Deck 30: Working Capital Management

Question 1

Suppose you purchase goods on terms of 3/10,net 60.Taking compounding into account,what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)

A)32%
B)25%
C)91%
D)28.2%

Answer 1

25%

Question 2

Which of the following trade credit terms is not valid?

A)3/10,net 50
B)8/10,EOM,net 60
C)2/10,net 30
D)All of these options are valid credit terms.

Answer 2

All of these options are valid credit terms.

Question 3

When credit is offered with only the invoice as a formal instrument of credit,the credit procedure is called an:

A)invoice account.
B)open account.
C)unsecured account.
D)unsecured note.

Answer 3

open account.

Question 4

The High-Rise Building Company (HRBC)uses 400,000 tons of stone per year.The carrying costs are $100/ton.The cost per order is $500.Calculate the optimal carrying costs.(Assume a linear usage rate and that HRBC runs its inventory down close to zero as the replenishment order arrives.)

A)$200,000
B)$100,000
C)$75,000
D)$50,000

Question 5

The High-Rise Building Company uses 400,000 tons of stone per year.The carrying costs are $100/ton.The cost per order is $500.Calculate the optimal number of orders per year.

A)400
B)100
C)200
D)300

Question 6

The net credit period for a company with terms of 3/10,net 60 is:

A)50 days.
B)60 days.
C)10 days.
D)57 days.

Question 7

The High-Rise Building Company uses 400,000 tons of stone per year.The carrying costs are $100/ton.The cost per order is $500.Calculate the optimal annual order costs.

A)$200,000
B)$100,000
C)$50,000
D)$150,000

Question 8

If a firm grants credit with terms of 3/10,net 30,the customer:

A)must pay a penalty of 3% when payment is made in more than 10 days after the sale.
B)must pay a penalty for 10% when payment is made in more than 3 days after the sale.
C)receives a discount of 3% when payment is made in less than 10 days after the sale.
D)receives a discount of 10% when payment is made in less than 3 days after the sale.

Question 9

Suppose you purchase goods on terms of 2/10,net 50.Taking compounding into account,what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)

A)2.0%
B)20.2%
C)10.2%
D)18.6%

Question 10

Accounts receivable include:
I.trade credit;
II.consumer credit;
III.inventories

A)I only
B)II only
C)III only
D)I and II only

Question 11

Which of the following transactions involve credit?
I.COD;
II.2/30,net 60;
III.2/10,EOM,net 60;
IV.CBD

A)I only
B)I and IV only
C)IV only
D)II and III only

Question 12

Suppose you purchase goods on terms of 1/10,net 30.Taking compounding into account,what annual rate of interest is implied by the cash discount? (Assume a year has 365 days.)

A)9.6%
B)9.2%
C)20.1%
D)44.6%

Question 13

Firms employ the following types of inventories:

A)raw material.
B)work in process.
C)finished goods.
D)all of these options.

Question 14

A trade acceptance,when immediate payment is not required,is a(n):

A)sight draft.
B)time draft.
C)bill of lading.
D)open account.

Question 15

The costs of holding inventory include:
i.carrying cost; II)order cost; III)insurance cost

A)I only
B)I and II only
C)III only
D)I,II,and III

Question 16

The High-Rise Building Company uses 400,000 tons of stone per year.The carrying costs are $100/ton.The cost per order is $500.Calculate the economic order quantity per order.

A)1,000 tons
B)2,000 tons
C)3,000 tons
D)4,000

Question 17

The economic order quantity (EOQ)is calculated using:

A)Q = √[(2 × sales × cost per order)/(carrying cost)].
B)Q = √[(2 × sales × carrying cost)/(cost per order)].
C)Q = √(2 × sales × cost per order × carrying cost).
D)none of these options.

Question 18

When a firm grants credit to a customer,this gives rise to a(n):
I.accounts receivable
II.COD
III.CBD

A)I only.
B)II only.
C)III only.
D)II and III only.

Question 19

In the EOQ inventory model,the optimal order size is achieved when:

A)carrying costs > order costs.
B)carrying costs < order costs.
C)carrying costs = order costs.
D)There is no optimal order size as a smaller size is always better.

Question 20

The High-Rise Building Company uses 400,000 tons of stone per year.The carrying costs are $100/ton.The cost per order is $500.Calculate the total costs of optimal inventory.

A)$200,000
B)$150,000
C)$100,000
D)$50,000

Question 21

The following are the main methods that firms use to send and receive money electronically:

A)direct payments.
B)direct deposits.
C)wire transfers.
D)all of these options.

Question 22

A customer has ordered goods generating a present value of $1,200.The present value of production costs is $800.Under what conditions should you extend credit if there is no possibility of repeat orders?

A)If the probability of payment exceeds 0.67
B)If the probability of payment exceeds 0.75
C)If the probability of payment exceeds 0.80
D)If the probability of payment exceeds 0.90

Question 23

The default rate of Don's new customers has been running at 20%.The average sale for each new customer amounts to $500,generating a present value of profit of $200 and a 30% chance of a second order next year.The default rate on second orders is only 5%.If the interest rate is 6%,what is the expected profit from each new customer?

