Question 1

A firm paid out a dividend of $700,000 and repaid $1,000,000 of 6-month notes payable. The net effect of these transactions on the firm's net working capital is a decrease of:

Accepted Answer

ΔNWC = -($700,000 + 1m)(decreases in cash) + 1m(decrease in current liabilities) = -$700,000

Question 2

The text suggests that, of the three strategies discussed, the relaxed strategy is probably the worst from the standpoint of managerial evaluation. Why is this thought to be the case, and when may it be an acceptable practice?

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The answer of The text suggests that, of the three...

Question 3

How would you develop a model to analyze the benefits and costs of stretching payables? Assume that cash discounts will be forgone and that short-term bank funds are usually available.

Accepted Answer

The answer of How would you develop a model to...

Question 4

Why do firms need to invest in net working capital?

Accepted Answer

The answer of Why do firms need to invest in...

Question 5

Describe in general a firm's cash conversion cycle.

Accepted Answer

The answer of Describe in general a firm's cash conversion...

Question 6

How do firms develop a short-term financial plan that meets their need for cash?

Accepted Answer

The answer of How do firms develop a short-term financial...

Question 7

A firm has projected the following values for the next three months:

Accepted Answer

The answer of A firm has projected the following values...

Question 8

How does the firm's sources and uses of cash relate to its need for short-term borrowing?

Accepted Answer

The answer of How does the firm's sources and uses...

Question 9

Create the statement of sources and uses of cash from the following entries:

Accepted Answer

The answer of Create the statement of sources and uses...

Question 10

Firms are often known to pay commitment fees to banks for the privilege of receiving a line of credit. Does it make sense for a firm to pay for something that, at least at the present time, it does not know whether it will use?

Accepted Answer

The answer of Firms are often known to pay commitment...

Question 11

Provide five reasons why firms may have a policy of maintaining a minimum cash balance at all times.

Accepted Answer

The answer of Provide five reasons why firms may have...

Question 12

Discuss the concept of maturities matching as that term is used in corporate financial planning.

Accepted Answer

The answer of Discuss the concept of maturities matching as...

Question 13

What is the best level of long-term financing relative to the total capital requirement?

Accepted Answer

The answer of What is the best level of long-term...

Question 14

What are some of the major sources of short-term financing and how are interest rates commonly quoted on these types of loans?

Accepted Answer

The answer of What are some of the major sources...

Question 15

A firm sells its accounts receivables to a factor at a 1.5% discount. The average collection period is 1 month. What is the implicit effective annual interest rate on the factoring arrangement? Suppose the average collection period is 1.5 months. How does this affect the implicit effective annual interest rate?

Accepted Answer

The answer of A firm sells its accounts receivables to...

Question 16

What is the length of the cash conversion cycle for a firm with $50,000 in 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 17

How does long-term financing policy affect short-term financing requirements?

Accepted Answer

The answer of How does long-term financing policy affect short-term...

Question 18

Show the effect of the following transactions on cash, net working capital, and the current ratio. Assume that the current ratio exceeds 1.0 to begin.
a. The firm borrows $1,000 short term and pays $500 in accounts payable.
b. The firm factors $1,000 in receivables at a 5% discount.
c. The firm issues $1,000 in long-term bonds, using the proceeds to pay $800 in payables and purchase $200 in marketable securities.

Accepted Answer

The answer of Show the effect of the following transactions...

Quiz 19: Short-Term Financial Planning