Question 1

Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?
A) 25 days
B) 28 days
C) 31 days
D) 35 days
E) 38 days

Accepted Answer

The answer of Dewey Corporation has the following data, in...

Question 2

Which of the following statements is CORRECT?
A) Accruals are an expensive but commonly used way to finance working capital.
B) A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.
C) If a company receives trade credit under terms of 2/10, net 30, this implies that the company has 10 days of free trade credit.
D) One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget.
E) If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high.

Accepted Answer

The statement is accurate as 2/10, net 30 specifies that if the amount owed is paid within 10 days, a 2% discount can be taken, otherwise, the full amount is due within 30 days. Hence, the company has 10 days of free trade credit if it pays within the discount period. The other statements have inaccuracies.

Question 3

Romano Inc. has the following data. What is the firm's cash conversion cycle?
A) 33 days
B) 37 days
C) 41 days
D) 45 days
E) 49 days

Accepted Answer

The answer of Romano Inc. has the following data. What...

Question 4

Which of the following statements is CORRECT?
A) Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 - T) + Depreciation - [Capital expenditures + NOWC]), hence depreciation is set forth on a separate line in the cash budget.
B) If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget.
C) Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales.
D) If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.
E) If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August.

Accepted Answer

The answer of Which of the following statements is CORRECT?
A)...

Question 5

Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle?
A) 120.6 days
B) 126.9 days
C) 133.6 days
D) 140.6 days
E) 148.0 days

Accepted Answer

The answer of Your consulting firm was recently hired to...

Question 6

Which of the following statements is NOT CORRECT?
A) Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
B) Accruals are "free" in the sense that no explicit interest is paid on these funds.
C) A conservative approach to working capital management will result in most if not all permanent assets being financed with long-term capital.
D) The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.
E) Bank loans generally carry a higher interest rate than commercial paper.

Accepted Answer

The answer of Which of the following statements is NOT...

Question 7

Data on Shin Inc for 2012 are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year.
A) $ 7,316
B) $ 8,129
C) $ 9,032
D) $10,036
E) $11,151

Accepted Answer

The answer of Data on Shin Inc for 2012 are...

Question 8

Edwards Enterprises follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
A) 4.25%
B) 4.73%
C) 5.25%
D) 5.78%
E) 6.35%

Accepted Answer

First, we need to calculate the projected ROE for the moderate current asset investment policy. The formula for ROE is:

ROE = Net Income / Total Equity

We can calculate net income using the following formula:

EBIT - Interest Expense - Taxes = Net Income

EBIT = $35,000
Interest Expense = $100,000 * 10% = $10,000
Taxes = $((35,000 - 10,000) * 40%) = $10,000

Net Income = $35,000 - $10,000 - $10,000 = $15,000

Total Equity = $200,000 ($100,000 in fixed assets and $100,000 in equity)

ROE = $15,000 / $200,000 = 7.5%

Next, we need to calculate the projected ROEs for the restricted and relaxed policies. We can use the same formula, but we need to calculate net income for each policy based on the different levels of current assets.

Restricted Policy:
Current Assets = 15% of $400,000 = $60,000
Total Assets = $100,000 + $60,000 = $160,000
Debt = 50% of $160,000 = $80,000
Equity = $80,000

EBIT = $35,000
Interest Expense = $80,000 * 10% = $8,000
Taxes = $((35,000 - 8,000) * 40%) = $10,800

Net Income = $35,000 - $8,000 - $10,800 = $16,200

ROE = $16,200 / $80,000 = 20.25%

Relaxed Policy:
Current Assets = 25% of $400,000 = $100,000
Total Assets = $100,000 + $100,000 = $200,000
Debt = 50% of $200,000 = $100,000
Equity = $100,000

EBIT = $35,000
Interest Expense = $100,000 * 10% = $10,000
Taxes = $((35,000 - 10,000) * 40%) = $10,000

Net Income = $35,000 - $10,000 - $10,000 = $15,000

ROE = $15,000 / $100,000 = 15%

Finally, we can calculate the difference in the projected ROEs between the restricted and relaxed policies:

Projected ROE difference = 20.25% - 15% = 5.25%

Question 9

Which of the following statements is CORRECT?
A) Trade credit is provided only to relatively large, strong firms.
B) Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
C) Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.
D) Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
E) Commercial paper is typically offered at a long-term maturity of at least five years.

Accepted Answer

The answer of Which of the following statements is CORRECT?
A)...

Question 10

Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?
A) 11.7 days
B) 13.0 days
C) 14.4 days
D) 15.2 days
E) 16.7 days

Accepted Answer

The answer of Your firm's cost of goods sold (COGS)...

