Question 1

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

Accepted Answer

When a firm sells its receivables to a factor, the factor assumes the responsibility for collecting on the account. This is the main advantage of factoring for the selling firm, as it frees up resources and reduces the risk of bad debt. However, the factor may charge a fee or discount for assuming this risk and responsibility.

Question 2

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

Accepted Answer

Investing in Treasury bills typically results in very low returns and may not even keep pace with inflation, resulting in a negative real return. Holding a large surplus of cash may also lower a firm's return on assets (ROA) and return on equity (ROE) ratios. Therefore, investing in other vehicles such as stocks or bonds may bring higher NPV to a firm.

Question 3

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.

Accepted Answer

When a loan is secured by receivables, the firm does assign the receivables to the bank as collateral, but the risk of default on the receivables remains with the firm, not the bank. The bank can collect the receivables if the firm fails to repay the loan, but any shortfall due to defaults on those receivables would still be the firm's responsibility.

Question 4

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

Accepted Answer

When a customer pays a $2,500 bill, the company will receive $2,500 in cash which results in an increase in their cash balance.

Question 5

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

Accepted Answer

Net working capital is calculated as current assets minus current liabilities. If a customer pays a bill resulting from a previous sale, it will increase the cash balance (a current asset) and decrease accounts receivable (also a current asset). However, since the company already recognized the revenue from the sale in a previous period, there is no change in the company's net working capital as a result of the payment.

Question 6

What is the length of the cash conversion cycle for a firm with $50,000 in average inventory, $60,000 in average receivables, $30,000 in average payables, annual sales of $700,000, and a cost of goods sold of 75%?

Accepted Answer

The answer of What is the length of the cash...

Question 7

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

Accepted Answer

When a company borrows $1 million long-term and uses the proceeds to invest in inventory, its current assets (inventory) increase by $1 million while its current liabilities (accounts payable or short-term loans) remain the same. This results in a $1 million increase in net working capital (current assets minus current liabilities).

Question 8

An increase in accounts payable is a source of cash.

Accepted Answer

An increase in accounts payable means that a company has received goods or services on credit and has not yet paid for them. This represents a source of cash as the company has more funds on hand that can be used for other purposes until the accounts payable are eventually settled.

Question 9

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

Accepted Answer

When a company pays off a debt to one of its suppliers, it will decrease its cash balance by the amount paid. In this case, the company will see a $5,000 decrease in cash.

Question 10

Permanent working capital requirements can be financed using commercial paper.

Accepted Answer

Permanent working capital requirements refer to the ongoing operational needs of a company such as inventory, accounts receivable, and fixed assets. These are typically financed using long-term sources of funding such as equity or debt. Commercial paper, on the other hand, is a short-term funding option used to cover temporary working capital needs.

Question 11

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

Accepted Answer

Changing the method of depreciation from straight line to MACRS does not result in a source of cash for the firm. Depreciation is a non-cash expense, meaning it does not involve any actual cash outflows. Changing the method of depreciation may impact the timing and amount of the tax deductions for depreciation, which may result in a lower or higher tax liability, but it does not provide any actual cash inflows or outflows for the firm.

Question 12

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

Accepted Answer

Companies can use their assets as collateral to obtain loans or lines of credit, or they can sell their assets to raise cash.

Question 13

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

Accepted Answer

When short-term interest rates increase, the cost of borrowing money for a firm also increases, leading to higher carrying costs or interest expenses. This, in turn, reduces the profit margins or cash flows of the firm, affecting its financial performance.

Question 14

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

Accepted Answer

Net working capital is the difference between current assets (such as cash, accounts receivable, and inventory) and current liabilities (such as accounts payable and short-term debt). If a company pays off a previous debt to a supplier, it will reduce its accounts payable (current liability) by $5,000, but this will be offset by a reduction in cash (current asset) by the same amount. Therefore, there will be no change in the company's net working capital.

Question 15

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.

Accepted Answer

This is correct. 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 16

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.

Accepted Answer

A line of credit is a flexible, revolving loan that allows a borrower to draw funds as needed, up to a certain credit limit, and then repay the loan balance at any time. The borrower has access to the funds whenever necessary, as long as the outstanding balance does not exceed the credit limit.

Question 17

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

Accepted Answer

An increase in long-term assets requires cash to be spent on acquiring them, so it is actually a use of cash rather than a source.

Question 18

What is the length of the cash conversion cycle for a firm with $55,000 in average inventory, $60,000 in average receivables, $30,000 in average payables, annual sales of $700,000, and a cost of goods sold of 75%?

Accepted Answer