Question 1

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements concerning commercial paper is incorrect?

Accepted Answer

A)   Commercial paper is generally written for terms less than 270 days.
B)   Commercial paper generally carries an interest rate below the prime rate.
C)   Commercial paper is sold to money market mutual funds, as well as to other financial institutions and nonfinancial corporations.
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 a type of unsecured promissory note issued by large, strong firms.F) B) and D)
G) A) and E)

Question 3

A firm that employs an aggressive working capital financing policy stands to increase profitability when the yield curve changes from upward sloping to downward sloping.

Accepted Answer

A) True 
 B)False

Question 4

Which of the following is typically part of the cash budget?

Accepted Answer

A)   Payments lag.
B)   Payment for plant construction.
C)   Cumulative cash.
D)   Statements a and c are correct.
E)   All of the statements above are correct.F) C) and E)
G) C) and D)

Question 5

Gaston Piston Corp. has annual sales of $50,735,000 and maintains an average inventory level of $15,012,000. The average accounts receivable balance outstanding is $10,008,000. The company makes all purchases on credit and has always paid on the 30th day. The company is now going to take full advantage of trade credit and pay its suppliers on the 40th day. If sales can be maintained at existing levels but inventory can be lowered by $1,946,000 and accounts receivable lowered by $1,946,000, what will be the net change in the cash conversion cycle? (Assume there are 365 days in the year.)

Accepted Answer

A)   -14.0 days
B)   -18.8 days
C)   -28.0 days
D)   -25.6 days
E)   -38.0 daysF) C) and E)
G) A) and B)

Question 6

Which of the following statement completions is most correct? If the yield curve is upward sloping, then a firm's marketable securities portfolio, assumed to be held for liquidity purposes, should be

Accepted Answer

A)   Weighted toward long-term securities because they pay higher rates.
B)   Weighted toward short-term securities because they pay higher rates.
C)   Weighted toward U.S. Treasury securities to avoid interest rate risk.
D)   Weighted toward short-term securities to avoid interest rate risk.
E)   Balanced between long- and short-term securities to minimize the effects of either an upward or a downward trend in interest rates.F) B) and E)
G) All of the above

Question 7

The target cash balance is set optimally such that it need not be adjusted for seasonal patterns and unanticipated fluctuations although it is changed to reflect long-term changes in the firm's operations.

Accepted Answer

A) True 
 B)False

Question 8

Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37 percent. But since your firm is not taking discounts and is paying on Day 20, what is the effective annual cost of your firm's current practice, using a 365-day year?

Accepted Answer

A)   36.7%
B)   105.4%
C)   73.4%
D)   43.6%
E)   109.0%F) C) and D)
G) D) and E)

Question 9

Analyzing days sales outstanding (DSO)  and the aging schedule are two common methods for monitoring receivables. However, they can provide erroneous signals to credit managers when

Accepted Answer

A)   Customers' payments patterns are changing.
B)   Sales fluctuate seasonally.
C)   Some customers take the discount and others do not.
D)   Sales are relatively constant, either seasonally or cyclically.
E)   None of the statements above is correct.F) B) and D)
G) All of the above

Question 10

Hayes Hypermarket purchases $4,562,500 in goods over a 1-year period from its sole supplier. The supplier offers trade credit under the following terms: 2/15, net 50 days. If Hayes chooses to pay on time but not to take the discount, what is the average level of the company's accounts payable, and what is the effective annual cost of its trade credit? (Assume a 365-day year.)

Accepted Answer

A)   $208,333; 17.81%
B)   $416,667; 17.54%
C)   $416,667; 27.43%
D)   $625,000; 17.54%
E)   $625,000; 23.45%F) A) and B)
G) None of the above E

Question 11

If Hot Tubs Inc. had sales of $2,027,773 per year (all credit)  and its days sales outstanding was equal to 35 days, what was its average amount of accounts receivable outstanding? (Assume a 365-day year.)

Accepted Answer

A)   $194,444
B)   $ 57,143
C)   $ 5,556
D)   $ 97,222
E)   $212,541F) B) and E)
G) B) and D)

Question 12

The maturity of most bank loans is short-term. Bank to business loans are frequently 90-day notes which are often rolled over, or renewed, at the end of their maturity.

Accepted Answer

A) True 
 B)False

Question 13

Accruals are "free" financing in the sense that no explicit interest is paid on accruals.

Accepted Answer

A) True 
 B)False

Question 14

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on uniform cash receipts and disbursements, but actual receipts are concentrated at the beginning of each month.

Accepted Answer

A) True 
 B)False  True

Question 15

A lockbox plan is most beneficial to firms which

Accepted Answer

A)   Send payables over a wide geographic area.
B)   Have widely disbursed manufacturing facilities.
C)   Have a large marketable securities account to protect.
D)   Hold inventories at many different sites.
E)   Make collections over a wide geographic area.F) A) and E)
G) B) and C)

Question 16

The aging schedule is a commonly used method of monitoring receivables.

Accepted Answer

A) True 
 B)False

Question 17

Wicker Corporation is determining whether to support $100,000 of its permanent working capital with a bank note or a short-term bond. The firm's bank offers a two-year note for which the firm will receive $100,000 and repay $118,810 at the end of two years. The firm has the option to renew the loan at market rates. Alternatively, Wicker can sell 8.5 percent annual coupon bonds with a 2-year maturity and $1,000 par value at a price of $973.97. How many percentage points lower is the interest rate on the less expensive debt instrument?

Accepted Answer

A)   0.0%
B)   1.2%
C)   1.0%
D)   1.8%
E)   0.6%F) B) and E)
G) A) and E)

Question 18

Which of the following statements is most correct?

