $684,932
C) $1,027,397
D) $1,712,329

Question 36

Field warehousing is a system of protecting the borrower against spoiled or stolen inventory.

Question 37

The factoring firm,under the terms recourse,bears responsibility for default on accounts receivable purchased from a firm.

Question 38

When a loan is secured by receivables,the firm assigns the receivables to the bank.If the firm fails to repay the loan,the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.The risk of default on the receivables is now borne by the bank.

Question 39

Some companies solve their financing problem by borrowing on the strength of their current assets; others solve it by selling their current assets.

Question 40

A firm borrows $100,000 from the bank,but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded monthly?

A) 12.03%
B) 13.00%
C) 14.05%
D) 16.08%

Question 41

A credit card company charges its customers an annual interest of 21.0% on the outstanding monthly balance.The effective annual rate for the customer will be:

A) 21.00%
B) 21.20%
C) 23.14%
D) 37.93%

Question 42

Bank lines of credit must be judiciously requested because the lines often:

A) accrue interest regardless of whether funds are borrowed
B) require payment of a commitment fee to establish
C) appear as a liability on the firm's balance sheet
D) have a negative impact on the firm's credit history

Question 43

Which of the following statements is correct concerning marketable securities on a firm's balance sheet?

A) all are U.S. government obligations
B) all earn interest income
C) all are without price risk
D) not all are guaranteed against loss

Question 44

What strategy regarding long- versus short-term financing is not being followed if managers resort to short-term investing during downturns in the business cycle?

A) a relaxed strategy
B) a middle-of-the-road strategy
C) a restrictive strategy
D) both b and c above

Question 45

What is the payable period for a firm with average accounts payable of $4 million and annual cost of goods sold of $44 million?

A) 20.0 days
B) 30.0 days
C) 35.6 days
D) 33.2 days

Question 46

What is the cash conversion cycle for a firm with a receivables period of 40 days,a payables period of 30 days,and an inventory period of 60 days?

A) 10 days
B) 50 days
C) 70 days
D) 130 days

Question 47

Ignoring defaults,what is the approximate effective cost of factoring if receivables are sold at a 4% discount and the average collection period is 2 months?

A) 19.40%
B) 24.00%
C) 26.53%
D) 27.75%

Question 48

A firm sells its $1,000,000 receivables to a factor for $960,000.Average collection period is one month.The effective annual rate is:

A) 27.43%
B) 48.00%
C) 60.10%
D) 63.21%

Question 49

Optimizing cash balances involves the equating of:

A) total benefits and total opportunity costs
B) average benefits and average opportunity costs
C) accounts receivable and accounts payable
D) marginal benefits and marginal opportunity costs

Question 50

Calculate the accounts receivable period for a firm with annual credit sales of $10 million and average accounts receivable of $2 million.

A) 18.25 days
B) 20.00 days
C) 51.00 days
D) 73.00 days

Question 51

A firm sells its accounts receivable to a factor at a 5% discount.If the average collection period is 1 month,determine the effective annual rate of interest on the factoring.

A) 90.06%
B) 85.06%
C) 80.06%
D) 75.06%

Question 52

A firm sells its accounts receivable to a factor at a 2% discount.If the average collection period is 1 month,determine the effective annual rate of interest on the factoring.

A) 27.43%
B) 28.53%
C) 29.63%
D) 30.73%

Question 53

A firm's inventory and accounts payable periods are 80 and 42 days respectively.How long can the firm's receivables period be in order to have no longer than a 65 day cash conversion cycle?

A) 27 days
B) 38 days
C) 57 days
D) 103 days

Question 54

What is the cash conversion cycle for a firm with $3 million average inventories,$1.5 million average accounts payable,a receivables period of 45 days,and an annual cost of goods sold of $18 million?

A) 14.59 days
B) 46.25 days
C) 75.41 days
D) 136.25 days

Question 55

Your accountant suspects a mistake in the computation of the payables period,which has been reported at 54.75 days.Calculate the correct payables period,given the following: annual sales = $1,200,000,annual cost of goods sold = $700,000,average accounts payable = $105,000.

A) 31.94 days
B) 54.75 days
C) 179.58 days
D) 212.92 days

Question 56

A line of credit would be considered:

A) an agreement to borrow up to a specific total amount on demand from a bank.
B) a short-term unsecured loan with minimum interest expense.
C) a secured loan to be amortized over three to five years.
D) a long-term, permanent source of funding.

Question 57

What is the inventory period for a firm with an annual cost of goods sold of $8 million,$1.5 million in average inventory,and a cash conversion cycle of 75 days?

A) 6.56 days
B) 18.75 days
C) 53.33 days
D) 68.44 days

Question 58

Ignoring defaults,what is the approximate effective cost of factoring if receivables are sold at a 2% discount and the average collection period is 1 month?