A)$152.50
B)$149.53
C)$275.00
D)$139.62

Question 24

An irrevocable letter of credit is issued by the:

A)exporter's bank.
B)importer's bank.
C)Dun & Bradstreet.
D)government

Question 25

The following are electronic funds transfer systems available in the U.S.except:

A)Fedwire.
B)CHIPS.
C)SWIFT.
D)ACH.

Question 26

Which of the following countries is the heaviest user of checks:

A)U.S.
B)U.K.
C)France
D)Canada

Question 27

In the U.S.,export business is insured by:

A)Export-Import Bank in association with Foreign Credit Insurance Association (FCIA)
B)Citibank
C)SBA
D)U.S.Department of the Treasury

Question 28

The default rate of Demurrage Associates' new customers has been running at 10%.The average sale for each new customer amounts to $800,generating a present value of profit of $100 and a 40% chance of a second order next year.The default rate on second orders is only 2%.If the interest rate is 9%,what is the expected profit from each new customer? (Examine only the first two periods of potential orders.)

A)$88.70
B)$47.74
C)$43.25

Question 29

Tom's Toys is currently experiencing a bad debt ratio of 6%.Tom is convinced that,with tighter credit controls,he can reduce this ratio to 2%; however,he expects sales to drop by 8% as a result.The cost of goods sold is 75% of the selling price.Per $100 of current sales,what is Tom's expected profit under the proposed credit standards?

A)$15.20
B)$23.00
C)$19.00
D)$21.20

Question 30

In the U.S.,large-value electronic payments are made through:
I.Fedwire;
II.ACH;
III.CHIPS

A)I only
B)II only
C)III only
D)I and III only

Question 31

Factoring refers to:

A)determining the aging schedule of the firm's accounts receivable.
B)the sale of a firm's accounts receivable to another firm.
C)the determination of the average collection period.
D)scoring a customer based on the 5 C's of credit.

Question 32

A customer has ordered goods generating a present value of $2,000.The present value of production costs is $1,800.Under what conditions should you extend credit if there is no possibility of repeat orders?

A)If the probability of payment exceeds 0.67
B)If the probability of payment exceeds 0.75
C)If the probability of payment exceeds 0.80
D)If the probability of payment exceeds 0.90

Question 33

Which of the following statements is true?
I.New companies must be prepared to incur more bad debts than established businesses as part of the cost of building up a good-customers list.
II.Generally,repeat orders warrant easier credit terms.
III.Companies with high profit margins need to be particularly careful about extending credit to high-risk customers.

A)I only
B)II only
C)III only
D)I and II only

Question 34

Terry's Place is currently experiencing a bad debt ratio of 4%.Terry is convinced that,with looser credit controls,this ratio will increase to 8%; however,she expects sales to increase by 10% as a result.The cost of goods sold is 80% of the selling price.Per $100 of current sales,what is Terry's expected profit under the proposed credit standards?

A)$26.00
B)$15.40
C)$13.20
D)$25.60

Question 35

Companies frequently use information from the following sources when conducting their credit analysis:
I.financial statement supplied by the customer;
II.payment history supplied by other firms;
III.payment history supplied by banks

A)I only
B)II only
C)II and III only
D)I,II,and III

Question 36

Which of the following statements regarding "bankers' acceptances" is true?
I.Bankers' acceptances are used in overseas trading.
II.Bankers' acceptances are bought and sold on a discount basis.
III.Bankers' acceptances are guaranteed by the bank.

A)I only
B)II only
C)III only
D)I,II,and III

Question 37

A commercial draft can be a:
I.sight draft;
II.time draft;
III.overdraft

A)I only
B)II only
C)III only
D)I and II only

Question 38

A customer has ordered goods generating a present value of $800.The present value of production costs is $600.Under what conditions should you extend credit if there is no possibility of repeat orders?

A)If the probability of payment exceeds 0.67
B)If the probability of payment exceeds 0.80
C)If the probability of payment exceeds 0.75
D)If the probability of payment exceeds 0.90

Question 39

Exporters who require guarantee of payment will ask for:

A)trade acceptances.
B)an open account.
C)an irrevocable letter of credit.
D)none of these options.

Question 40

Determining the appropriate target cash balance involves assessing the trade-off between:

A)income and diversification.
B)the benefit and cost of liquidity.
C)balance sheet strength and transaction needs.
D)all of these options.

Question 41

"Eurodollars" or "international dollars" are:

A)dollars deposited in banks outside the U.S.
B)dollars deposited in the U.S.by foreigners.
C)dollars held by foreign governments.
D)Euros or international currency deposited in U.S.branches of foreign banks.

Question 42

The most common cash management technique used to speed up collections is:

A)wire transfers.
B)lockboxes.
C)in-house processing.
D)SWIFT.

Question 43

Which of the following is a real-time gross settlement system:

A)Fedwire.
B)CHIPS.
C)ACH.
D)all of these options.

