Deck 19: Short-Term Financial Planning

Question 1

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

Answer 1

True

Question 2

Companies with unusually high cash reserves often hold the cash in tax havens.

Answer 2

True

Question 3

A reduction in inventory levels would be a source of cash.

Answer 3

True

Question 4

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

Question 5

Evidence suggests that investors place a particularly high value on liquidity in the case of companies with growth opportunities.

Question 6

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 7

Cash holdings decline when a firm buys raw materials on credit.

Question 8

The primary aim of cash budgeting models is to obtain better forecasts of earnings.

Question 9

The term "tax inversion" refers to the negative tax shield that is created when a firm invests in securities.

Question 10

The largest inflows of cash usually come from payments by the firm's customers.

Question 11

Firms with a permanent investment in working capital finance that investment with short-term debt.

Question 12

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

Question 13

Firms with surplus cash can use it to increase dividends or buy back securities.

Question 14

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 15

A company that sells goods to a customer on credit will see no immediate change in its cash position.

Question 16

Short-term financing plans are usually developed by trial and error.

Question 17

Unless customers pay cash on delivery,cash flow comes from collections on receivables.

Question 18

Most firms have a permanent investment in working capital.

Question 19

Unlike long-term planners short-term planners are concerned only with the most likely outcomes.

Question 20

If a firm reduces its accounts payable period,other things equal,it increases its cash holdings.

Question 21

Inventory is generally more liquid than receivables.

Question 22

Managers with a large surplus of cash are often tempted to run a less tight ship.

Question 23

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

Question 24

The planning horizon for cash budgeting is usually at least five years.

Question 25

Holdings of marketable securities are at worst zero-NPV investments for taxpaying firms.

Question 26

Which of these events reduces cash holdings?

A) The firm changes its terms of sale and gives customers less time to pay for their purchases.
B) The firm sells a parcel of land at a profit.
C) The firm pays more promptly for its raw materials.
D) The firm sells a parcel of land at a loss.

Question 27

Which of the following statements is not true of short-term financial planning?

A) The plan should consider possible shortfalls in sales or a delay in collections.
B) The plan seeks to ensure that the company will be able to meet its cash needs.
C) The planning period is typically five years.
D) The plan needs to be based on the best forecasts available.

Question 28

Many high tech firms hold large amounts of marketable securities.

Question 29

An increase in accounts payable is a source of cash.

Question 30

If a firm's customers on average take two weeks to pay their bills,then about half of each month's bills will not be paid until the following month.

Question 31

A company that matches maturities will generally try to finance its receivables with long-term debt.

Question 32

The short-term financial plan sets out a strategy for investing any cash surpluses or financing any deficit.

Question 33

Which of these assets is likely to be the least liquid?

A) receivables
B) marketable securities
C) inventories of work in progress
D) inventories of finished goods

Question 34

A company stretches payables whenever it offers more generous payment terms to its customers.

Question 35

A firm that sells marketable securities will see an increase in its working capital but no change in its holdings of cash.

Question 36

If the firm repurchases its own stock,its cash holdings are unaffected.

Question 37

Firms with large holdings of current assets generally enjoy greater liquidity.

Question 38

For firms facing financial distress a dollar of cash within the firm is often worth less than a dollar to shareholders.

Question 39

Investments in marketable securities are generally a positive NPV investment for tax-paying firms.

Question 40

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

Question 41

When internally generated cash is temporarily insufficient to meet a firm's cash need,the firm 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) payoff all debts.

Question 42

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

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

Question 43

A firm's permanent working capital refers to the:

A) difference between fixed assets and current assets.
B) maximum 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 44

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) holding excessive current liabilities.
D) incurring extra taxes.

Question 45

The principle of matched maturities in finance refers to:

A) finding sources of funds with the longest maturity, in order to avoid liquidity crises.
B) funding long-term assets with long-term sources and short-term assets with short-term financing.
C) using as much short-term financing as possible due to the lower cost of interest.
D) buying marketable securities when demand is high and borrowing short-term when demand is low.

Question 46

A firm had $2,800 cash at the beginning of the period.During the period,the firm collected $1,600 in receivables,paid $1,850 to supplier,had credit sales of $4,200,and incurred cash expenses of $2,300.What was the cash balance at the end of the period?