A) 19.40%
B) 24.00%
C) 26.53%
D) 27.43%

Question 59

The goal of managing working capital,such as inventory,should be to minimize the:

A) costs of carrying inventory
B) opportunity cost of capital
C) aggregate of carrying and shortage costs
D) amount of spoilage or pilferage

Question 60

Which of the following is correct for a firm that reduces its accounts receivable balance from the previous quarter?

A) collections exceeded beginning receivables balance
B) sales exceeded collections
C) beginning receivables balance exceeded sales
D) collections exceeded sales

Question 61

Managers are alerted to projected cash shortages by way of the:

A) statement of sources and uses of cash
B) pro forma balance sheet
C) cash budget
D) monthly bank statements

Question 62

What motivation is provided for managers not to follow the relaxed strategy of long- versus short-term financing?

A) transaction costs are required to continually obtain financing
B) short-term investment income is often unattractive
C) investment opportunities must frequently be ignored
D) long-term financing has burdensome tax consequences

Question 63

If a firm's current ratio exceeds 1.0,what happens as a result of paying cash to reduce accounts payable?

A) net working capital increases
B) net working capital decreases
C) current ratio increases
D) current ratio decreases

Question 64

A firm has borrowed $1 million and assigned its receivables to the lender.Because of defaults,the receivables prove insufficient to cover the debt.In this case,the:

A) lender bears the risk of default
B) firm bears the risk of default
C) default risk is shared between lender and firm
D) insurance carrier will bear the risk

Question 65

Which of the following would not be included in a cash budget?

A) income tax payments
B) cash receipts
C) dividend payments
D) depreciation

Question 66

The time interval between paying for raw materials and collecting on sales of finished goods is known as the:

A) inventory cycle
B) matching cycle
C) cash conversion cycle
D) accounts receivable cycle

Question 67

What will be the change in net working capital if you observe the following changes in current assets and current liabilities? (I.)Current assets increase by $170,000.
(II))Current liabilities decrease by $60,000.

A) Increase by $110,000
B) Increase by $230,000
C) Decrease by $110,000
D) Decrease by $230,000

Question 68

Which of the following would act to reduce the carrying costs of inventory?

A) the inventory is capable of spoiling
B) the inventory will rapidly go out of style
C) general interest rates decrease in the economy
D) general interest rates increase in the economy

Question 69

Which of the following would not be considered a use of cash?

A) dividends
B) decreased accounts payable
C) depreciation
D) increased accounts receivable

Question 70

The safety margin kept by the bank on loan against liquid assets is called:

A) a haircut
B) a line of credit
C) factoring
D) filed warehousing

Question 71

If the Statement of Sources and Uses of Cash shows a decrease in cash balance,which of the following changes might have eliminated that decrease?

A) increase in cash dividends paid
B) increase in accounts payable
C) increase in accounts receivable
D) increase in inventories

Question 72

When product demand is high,firms following a "middle of the road policy" for long- versus short-term financing will:

A) borrow short-term
B) borrow long-term
C) hold marketable securities
D) sell marketable securities

Question 73

If managers could automatically change each term in the equation of the cash conversion cycle,which of the following would be expected to provide the most benefit?

A) decrease numerator of each term by 10%
B) decrease denominator of each term by 10%
C) increase numerator of each term by 10%
D) increase denominator of each term by 10%

Question 74

When a firm finances long-term assets with short-term sources of funding,it:

A) reduces the risk of cash shortage
B) will have lower interest expense
C) improves the leverage ratio
D) is ignoring the principle of matched maturities

Question 75

Field warehousing can be an important source of:

A) additional storage space for cash-strapped firms
B) investing for those who follow the "relaxed cash strategy"
C) cash management for those who factor receivables
D) short-term financing with low risk to the lender

Question 76

A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable (due for 90 days.)The net effect of these transactions on the firm's net working capital is:

A) decrease of $1,700,000
B) decrease of $1,000,000
C) decrease of $700,000
D) decrease of $300,000

Question 77

Firms that continually invest in non-trivial amounts of marketable securities may be guilty of:

A) excessive short-term borrowing
B) not matching their sources and uses of cash
C) incurring excessive shortage costs
D) not maximizing shareholder returns

Question 78

In "field warehousing" the inventory is kept by the:

A) borrowing firm
B) lending institution
C) independent warehousing company
D) jointly by the firm and the lender

Question 79

As for the preparation of cash budgets,capital expenditures are:

A) not included because these items are depreciated
B) included as sources of operating cash
C) included as uses of cash and make the budget lumpy
D) traditionally offset as a use of cash by interest income

Question 80

Ignoring the risk of theft,cash balances cannot spoil,yet managers are concerned with carrying costs.Why?

A) the federal government may devalue the currency
B) higher balances require additional supervisors
C) cash balances are idle and face an opportunity cost
D) embezzlement is a real risk in most firms