Accepted Answer

A)   A good cash management system would minimize disbursement float and maximize collections float.
B)   If a firm begins to use a well-designed lockbox system, this will reduce its customers' net float.
C)   In the early 1980's, the prime interest rate hit a high of 21 percent. In 1995 the prime rate was considerably lower. That sharp interest rate decline has increased firms' concerns about the efficiency of their cash management programs.
D)   If a firm can get its customers to permit it to pay by wire transfers rather than having to write checks, this will increase its net float and thus reduce its required cash balances.
E)   A firm which has such an efficient cash management system that it has positive net float can have a negative checkbook balance at most times and still not have its checks bounce.F) C) and E)
G) All of the above

Question 19

If you receive some goods on April 1 with the follow¬ing terms; 3/20, net 30, June 1 dating, it means that you will receive a 3 percent discount if the bill is paid on or before June 20 and that the full amount must be paid 30 days after receipt of the goods.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is most correct?

Accepted Answer

A)   Poor synchronization of cash flows which results in high cash management costs can be partially offset by increasing disbursement float and decreasing collections float.
B)   The size of a firm's net float is primarily a function of its natural cash flow synchronization and how it clears its checks.
C)   Lockbox systems are used mainly for security purposes as well as to decrease the firm's net float.
D)   If a firm can speed up its collections and slow down its disbursements, it will be able to reduce its net float.
E)   A firm practicing good cash management and making use of positive net float will bring its check book balance as close to zero as possible, but must never generate a negative book balance.F) A) and D)
G) A) and C) A

Exam 21: Working Capital Management

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Correct Answer
verified

Which of the following statements concerning commercial paper is incorrect?

Correct Answer
verified

A firm that employs an aggressive working capital financing policy stands to increase profitability when the yield curve changes from upward sloping to downward sloping.

Correct Answer
verified

Which of the following is typically part of the cash budget?

Correct Answer
verified

Correct Answer
verified

Which of the following statement completions is most correct? If the yield curve is upward sloping, then a firm's marketable securities portfolio, assumed to be held for liquidity purposes, should be

Correct Answer
verified

The target cash balance is set optimally such that it need not be adjusted for seasonal patterns and unanticipated fluctuations although it is changed to reflect long-term changes in the firm's operations.

Correct Answer
verified

Correct Answer
verified

Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring receivables. However, they can provide erroneous signals to credit managers when

Correct Answer
verified

Correct Answer
verified
E

If Hot Tubs Inc. had sales of $2,027,773 per year (all credit) and its days sales outstanding was equal to 35 days, what was its average amount of accounts receivable outstanding? (Assume a 365-day year.)

Correct Answer
verified

The maturity of most bank loans is short-term. Bank to business loans are frequently 90-day notes which are often rolled over, or renewed, at the end of their maturity.

Correct Answer
verified

Accruals are "free" financing in the sense that no explicit interest is paid on accruals.

Correct Answer
verified

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on uniform cash receipts and disbursements, but actual receipts are concentrated at the beginning of each month.

Correct Answer
verified
True

A lockbox plan is most beneficial to firms which

Correct Answer
verified

The aging schedule is a commonly used method of monitoring receivables.

Correct Answer
verified

Correct Answer
verified

Which of the following statements is most correct?

Correct Answer
verified

If you receive some goods on April 1 with the follow¬ing terms; 3/20, net 30, June 1 dating, it means that you will receive a 3 percent discount if the bill is paid on or before June 20 and that the full amount must be paid 30 days after receipt of the goods.

Correct Answer
verified

Which of the following statements is most correct?

Correct Answer
verified
A

Exam 21: Working Capital Management

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Correct AnswerverifiedShow Answer

Which of the following statements concerning commercial paper is incorrect?

Correct AnswerverifiedShow Answer

A firm that employs an aggressive working capital financing policy stands to increase profitability when the yield curve changes from upward sloping to downward sloping.

Correct AnswerverifiedShow Answer

Which of the following is typically part of the cash budget?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statement completions is most correct? If the yield curve is upward sloping, then a firm's marketable securities portfolio, assumed to be held for liquidity purposes, should be

Correct AnswerverifiedShow Answer

The target cash balance is set optimally such that it need not be adjusted for seasonal patterns and unanticipated fluctuations although it is changed to reflect long-term changes in the firm's operations.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring receivables. However, they can provide erroneous signals to credit managers when

Correct AnswerverifiedShow Answer

Correct AnswerverifiedE

If Hot Tubs Inc. had sales of $2,027,773 per year (all credit) and its days sales outstanding was equal to 35 days, what was its average amount of accounts receivable outstanding? (Assume a 365-day year.)

Correct AnswerverifiedShow Answer

The maturity of most bank loans is short-term. Bank to business loans are frequently 90-day notes which are often rolled over, or renewed, at the end of their maturity.

Correct AnswerverifiedShow Answer

Accruals are "free" financing in the sense that no explicit interest is paid on accruals.

Correct AnswerverifiedShow Answer

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on uniform cash receipts and disbursements, but actual receipts are concentrated at the beginning of each month.

Correct AnswerverifiedTrue

A lockbox plan is most beneficial to firms which

Correct AnswerverifiedShow Answer

The aging schedule is a commonly used method of monitoring receivables.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedShow Answer

If you receive some goods on April 1 with the follow¬ing terms; 3/20, net 30, June 1 dating, it means that you will receive a 3 percent discount if the bill is paid on or before June 20 and that the full amount must be paid 30 days after receipt of the goods.

Correct AnswerverifiedShow Answer

Which of the following statements is most correct?

Correct AnswerverifiedA

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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E

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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True

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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A