Question 44

A municipal variable rate demand bond (VRDB):
I.is a long-term security;
II.has interest payments linked to the level of short-term interest rates;
III.may periodically be sold back to the issuer at face value;
IV.is tax-exempt

A)I only
B)I and II only
C)I,II,and III only
D)I,II,III,and IV

Question 45

In the U.S.,small-value electronic transfers are made through:
I.Fedwire;
II.ACH;
III.CHIPS

A)I only
B)II only
C)III only
D)I and III only

Question 46

If the short-term commercial paper rate is 6% and the corporate tax rate is 35%,what yield would a corporation require on an investment in floating-rate preferred stock? Assume the default risk is the same as for commercial paper.

A)6.0%
B)39%
C)9.2%
D)4.4%

Question 47

Negotiable CDs are issued by:

A)the U.S.government.
B)federal agencies.
C)banks.
D)corporations.

Question 48

A large firm may hold substantial cash balances because:

A)these balances are required by the bank in the form of compensating balances.
B)the company may have accounts in many different banks.
C)the company may have a very decentralized organization.
D)all of these options.

Question 49

The market for short-term investments is called:

A)capital market.
B)stock market.
C)bond market.
D)money market.

Question 50

A repurchase agreement occurs when:

A)a company agrees to buy back its commercial paper before maturity.
B)a bank depositor agrees,in advance,to reinvest money in a negotiable certificate of deposit.
C)an investor buys part of a government security dealer's inventory and simultaneously agrees to sell it back.
D)the federal government agrees to buy T-bills.

Question 51

A tax-paying corporation would prefer to invest short-term money in:

A)warrants.
B)floating-rate preferred stock.
C)common stock.
D)long-term bonds.

Question 52

Floating-rate preferred stock offers competitive rates of return with traditional money market instruments but:

A)is not rated by Moody's or Standard & Poor's.
B)still provides the corporate investor with the tax exclusion on dividend income.
C)has a fixed rate of dividend income.
D)offers a highly competitive trading market.

Question 53

Firms that receive a large volume of checks use the following to speed up availability of funds:

A)concentration banking.
B)retail banking.
C)money market deposit account.
D)none of these options.

Question 54

Which of the following have the most developed secondary market?

A)Treasury bills
B)commercial paper
C)repurchase agreements
D)bankers' acceptances

Question 55

The main advantage of using a netting system to settle foreign currency payments is that it:

A)drastically reduces the number of payments.
B)increases the number of payments.
C)reduces the number of foreign currencies.
D)none of these options.

Question 56

The discount on a 91-Treasury bill is 5.65%.What is the annually compounded rate of return? (Assume a 360-day discount basis.)

A)5.2%
B)5.9%
C)5.6%
D)5.5%

Question 57

The discount on a 91-Treasury bill is 5.2%.What is the annually compounded rate of return? (Assume a 360-day discount basis.)

A)4.8%
B)5.2%
C)5.4%
D)5.0%

Question 58

The following are advantages of electronic payment systems except:

A)record keeping is easy.
B)marginal cost of transaction is low.
C)float is drastically reduced.
D)initial investment is high.

Question 59

The following are money market instruments except:

A)T-bills.
B)federal agency discount notes.
C)commercial paper.
D)preferred stocks.

Question 60

If the short-term commercial paper rate is 10% and the corporate tax rate is 35%,what yield would a corporation require on an investment in floating-rate preferred stock? Assume the default risk is the same as for commercial paper.

A)15.2%
B)10.0%
C)7.3%
D)6.6%

Question 61

If a commercial draft is an order to pay immediately,it is called a time draft.

Question 62

Fedwire is a system that transfers money between banks.

Question 63

If goods are sold on an open account,the customer is asked to sign an IOU.

Question 64

Discuss the general principles that should be used for credit decisions.

Question 65

In the U.S.,export credit insurance is provided by the Export-Import Bank in association with a group of insurance companies known as the Foreign Credit Insurance Association (FCIA).

Question 66

Lockbox systems are used to speed up collections.

Question 67

Briefly explain different terms of sale used in practice.

Question 68

What is the effective annual cost of not taking a discount under terms 3/30,net 60?

Question 69

Bankers' acceptances are used in overseas trade.

Question 70

What are the major objectives of credit management?

Question 71

As an example of trade credit terms,"3/10,EOM,net 60," is not valid.

Question 72

Direct deposits are processed through Automated Clearing House (ACH)system.

Question 73

What is the main objective of a collection policy?

Question 74

A factor buys a firm's receivables,and then the firm's customer makes payments directly to the factor.

Question 75

Suppose that a firm sells goods on terms of 2/30,net 60.Those customers who do not take the cash discount are effectively borrowing money at approximately 2% per year.

Question 76

Concentration banking is used to slow down disbursements.

Question 77

The market for short-term investments is known as the capital market.

Question 78

One good reason to hold cash is that cash provides more liquidity than other marketable securities.

Question 79

A commercial draft is simply an order to pay.

Question 80

Briefly describe the most widely used commercial credit instruments.