A) $4,450
B) $250
C) $2,850
D) $1,250

Question 47

Which one of the following is more likely for a firm practicing the relaxed strategy of long-versus short-term borrowing at the height of sales demand?

A) It will borrow heavily on a short-term basis.
B) At the height of demand, it will invest heavily in marketable securities.
C) It will borrow on both a long-term and a short-term basis.
D) It's long-term financing will approximately equal its total capital requirements.

Question 48

A firm starts with $5,000 of accounts receivables and ends the period with $4,000 of receivables.If it collected $4,000 of receivables during the period,what was the amount of sales?

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

Question 49

Which one 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.
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 50

A toy store does not pay for its purchases of toys from manufacturers until one month later.Suppose that in October it starts to stock up in anticipation of a surge in toy sales in December,when is it most likely to have a negative operating cash flow?

A) It should never have a negative operating cash flow as long as its business is profitable.
B) In October because this is when it starts to stock up.
C) In November because this is when it will need to pay for the increased inventory.
D) In December because this is when the toys will start to move off the shelves.

Question 51

Which one of the following statements best describes the total capital requirement for most profitable firms?

A) The general trend in the total capital requirement is downward sloping.
B) The total capital requirement tends to be constant over long periods of time.
C) There are seasonal fluctuations around the total capital requirement trend.
D) The total capital requirement must be funded with short-term debt.

Question 52

A firm starts the week with payables of $172,000.It pays $80,000 of outstanding bills,and purchases $44,000 of raw materials on one month's credit.What is the level of payables at the end of the week?

A) $136,000.
B) $208,000.
C) $96,000.
D) $216,000.

Question 53

A firm must decide between borrowing from a bank at 12% interest or stretching its payables for one quarter.If it stretches the payables it will forgo a 2% discount for timely payment.Based solely on cash flows,which is the cheaper solution?

A) Stretching saves the firm approximately 8% per year.
B) Use the bank loan; forgoing a cash discount is costly.
C) Stretch the payables and finance at a savings of approximately 3.75% annually.
D) Use the bank loan because it represents simple interest.

Question 54

Splitterfield Foods forecasts the following sales and expenses: June
July
August
Sales ($ millions)
120
150
160
Purchases of raw materials ($ millions)
70
80
85
Other expenses ($ millions)
30
38
40
Seventy percent of sales are paid for in the same month and the remainder with a delay of one month.All raw materials are paid for with a delay of one month,other expenses are paid with no delay.What is the expected cash flow from operations in July?

A) $29.5 million.
B) $32 million.
C) $33 million.
D) $20 million.

Question 55

A firm purchases $32 million of materials from suppliers in January,$28 million in February and $25 million in March.Forty percent are supplied cash on delivery.The remainder needs to be paid for in the following month.What is the cash outflow in February?

A) $26.2 million
B) $29.6 million
C) $30.4 million
D) $32.0 million

Question 56

Avatar Corp solves its cash shortage by paying its bills a week late but loses a 1% discount by doing so.This is equivalent to borrowing at an annual interest rate of:

A) 52.0%.
B) 12.8%.
C) 68.6%.
D) 1.0%.

Question 57

Brad Corp expects to make sales of $80 million in January.In February forecast sales are $90 million,and in March they are $60 million.On average 50% of sales are paid for in the current month,30% are paid for in the next month,and the remainder in the following month.What is the expected cash flow from operations in March?

A) $30 million
B) $60 million
C) $73 million
D) $76.7 million

Question 58

What happens to a firm whose uses of cash exceed its sources of cash during an accounting period?

A) It has a loss of net working capital.
B) It declares a net loss on the income statement.
C) It experiences a decrease in sales.
D) It experiences a decrease in its cash balance.

Question 59

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

A) Dividends
B) Decreased accounts payable
C) Depreciation
D) Increased accounts receivable

Question 60

Which of the following transactions would not be a source of cash:

A) The firm issues $1 million of short-term debt and invests the proceeds in inventory.
B) A customer pays an outstanding bill.
C) The firm sells $10 million of marketable securities.
D) The firm receives $10 million from an insurance company to compensate for flood damage earlier that month.

Question 61

When managers are continually short-term lenders,they are said to follow a:

A) middle-of-the-road financing strategy.
B) restrictive financing strategy.
C) relaxed financing strategy.
D) permanent working-capital strategy.

