Question 1

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

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Question 2

A firm faces a liquidity crunch and must decide between borrowing from a bank at 12% interest and 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 would you suggest?

Accepted Answer

To determine the best choice, we need to compare the cost of borrowing from the bank (option B) and the cost of stretching payables (option A). Using simple interest, we can calculate the cost of borrowing from the bank as:

12% / 4 = 3% per quarter

On the other hand, if the firm stretches its payables, it will forgo a 2% discount, which is equivalent to financing the payment for a quarter at:

2% / 3 = 0.67% per quarter

Therefore, the savings from stretching payables is:

3% - 0.67% = 2.33% per quarter or 9.32% annually

Comparing the savings, stretching payables saves the firm approximately 9.32% annually, which is higher than the cost of borrowing from the bank at 12%. Therefore, the best choice is to stretch the payables and finance at a savings of approximately 9.32% annually (option C).

Question 3

Describe a firm's cash conversion cycle and its uses.

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Question 4

A firm needs spare cash to deal with capital budget appropriations,dividend payments,and other large outlays.The interest rate on bank loans is simply quoted as:

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Question 5

If a firm decided to speed up its collection from its customers by reducing the receivables period and kept the inventory period and payable period the same,then:

Accepted Answer

By reducing the receivables period, the firm will be able to collect cash from its customers sooner, which will decrease the cash conversion cycle (the time it takes to convert sales into cash). The inventory period and payable period staying the same do not affect the calculation of the cash conversion cycle. However, it is important to note that while the cash conversion cycle may decrease, it does not necessarily mean that the firm's investment in working capital will be minimized. The firm may still need to maintain a certain level of inventory and pay its suppliers within the same time frame, meaning its investment in working capital may stay the same or even increase.

Question 6

Issuing additional long-term debt of $5 million and buying new long-term assets worth $5 million will result in a net cash flow of:

Accepted Answer

Issuing additional long-term debt of $5 million will result in a cash inflow of $5 million, but using that $5 million to buy new long-term assets will result in a cash outflow of $5 million. Therefore, the net cash flow is zero.

Question 7

Calculate the simple interest on a bank loan of $200,000 for a month,with a quoted rate of 6% simple interest.At the end of the month how much would you need to repay?

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Question 8

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

Accepted Answer

Factoring of receivables typically involves a financial institution (the factor) purchasing the receivables from a company. In this arrangement, the risk of default on the receivables is transferred from the selling firm to the factor. Therefore, it is least likely that the selling firm bears the risk of default, as this risk is usually assumed by the factor upon purchase of the receivables.

Question 9

The principle of "matched maturities" in finance refers to:

Accepted Answer

The principle of "matched maturities" refers to funding long-term assets with long-term sources, and short-term assets with short-term borrowings. This principle helps to mitigate the risk of liquidity mismatches and aligns the cash flows of assets and liabilities.

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?

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Question 11

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.
The firm borrows $1,000 short-term and pays $500 in accounts payable.
The firm factors $1,000 in receivables at a 5% discount.
The firm issues $1,000 in long-term bonds,using the proceeds to pay $800 in payables and purchase $200 in marketable securities.

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Question 12

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

Accepted Answer

Stretching payables, or delaying payment to suppliers beyond the agreed terms, is unlikely to result in more favorable status from suppliers. Instead, it could lead to strained relationships, reduced trust, and potentially being labeled as a credit risk. Suppliers typically favor customers who pay on time, as it helps with their own cash flow management.

Question 13

Discuss the usefulness of the concept of "maturities matching" in finance.

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Question 14

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

Accepted Answer

Commercial paper borrowing typically involves short-term maturity, non-bank lenders (such as corporations or other financial institutions), and high-quality borrowers that are able to repay the loans quickly. The loans are typically unsecured, meaning they are not backed by collateral. Therefore, option C, "the loans are secured", is not typically a characteristic of commercial paper borrowing.

Question 15

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.

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Question 16

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

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Question 17

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

Accepted Answer

Total capital requirements are unlikely to remain constant over time, especially for a profitable firm. As the business grows or expands its operations, the total capital required to fund these activities may also increase. Similarly, changes in the business environment, such as new regulations or increased competition, can also impact the total capital requirement. Seasonal variations may also affect the total capital requirement, with some periods requiring more capital than others. Finally, a portion of working capital may be permanent, but this depends on the business's nature and operations.

Question 18

Why do firms need to invest in net working capital?

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Question 19

The text suggests that,of the three financing strategies shown,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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Question 20

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

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Quiz 20: Short-Term Financial Planning