Deck 19: Short-Term Financial Planning

Question 1

A company that borrows $1 million short term and invests the proceeds in inventory will see no change in its net working capital.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

Banks will not usually lend the full value of the assets that are used as security.The safety margin is likely to be even larger in the case of loans that are secured by inventory.

Answer 3

True

Question 4

A company that pays out a $2 million cash dividend will see a $2 million decrease in working capital.

Question 5

The factoring firm bears responsibility for default on accounts receivable purchased from a firm.

Question 6

A company that sells $5 million of marketable securities for cash will see no change in its net working capital.

Question 7

A company that sells $5 million of marketable securities for cash will see a $5 million increase in cash.

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

A cash conversion cycle is the period between a firm's payment for materials and collection on its sales.

Question 15

Biotech firms require large amounts of cash if their drugs succeed in gaining regulatory approval.Therefore,these firms often have substantial cash holdings to fund their possible investment needs.

Question 16

A company that borrows $1 million short term and invests the proceeds in inventory will see its cash position unchanged.

Question 17

Currently,receivables account for the majority of the current assets of retail firms.Cash and short-term securities are more important for oil companies,and inventory makes up the bulk of the current assets of telecom and software companies.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

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

Question 22

Once the firm has sold its receivables,the factor bears all the responsibility for collecting on the account.

Question 23

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

Question 24

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

Question 25

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

Question 26

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 27

A company that borrows $1 million long term and invests the proceeds in inventory will see its cash position unchanged.

Question 28

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 29

The most common benchmarks of bank loans are the London Interbank Offered Rate (LIBOR),the federal funds rate,or the bank's prime rate.

Question 30

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

Question 31

When financial managers are asked the key reason for choosing short-term rather than long-term debt,they often say that they try to "match" the maturities of the firm's assets and liabilities.

Question 32

Permanent working capital requirements can be financed using commercial paper.

Question 33

The credit crisis of 2007 to 2009 largely left the market for commercial paper unaffected.

Question 34

A company that borrows $1 million long term and invests the proceeds in inventory will see a $1 million increase in its net working capital.

Question 35

An increase in accounts payable is a source of cash.

Question 36

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 37

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

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

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

Question 40

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 41

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 42

What is the cash conversion cycle for a firm with $3 million average inventories,$1.5 million average accounts payable,a receivables period of 40 days,and an annual cost of goods sold of $18 million?

A) 14.59 days
B) 46.25 days
C) 70.41 days
D) 136.25 days

Question 43

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 44

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 45

A firm's permanent working capital refers to the:

A) difference between current assets and current liabilities.
B) minimum difference between current assets and current liabilities.
C) portion of net working capital that is financed from long-term sources.
D) amounts that must be held to meet debt covenants.

Question 46

Which of the following statements about total capital requirement is least likely to be correct for a profitable firm?

A) Requirements remain constant over time.
B) Seasonal variations are often experienced.
C) The trend is often upward-sloping.
D) A portion of working capital is permanent.

Question 47

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 48

Which of the following is least likely to be correct about the factoring of receivables?

A) The selling firm bears the risk of default.
B) The higher the perceived quality of the receivables, the lower the discount rate.
C) The discount is paid by the selling firm in the form of reduced sales price.
D) Factoring may be the cheapest method of avoiding a cash flow problem.

Question 49

Which of the following is not typically a characteristic of commercial paper borrowing?

A) Maturity is short-term.
B) Banks are not the lenders.
C) The loans are secured.
D) Borrowers have high credit quality.

Question 50

Firms that continually invest in nontrivial 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 51

Which of the following is least likely to be correct for a firm that repeatedly stretches its payables?

A) The firm may receive more favorable status from suppliers due to its volume of purchases.
B) The firm may reduce its explicit short-term interest expense.
C) The cost of forgone discounts may exceed the cost of bank credit.
D) The firm may be labeled as a credit risk.

Question 52

Trade credit is created when:

A) customers return unacceptable goods.
B) final consumers purchase goods on credit.
C) companies purchase goods on credit.
D) current assets exceed current liabilities.

Question 53

When financial managers take action to minimize the carrying costs of current assets,they:

A) are likely to maximize profits.
B) also consider spoilage costs.
C) may increase costs due to shortages.
D) engage in the matching of maturities.

Question 54

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 55

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 56

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 57

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 58

Which of the following would not be included among the costs of carrying inventory?

A) Obsolescence
B) Opportunity cost of capital
C) Raw material cost
D) Risk of pilferage

Question 59

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) 27.40%

Question 60

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) field warehousing.

Question 61

What is the inventory period for a firm with an annual cost of goods sold of $8 million,$1.5 million in 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 62

Calculate the accounts receivable period for a firm with an annual 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 63

The longer the firm's accounts payable period,the:

A) longer the firm's cash conversion cycle.
B) shorter the firm's inventory period.
C) more the delay in the accounts receivable period.
D) less the firm must invest in working capital.

Question 64

Which of the following situations will improve the current ratio if it is initially less than 1.0?

A) Using cash to repay accounts payable
B) Purchasing inventory on credit terms
C) Selling finished goods inventory on credit
D) Purchasing marketable securities for cash

Question 65

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 66

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 67

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 68

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 69

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

A) Embezzlement is a real risk in most firms.
B) Higher balances require additional supervisors.
C) Cash balances are idle and face an opportunity cost.
D) All of these.

Question 70

Which of the following situations should provide managers with the most comfort if accounts receivable balances are increasing each quarter?

A) The sales level has decreased.
B) The sales level has increased.
C) The rate of collections has decreased.
D) The rate of collections has increased.

Question 71

Which of the following is not a source of cash?

A) Net income
B) Repayment of a bank loan
C) Reduction in accounts receivable
D) Depreciation

Question 72

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 73

Customers may change firms when faced with minimal inventory selection.Sales lost in this manner illustrate the:

A) costs of carrying inventory.
B) lack of customer loyalty.
C) need to maintain a high current ratio.
D) impact of shortage costs.

Question 74

When the length of the financing is directly related to the life of the asset being financed,the firm is said to follow a:

A) policy of maturity matching.
B) restrictive financing strategy.
C) matched depreciation strategy.
D) minimum working capital strategy.

Question 75

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 76

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 77

Although commercial paper is unsecured,the companies that issue this short-term security are:

A) typically known to repay all defaults.
B) large firms of top credit quality.
C) small firms of top credit quality.
D) firms that have government-sponsored guarantees for the debt.

Question 78

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 79

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 80

For most corporations,net working capital is:

A) negative during the inventory period of the cash conversion cycle.
B) equal to the amount of current assets.
C) positive to provide liquidity during the cash conversion cycle.
D) present only during slack periods of the year.