Question 1

A firm needs spare cash because during economic downturns, sales may fall below expectations while outflows could prove higher than was budgeted.Firms sell their accounts receivable at a discount for the purpose of:

Accepted Answer

Selling accounts receivable at a discount is a way to obtain short-term financing. This is a common practice used by firms to generate cash flow during economic downturns or in times of tight financial constraints. By selling their accounts receivable, firms are able to receive immediate cash for outstanding invoices, allowing them to meet their short-term financing needs. This practice is often referred to as factoring or invoice financing.

Question 2

A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable.The net effect of these transactions on the firm's net working capital is:

Accepted Answer

The answer of A firm paid out a dividend of...

Question 3

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded quarterly?

Accepted Answer

The answer of A firm borrows $100,000 from the bank,...

Question 4

Maintaining a compensating balance will:

Accepted Answer

Maintaining a compensating balance effectively reduces the amount of usable funds from a loan, which increases the effective annual rate since the borrower pays interest on the full loan amount but can only use a portion of it.

Question 5

A credit card company charges its customers an annual interest of 21.0% on the outstanding monthly balance.The effective annual rate for the customer will be:

Accepted Answer

Since the interest is charged monthly, we need to use the formula for calculating the effective annual rate,
Effective annual rate = (1 + Monthly interest rate)^12 - 1
= (1 + 0.21/12)^12 - 1
= 0.2314 or 23.14%
Hence, the best choice is option C.

Question 6

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded monthly?

Accepted Answer

The effective annual rate (EAR) is calculated by considering the actual amount available for use, which is $80,000 ($100,000 - $20,000). The nominal interest rate is 12%, but since the compensating balance reduces the usable funds, the effective rate is higher. The formula for EAR with monthly compounding is: EAR = (1 + (0.12/12))^12 - 1, adjusted for the compensating balance, leading to an EAR of approximately 16.08%.

Question 7

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

Accepted Answer

In "field warehousing", the inventory is kept by an independent warehousing company, which specializes in storing goods for companies that need short-term financing. The company provides a place to store the inventory and issues a loan to the borrowing firm based on the value of the goods being stored. Field warehousing is commonly used in agriculture, where farmers may need to store crops in between harvests and sales.

Question 8

A firm has $50 million and $60 million credit sales during the first two quarters of the year.Eighty% of the receivables are collected in the same quarter and the balance in the next quarter.What will be the total collection for the firm in the second quarter?

Accepted Answer

For the first quarter, the amount collected would be:
$50 million x 80% = $40 million

For the second quarter, the amount collected from the first quarter's sales would be the remaining 20% (not collected in the first quarter) of $50 million plus the 80% of $60 million (second quarter sales):
$50 million x 20% + $60 million x 80% = $10 million + $48 million = $58 million

Therefore, the total collection for the firm in the second quarter would be $58 million.

Question 9

The safety margin kept by the bank on loan against liquid assets is called:

Accepted Answer

A safety margin on a loan against liquid assets is commonly referred to as a haircut. This represents the difference between the market value of the assets used as collateral and the value of the loan. The bank holds this margin in case the market value of the assets decreases, ensuring that they can still recover the loan amount. Choices B, C, and D are not applicable to this scenario.

Question 10

Calculate the Cash Conversion and Operating cycle, given the following information:

Accepted Answer

The answer of Calculate the Cash Conversion and Operating cycle,...

Question 11

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 collect cash from its customers faster. This will lead to a decrease in the cash conversion cycle as it measures the time taken for a company to convert its investment in inventory and other resources into cash received from sales. The investment in working capital may or may not be minimized depending on how the firm manages its inventory and payable periods.

Question 12

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded semi-annually?

Accepted Answer

The answer of A firm borrows $100,000 from the bank,...

Question 13

Calculate the Cash Conversion and Operating cycle, given the following information:

Accepted Answer

The answer of Calculate the Cash Conversion and Operating cycle,...

Question 14

Some bank loans require the firm to maintain some amount of money on a balance at the bank which is known as:

Accepted Answer

The answer of Some bank loans require the firm to...

Question 15

A firm borrows $200,000 from the bank, but has to maintain a compensating balance of $15,000 with the bank.The annual interest rate for the loan is 13%.What is the effective annual rate if the interest is compounded annually?

Accepted Answer

The effective annual rate (EAR) is calculated by considering the actual amount available for use after maintaining the compensating balance. The firm effectively borrows $185,000 ($200,000 - $15,000). The interest paid is $26,000 (13% of $200,000). The EAR is calculated as ($26,000 / $185,000) * 100% = 14.05%.

Question 16

Optimizing cash balances involves the equating of:

Accepted Answer

Optimizing cash balances involves analyzing the marginal benefits and marginal opportunity costs. This means that executives or managers need to identify the point at which the additional benefit from holding extra cash equals the additional opportunity cost of doing so. By equating these two factors, they can determine the optimal cash balance for their organization. Options A, B, and C are not related to optimizing cash balances.

Question 17

Which of the following would not be included in a cash budget?

Accepted Answer

Depreciation is a non-cash expense and does not involve actual cash inflow or outflow, so it would not be included in a cash budget. The other options listed involve cash flows and would be included in a cash budget.

Question 18

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 19

A firm sells its $1,000,000 receivables to a factor for $960,000.Average collection period is one month.The effective annual rate is:

Accepted Answer

The answer of A firm sells its $1,000,000 receivables to...

Question 20

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:

Accepted Answer

Simple interest is the interest charged on the principal amount only, and it is usually quoted as a percentage of the principal amount per year.

Quiz 20: Working Capital Management

A firm needs spare cash because during economic downturns, sales may fall below expectations while outflows could prove higher than was budgeted.Firms sell their accounts receivable at a discount for the purpose of:

A firm paid out a dividend of $700,000 and repaid $1,000,000 notes payable.The net effect of these transactions on the firm's net working capital is:

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded quarterly?

Maintaining a compensating balance will:

A credit card company charges its customers an annual interest of 21.0% on the outstanding monthly balance.The effective annual rate for the customer will be:

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded monthly?

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

A firm has $50 million and $60 million credit sales during the first two quarters of the year.Eighty% of the receivables are collected in the same quarter and the balance in the next quarter.What will be the total collection for the firm in the second quarter?

The safety margin kept by the bank on loan against liquid assets is called:

Calculate the Cash Conversion and Operating cycle, given the following information:

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:

A firm borrows $100,000 from the bank, but has to maintain a compensating balance of $20,000 with the bank.The annual interest rate for the loan is 12%.What is the effective annual rate if the interest is compounded semi-annually?

Calculate the Cash Conversion and Operating cycle, given the following information:

Some bank loans require the firm to maintain some amount of money on a balance at the bank which is known as:

A firm borrows $200,000 from the bank, but has to maintain a compensating balance of $15,000 with the bank.The annual interest rate for the loan is 13%.What is the effective annual rate if the interest is compounded annually?

Optimizing cash balances involves the equating of:

Which of the following would not be included in a cash budget?

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:

A firm sells its $1,000,000 receivables to a factor for $960,000.Average collection period is one month.The effective annual rate is:

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: