Question 1

The cash conversion cycle is equal to the days of sales outstanding plus the days of sales in inventory plus the days of payables outstanding.

Accepted Answer

The cash conversion cycle is equal to the days of sales outstanding plus the days of sales in inventory minus the days of payables outstanding.

Question 2

Trade credit is an example of which of the following sources of financing?
A) spontaneous
B) temporary
C) permanent
D) discretionary

Accepted Answer

Trade credit is a form of financing that arises spontaneously as a result of a business relationship between a buyer and a seller. It is not a formal or deliberate decision to obtain financing, but rather an extension of credit from the supplier to the purchaser. Therefore, it falls under the category of spontaneous financing.

Question 3

Key Enterprises borrows $12,000 for a short-term purpose.The loan will be repaid after 120 days,with Key paying a total of $12,400.What is the approximate cost of credit using the APY ,or annual percentage yield,calculation?
A) 4.33%
B) 10.34%
C) 12.25%
D) 12.46%

Accepted Answer

The answer of Key Enterprises borrows $12,000 for a short-term...

Question 4

If a company's inventory turnover increases from 8 to 10,then its cash conversion cycle will also increase,i.e.,get longer.

Accepted Answer

An increase in inventory turnover indicates that the company is selling its inventory faster, which actually leads to a decrease in the cash conversion cycle. Therefore, if the inventory turnover increases from 8 to 10, the company's cash conversion cycle will decrease, i.e., get shorter.

Question 5

The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.

Accepted Answer

The cash conversion cycle measures how long it takes for a company to convert its investments in inventory and other resources into cash flow from sales. It is a key metric for evaluating the financial health and efficiency of a company's operations.

Question 6

In the context of managing working capital,the hedging principle refers to which of the following?
A) speculation regarding the direction of short-term interest rates
B) the usage of interest rate swaps
C) matching the maturity of the source of financing to the cash flow generating characteristics of the asset being financed
D) protecting the firm against the risk of rising interest rates

Accepted Answer

The hedging principle in the context of managing working capital involves matching the maturity of the source of financing to the cash flow generating characteristics of the asset being financed. This helps to ensure that the firm is able to meet its cash flow obligations while minimizing the risk of having to refinance short-term debt at unfavorable interest rates. It is not related to speculation or protecting against rising interest rates, nor is it specifically tied to the usage of interest rate swaps.

Question 7

The cash conversion cycle cannot be negative.

Accepted Answer

The cash conversion cycle can indeed be negative if a company is able to sell its products and collect the cash from sales before it has to pay its suppliers for the inventory. This indicates a highly efficient operation where the company is effectively using its suppliers' resources to finance its sales.

Question 8

Key Enterprises borrows $12,000 for a short-term purpose.The loan will be repaid after 120 days,with Key paying a total of $12,400.What is the approximate cost of credit using the APR ,or annual percentage rate,calculation?
A) 3.33%
B) 4.00%
C) 10.00%
D) 11.75%

Accepted Answer

The answer of Key Enterprises borrows $12,000 for a short-term...

Question 9

Compounding effectively raises the cost of short-term credit.

Accepted Answer

Compounding adds interest to both the principal amount and the accumulated interest, making the total cost of credit higher than simple interest. Thus, compounding effectively raises the cost of short-term credit.

Question 10

One way to improve a company's cash conversion cycle is to increase its days sales outstanding.

Accepted Answer

Increasing the days sales outstanding will actually result in a longer cash conversion cycle, as it takes longer to collect payments from customers. To improve the cash conversion cycle, a company should aim to decrease its days sales outstanding by improving its accounts receivable management or by incentivizing customers to pay their bills more quickly.

Question 11

Which of the following is most likely to be a temporary source of financing?
A) commercial paper
B) preferred stock
C) long-term debt
D) common stock

Accepted Answer

Commercial paper is a short-term debt instrument issued by companies to raise funds for a specific purpose. It is usually used to cover short-term cash needs and is typically repaid within a few months, making it a temporary source of financing. Preferred stock, long-term debt, and common stock are all considered long-term financing options.

Question 12

A company that forgoes the discount when credit terms are 2/10 net 60 due to insufficient cash flow would be better off to borrow funds and take the discount as long the company could borrow the funds at any rate
A) less than 16.33%.
B) less than 15.47%.
C) less than 14.69%.
D) less than 12.00%.

Accepted Answer

To determine the cutoff interest rate at which it is worth it to borrow funds and take the discount, we can calculate the effective annual interest rate (EAR) assuming the discount is taken.

If the discount is taken, the effective payment period is 50 days (60 days - 10 days), or 5/6 of a year. The EAR can be calculated using the following formula:

EAR = (1 + (discount / (100 - discount)))^(365 / payment period) - 1

Substituting in the values for this scenario, we get:

EAR = (1 + (2 / 98))^(365 / (5/6)) - 1
    = 0.1490 or 14.90%

Therefore, any interest rate less than 14.69% would make it worthwhile for the company to borrow funds and take the discount. Choice C is the correct answer as it is the lowest interest rate listed that is less than the calculated EAR.

Question 13

With regard to the hedging principle,which of the following would be an appropriate method to finance a minimum level of current assets required for year round operations?
A) short-term notes payable
B) trade credit
C) common stock
D) revolving credit agreements that must be repaid in a period less than 1 year

Accepted Answer

The hedging principle suggests matching the maturity of assets and liabilities to manage risk. Financing a minimum level of current assets required for year-round operations, which are long-term in nature, would be appropriately done with long-term financing such as issuing common stock.

