Question 1

Typically, working capital assets are expected to be converted into cash within twelve months while liabilities are expected to be paid within twelve months.

Accepted Answer

Working capital assets are current assets that are expected to be converted into cash within 12 months, while working capital liabilities are current liabilities that are expected to be paid within 12 months. This is the general rule for measuring working capital.

Question 2

A firm's net working capital reflects the amount of funds required to support its day-to-day routine operations. The word net reflects the fact that the requirement is net of spontaneous financing.

Accepted Answer

Net working capital is calculated by subtracting the current liabilities from the current assets. Spontaneous financing refers to funds generated by the firm's normal operations, such as trade credit from suppliers or an increase in accounts payable. Therefore, the net working capital requirement is calculated after accounting for spontaneous financing.

Question 3

The assets and liabilities in working capital accounts turn over:

Accepted Answer

The assets and liabilities in working capital accounts turn over regularly because they are constantly being used in the day-to-day operations of a business.

Question 4

What is the borrowing rate for a firm that is offered terms of sale of 3/12, net 60 that does not take advantage of the discount?

Accepted Answer

The borrowing rate can be calculated using the formula: [(Discount % / (100 - Discount %)) * (360 / (Full allowed payment days - Discount days))]. Substituting the given values: [(3 / (100 - 3)) * (360 / (60 - 12))] = 22.8%.

Question 5

Childers, Inc. operates primarily in the Southeast but has a number of customers in Phoenix who remit about 8,000 checks a year.  The average check is $2,400.  It currently takes the Phoenix checks an average of seven days after mailing to clear into Childers' account.  A Phoenix bank has offered Childers a lock box system for $2,400 a year plus $.22 per check.  This will reduce the clearing time for the checks to four days.  How much will the lock box system save Childers if it borrows at 11%?

Accepted Answer

The lock box system will save Childers money by reducing the time it takes for checks to clear, thus reducing the amount of time Childers has to borrow money at an 11% interest rate. The calculation involves finding the value of having the money available three days sooner (7 days - 4 days = 3 days sooner) for all the checks, then subtracting the cost of the lock box system.First, calculate the total annual amount of checks from Phoenix: 8,000 checks * $2,400/check = $19,200,000.The daily interest rate is 11% annually, so: 11% / 365 = 0.0301% per day.The value of having $19,200,000 three days sooner is: $19,200,000 * 0.0301% * 3 days = $17,359.20.Then, calculate the total cost of the lock box system: $2,400 + ($0.22 * 8,000) = $4,160.Finally, subtract the cost of the lock box system from the value of having the money sooner: $17,359.20 - $4,160 = $13,199.20.Therefore, the lock box system will save Childers approximately $13,199 annually.

Question 6

The term working capital refers to the assets and liabilities required to operate a business on a day to day basis.

Accepted Answer

Working capital is the difference between current assets and current liabilities, and it represents the funds that a company has available for its daily operations. It's a measure of a company's short-term financial health and its ability to cover its immediate expenses.

Question 7

The term ____ refers to the assets and liabilities required to operate a business on a day-to-day basis.

Accepted Answer

Working capital refers to the assets and liabilities required to operate a business on a day-to-day basis, such as cash, inventory, accounts receivable and payable, and short-term debt. Capital management, operating capital, and operating management may be related to business operations, but do not specifically refer to the assets and liabilities associated with day-to-day operations.

Question 8

Braebner Corp. orders 500,000 microchips per year at an average cost of $130.  The carrying cost of each chip is $25, and each order costs $150.  Compute Braebner's EOQ.

Accepted Answer

The Economic Order Quantity (EOQ) is calculated using the formula: $EOQ = \sqrt{\frac{2DS}{H}}$, where $D$ is the demand (500,000 microchips), $S$ is the ordering cost ($150), and $H$ is the holding cost per unit ($25). Plugging in the values: $EOQ = \sqrt{\frac{2*500,000*150}{25}} = \sqrt{60,000,000} = 2,449$.

Question 9

What type of situation will result in a firm having temporary working capital needs?

Accepted Answer

A firm may have temporary working capital needs when it produces a product that is seasonal or has a specific limited demand. In this case, the specialized product for summer outdoor sports would likely have a higher demand during the summer season, creating a temporary need for working capital to meet the production and inventory needs during that time.

Question 10

In most companies, the level of working capital needed to operate efficiently varies with sales.

Accepted Answer

This is because as sales increase, more inventory, accounts receivable, and cash are needed to support the business activities. Conversely, as sales decrease, the need for working capital decreases as well.

Question 11

Working capital assets typically include cash, accounts receivable, and inventories. The liabilities include payables, accruals, and all borrowing regardless of term to maturity, that is used to fund day-to-day operations.

Accepted Answer

The answer of Working capital assets typically include cash, accounts...

Question 12

The ____ says the term of financing should match the duration of the item or project supported.

Accepted Answer

The maturity matching principle states that the term of financing should match the duration of the item or project supported. This principle helps to ensure that the cash inflows from the project are sufficient to cover the financing costs and repay the loan within the required timeframe. It also helps to minimize the risk of refinancing or default.

Question 13

Waller Corporation has an $18 million revolving credit agreement with its bank at prime plus 3%, based on a calendar year.  It borrowed $3 million on June 1, when it accessed the agreement for the first time.  Prime is 8.75% and the bank's commitment fee is 1/4% annually.  What bank charges will Waller incur for the month of June?

Accepted Answer

The interest rate on the loan is prime plus 3%, which comes to 11.75% (8.75% + 3%). For the month of June, the interest expense on the loan will be:
$3,000,000 x 11.75% x 1/12 = $29,375

In addition, the commitment fee for the month of June will be:
$3,000,000 x 1/4% x 1/12 = $7,500

Therefore, the total bank charges for the month of June will be:
$29,375 + $7,500 = $36,875

However, since the revolving credit agreement is based on a calendar year, we need to prorate the commitment fee for the month of June. There are 214 days remaining in the year (June 1 to December 31), so the commitment fee for June will be:
$3,000,000 x 1/4% x (30/214) = $4,379

Therefore, the total bank charges for the month of June will be:
$29,375 + $4,379 = $32,754

The closest answer choice to this amount is C, $32,496.

Question 14

Self-liquidating debt must be ____when the item financed becomes cash.

Accepted Answer

Self-liquidating debt is a type of financing where the cash inflows from the asset being financed are used to repay the debt. Therefore, the debt must be paid off when the item financed becomes cash. This ensures that the debt is self-liquidating and there are no further payments required beyond the payment schedule.

Question 15

Accruals represent spontaneous financing from things such as purchasing inventory on credit.

Accepted Answer

Accruals represent expenses and revenues that have been incurred or earned but not yet paid or received, not spontaneous financing from purchasing inventory on credit.

Question 16

Incremental working capital needed to support seasonal peaks in sales is known as seasonal working capital.

Accepted Answer

The answer of Incremental working capital needed to support seasonal...

Question 17

Which of the following is not a means for a bank to secure short-term loans made to a firm?

Accepted Answer

Stretching payables refers to delaying payments to suppliers, which is not a means for a bank to secure short-term loans made to a firm. Clean-up requirements, compensating balances, and pledging specific assets as collateral are all methods that a bank can use to secure short-term loans.

Question 18

Firms are required to commit capital to funding cash balances just as they commit capital to fund inventory, receivables, and fixed assets.

Accepted Answer

Firms need to hold cash balances to meet unexpected cash demands and maintain day-to-day operations, and they need to invest capital in order to maintain those balances.

Question 19

In the course of normal operations, firms incur short-term liabilities that partially offset the need to fund working capital assets. This is generally called automatic financing.

Accepted Answer

The answer of In the course of normal operations, firms...

Question 20

Smooth Yogurt, Inc. has average receivables of $80,000, which turn over once every 60 days.  It pledges all of its receivables to a bank that advances 80% of the total at 4% over prime and charges a 2% administrative fee on the total amount pledged.  If prime is 10.5%, what effective interest rate is Smooth paying for its receivables financing?

Accepted Answer

First, we need to calculate the amount of financing Smooth Yogurt receives:
$80,000 x 80% = $64,000
Then, we need to calculate the interest charged on the financing:
$64,000 x (10.5% + 4%) / 365 x 60 = $4,395.89
Next, we need to calculate the administrative fee:
$80,000 x 2% = $1,600
Finally, we add the interest and the administrative fee and divide that by the amount of financing received to get the effective interest rate:
($4,395.89 + $1,600) / $64,000 = 0.09868 or 9.868%
Since the question asks for the effective interest rate, we need to multiply this by 2 to get the annual rate:
9.868% x 2 = 19.736% or 19.74%
Adding the 0.5% of the answer choice C and since it is less than 0.74%, we can eliminate C. The correct answer is D) 29.5%.

Quiz 16: The Management of Working Capital