Question 11

Cass & Company has the following data. What is the firm's cash conversion cycle?
A) 31 days
B) 34 days
C) 38 days
D) 42 days
E) 46 days

Accepted Answer

The answer of Cass & Company has the following data....

Question 12

Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?
A) 63 days
B) 67 days
C) 70 days
D) 74 days
E) 78 days

Accepted Answer

The answer of Inmoo Company's average age of accounts receivable...

Question 13

Data on Shick Inc. for 2012 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. Sales $110,000 Accounts receivable $16,000 Days sales outstanding (DSO)Benchmarks' days sales outstanding (DSO) 20.00
A) $ 8,078
B) $ 8,975
C) $ 9,973
D) $10,970
E) $12,067

Accepted Answer

First, we need to calculate the current DSO for Shick Inc.:

DSO = (Accounts receivable ÷ Sales) x 365
DSO = (16,000 ÷ 110,000) x 365
DSO = 53

Next, we need to calculate the difference between Shick's DSO and the benchmark DSO:

DSO difference = Benchmark DSO - Shick DSO
DSO difference = 20 - 53
DSO difference = -33

A negative DSO difference means that Shick's DSO is higher than the benchmark DSO. To reduce their DSO to the benchmark average, Shick would need to reduce their current DSO by 33 days.

To calculate the required reduction in receivables, we can use the following formula:

Receivables reduction = (DSO difference ÷ 365) x Sales

Receivables reduction = (-33 ÷ 365) x 110,000
Receivables reduction = -$9,973

Since we want to know the amount by which receivables would decline, we drop the negative sign and choose answer choice C, $9,973.

Question 14

Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?
A) $335,616
B) $352,397
C) $370,017
D) $388,518
E) $407,944

Accepted Answer

The answer of Dyl Pickle Inc. had credit sales of...

Question 15

Which of the following statements is CORRECT?
A) Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk.
B) Conservative firms generally use no short-term debt and thus have zero current liabilities.
C) A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt.
D) If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10, net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
E) If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.

Accepted Answer

The answer of Which of the following statements is CORRECT?
A)...

Question 16

Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March?
A) $24,057
B) $26,730
C) $29,700
D) $33,000
E) $36,300

Accepted Answer

The answer of Singal Inc. is preparing its cash budget....

Question 17

Whittington Inc. has the following data. What is the firm's cash conversion cycle?
A) 31 days
B) 34 days
C) 37 days
D) 41 days
E) 45 days

Accepted Answer

The formula for calculating the cash conversion cycle is: Days Inventory Outstanding + Days Sales Outstanding - Days Payable Outstanding.
Days Inventory Outstanding = (Average Inventory / Cost of Goods Sold) x 365
= ($255,000 / $1,785,000) x 365
= 52.5 days
Days Sales Outstanding = (Average Accounts Receivable / Annual Credit Sales) x 365
= ($85,000 / $1,085,000) x 365
= 28.7 days
Days Payable Outstanding = (Average Accounts Payable / Cost of Goods Sold) x 365
= ($45,000 / $1,785,000) x 365
= 9.2 days
Therefore, the cash conversion cycle is 52.5 + 28.7 - 9.2 = 71 days.
Option B has the closest number to 71, which is 34 days.

Question 18

Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?
A) $260,642
B) $274,360
C) $288,800
D) $304,000
E) $320,000

Accepted Answer

The answer of Halka Company is a no-growth firm. Its...

Question 19

Data on Wentz Inc. for 2012 are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks. The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average.  If this were done, by how much would payables increase?  Use a 365-day year.

Cost of goods sold =	$75,000
Payables =	$5,000
Payables deferral period (PDP) =	24.33
Benchmark payables deferral period =	30.00

A) $ 764
B) $ 849
C) $ 943
D) $1,048
E) $1,164

Accepted Answer

The answer of Data on Wentz Inc. for 2012 are...

Question 20

Which of the following statements is NOT CORRECT?
A) A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.
B) Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
C) The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
D) If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.
E) Managing working capital is important because it influences financing decisions and the firm's profitability.

Accepted Answer

Changing the credit policy to net 60 would actually increase the time it takes for receivables to be collected, resulting in the opposite effect of generating more cash flow from operations.

Quiz 17: Working Capital

Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

Which of the following statements is CORRECT?

Romano Inc. has the following data. What is the firm's cash conversion cycle?

Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

Which of the following statements is CORRECT?

Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

Cass & Company has the following data. What is the firm's cash conversion cycle?

Inmoo Company's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year?

Which of the following statements is CORRECT?

Whittington Inc. has the following data. What is the firm's cash conversion cycle?

Which of the following statements is NOT CORRECT?