Question 14

Which of the following is considered a spontaneous source of financing?
A) short-term notes payable
B) accounts payable
C) long-term notes payable
D) preferred stock

Accepted Answer

Accounts payable are considered a spontaneous source of financing because they arise spontaneously from the normal operations of a business. This refers to the money that a company owes to its suppliers for goods and services received but not yet paid for. Unlike other financing sources, such as loans or issuing stocks, accounts payable do not require a formal agreement or contract, and there are no interest charges associated with them. Therefore, accounts payable can be used as a short-term financing option to meet immediate working capital needs.

Question 15

Bigtime Corp.is considering borrowing $15,000 for a 60-day period.The firm will repay the $15,000 principal amount plus $200 in interest.What is the effective annual rate of interest? Use a 360-day year.
A) 7.2%
B) 8.0%
C) 8.2%
D) 10.5%

Accepted Answer

The answer of Bigtime Corp.is considering borrowing $15,000 for a...

Question 16

A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 days.

Accepted Answer

A negative cash conversion cycle means that the company is collecting payment from customers before it needs to pay its suppliers, which is a good thing as it leads to improved cash flow and liquidity. On the other hand, a cash conversion cycle of 50 days means that the company is taking longer to collect payment from customers and/or is taking longer to pay its suppliers, which can hurt cash flow and liquidity.

Question 17

Your company is able to arrange financing at either a rate of 12.75% annually,or at a rate of 12% compounded monthly.Assuming financing is needed for one year,which rate is the best?
A) 12% compounded monthly, because the annual percentage yield is 12.68%
B) Both rates are effectively the same, so your company should be indifferent between the two.
C) 112.75% annually because the annual percentage yield for 12% compounded monthly is greater than 12.75%.
D) 12.75% annually, because even though the annual percentage yield is higher, interest if paid only once per year at year end.

Accepted Answer

The best choice is 12% compounded monthly because it has a higher annual percentage yield (APY) than the 12.75% annual rate. The APY for 12% compounded monthly is calculated as (1+0.01/12)^12 - 1 = 0.1268, which is higher than the 12.75% annual rate. This means that with the 12% compounded monthly rate, more interest is earned on the principal investment.

Question 18

Assume that Billings,Inc.borrows $5,000,000 for 120 days.The total interest paid is $150,000.What is the APY,or Effective Annual Rate of interest that Billings pays?
A) 3.00%
B) 9.00%
C) 9.27%
D) 9.77%

Accepted Answer

To find the APY, we can use the formula:

APY = (1 + r/n)^n - 1

where r is the nominal annual interest rate and n is the number of compounding periods in a year.

First, we need to find the nominal annual interest rate. We can use the formula:

Interest = Principal x Rate x Time

Plugging in the values we know:

150,000 = 5,000,000 x r x (120/365)

Solving for r:

r = 0.09863 or 9.863%

Next, we need to find the number of compounding periods in a year. Since the loan is for 120 days, or about 4 months, there are 3 compounding periods in a year. We can now calculate the APY:

APY = (1 + 0.09863/3)^3 -1 = 0.0927 or 9.27%

Therefore, the best choice is C with an APY of 9.27%.

Question 19

With regard to the hedging principle,which of the following assets should be financed with current liabilities?
A) minimum level of cash required for year round operations
B) expansion of accounts receivable to meet seasonal demand
C) machinery
D) buildings

Accepted Answer

Financing the expansion of accounts receivable with current liabilities is a hedging strategy as it matches short-term debt with short-term assets. This allows the company to avoid long-term financing commitments and reduce interest expenses. The other options, such as minimum cash requirements, machinery, and buildings, are typically financed with long-term debt or equity.

Question 20

If a company offers a cash discount for early payment,this will most likely increase its cash conversion cycle since it will have to pay out more cash to its customers.

Accepted Answer

Offering a cash discount for early payment can actually decrease the cash conversion cycle as it incentivizes customers to pay earlier, allowing the company to collect cash faster.

Quiz 15: Working-Capital Management

The cash conversion cycle is equal to the days of sales outstanding plus the days of sales in inventory plus the days of payables outstanding.

Trade credit is an example of which of the following sources of financing?

Key Enterprises borrows $12,000 for a short-term purpose.The loan will be repaid after 120 days,with Key paying a total of $12,400.What is the approximate cost of credit using the APY ,or annual percentage yield,calculation?

If a company's inventory turnover increases from 8 to 10,then its cash conversion cycle will also increase,i.e.,get longer.

The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.

In the context of managing working capital,the hedging principle refers to which of the following?

The cash conversion cycle cannot be negative.

Key Enterprises borrows $12,000 for a short-term purpose.The loan will be repaid after 120 days,with Key paying a total of $12,400.What is the approximate cost of credit using the APR ,or annual percentage rate,calculation?

Compounding effectively raises the cost of short-term credit.

One way to improve a company's cash conversion cycle is to increase its days sales outstanding.

Which of the following is most likely to be a temporary source of financing?

A company that forgoes the discount when credit terms are 2/10 net 60 due to insufficient cash flow would be better off to borrow funds and take the discount as long the company could borrow the funds at any rate

With regard to the hedging principle,which of the following would be an appropriate method to finance a minimum level of current assets required for year round operations?

Which of the following is considered a spontaneous source of financing?

Bigtime Corp.is considering borrowing $15,000 for a 60-day period.The firm will repay the $15,000 principal amount plus $200 in interest.What is the effective annual rate of interest? Use a 360-day year.

A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 days.

Your company is able to arrange financing at either a rate of 12.75% annually,or at a rate of 12% compounded monthly.Assuming financing is needed for one year,which rate is the best?

Assume that Billings,Inc.borrows $5,000,000 for 120 days.The total interest paid is $150,000.What is the APY,or Effective Annual Rate of interest that Billings pays?

With regard to the hedging principle,which of the following assets should be financed with current liabilities?

If a company offers a cash discount for early payment,this will most likely increase its cash conversion cycle since it will have to pay out more cash to its customers.