Question 62

A firm starts the week with payables of $172,000,it pays $$80,000 of outstanding bills,and purchases $44,000 of raw materials on one month's credit.What is the change in its cash balance over the week?

A) −$36,000
B) +$96,000
C) −$80,000
D) +$92,000

Question 63

Zeta Stores places orders for 60% of the sales forecast in the next month and for 40% of the sales forecast for the following month.It pays for these goods with a 1-month delay? If sales for August are forecast at $10 million and sales for September and October are forecast at $12 million,what will be the forecast cash outflow in September?

A) $10.8 million
B) $15.6 million
C) $4.8 million
D) $9.6 million

Question 64

Managers who "stretch their payables" are attempting to:

A) repay more recent bills before earlier bills.
B) improve their current ratio before preparing financial statements.
C) offer finished goods at a discount for quicker repayment.
D) obtain short-term financing.

Question 65

Which of the following will not reduce an imminent cash shortage?

A) Phoning customers who have overdue bills.
B) Issuing common stock to repay long-term debt.
C) Postponing purchase of a new machine.
D) Rolling over maturing bank debt.

Question 66

Before settling on a final short-term financial plan,the manager needs to ask several questions.Which is the odd man out?

A) Does the plan yield satisfactory financial ratios?
B) Would the firm do better to arrange long-term financing to cover any cash shortage?
C) Has the firm estimated its EVA correctly?
D) Does the company need a larger reserve of cash or marketable securities to cover emergencies?

Question 67

A firm that stretches its payables gains an extra 1 month before it needs to pay for its purchases of raw materials but it loses a 2% discount for prompt payment.This is like borrowing at an effective annual interest rate of:

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

Question 68

Zeta Stores places orders for 60% of the sales forecast in the next month and for 40% of the sales forecast for the following month.It pays for these goods with a 2-month delay.If sales for August are forecast at $10 million and sales for September and October are forecast at $12 million,what will be the forecast cash outflow in September?

A) $10.8 million.
B) $15.6 million.
C) $4.8 million.
D) $9.6 million.

Question 69

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

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

Question 70

For a recent period,a firm collected $38,200 on accounts receivable,paid $19,700 to suppliers on trade credit,paid $12,000 in cash expenses,purchased for cash a $42,000 piece of equipment that will be depreciated straight-line to zero over 4 years,and had $59,000 of sales of which 15% were cash sales.The firm also paid $13,500 in taxes and interest.The beginning cash balance was $11,300.How much did the firm need to borrow in order to maintain a minimum cash balance of $10,000?

A) $38,850
B) $37,550
C) $7,350
D) $30,000

Question 71

Which of the following would increase the firm's cash balance?

A) increase the cash dividend
B) increase the accounts payable
C) increase accounts receivable
D) increase inventory

Question 72

The Boat Works started the month with $1.28 million in accounts receivable.Sales for the month were $3.4 million.The firm collects 35% of its sales in the month of sale with the remainder paid the following month.What is the accounts receivable balance at month end?

A) $2.21 million
B) $1.19 million
C) $3.49 million
D) $2.71 million

Question 73

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 74

Which statement does not correctly describe short-term financial decisions?

A) Most firms finance short-term assets with short-term borrowing.
B) Most firms maintain a positive investment in working capital.
C) Most firms finance their investment in working capital with short-term debt.
D) Liquidity is particularly valued by small firms that face relatively high costs to raising funds on short notice.

Question 75

Which one of the following is a use of cash?

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

Question 76

There are three steps to constructing a cash budget.Which of the following is not one of those steps?

A) Calculate whether the firm is facing a cash shortage or surplus.
B) Forecast the uses of cash.
C) Set a policy for deciding how much time to give customers to pay.
D) Forecast the sources of cash.

Question 77

Clopton Inc.forecasts cash sales of $18 million in January,$23 million in February and $25 million in March.Credit sales in these three months are forecast at $80 million,$110 million and $145 million.On average 50% of credit sales are paid for in the current month,30% in the next month,and the remainder in the following month.What is the expected cash inflow in March?

A) $121.5 million
B) $102 million
C) $127 million
D) $146.5 million

Question 78

In 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 79

Which one of the following would not be included as a source of short-term financing?

A) Line of credit from a bank
B) Increase in the minimum operating cash balance
C) Sale of marketable securities
D) Stretching of accounts payable

Question 80

Which one of these is most associated with a disadvantage of 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.