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Exam 16: Working Capital Management

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Question 31

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Which of the following statements is NOT CORRECT?

A) A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales,profits,and cash flows during the coming year.
B) Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
C) The cash budget is useful to help estimate future financing needs,especially the need for short-term working capital loans.
D) If a firm wants to generate more cash flow from operations in the next month or two,it could change its credit policy from 2/10,net 30 to net 60.
E) Managing working capital is important because it influences financing decisions and the firm's profitability.

F) A) and B)
G) B) and D)

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Question 32

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If a profitable firm finds that it simply must "stretch" its accounts payable,then this suggests that it is undercapitalized,i.e. ,that it needs more working capital to support its operations.

A) True
B) False

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Question 33

Multiple Choice

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Buskirk Construction buys on terms of 2/15,net 60 days.It does not take discounts,and it typically pays on time,60 days after the invoice date.Net purchases amount to $500,000 per year.On average,how much "free" trade credit does the firm receive during the year? (Assume a 365-day year,and note that purchases are net of discounts. )

Van Den Borsh Corp.has annual sales of $68,735,000,an average inventory level of $15,012,000,and average accounts receivable of $10,008,000.The firm's cost of goods sold is 85% of sales.The company makes all purchases on credit and has always paid on the 30th day.However,it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day.The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000.What will be the net change in the cash conversion cycle,assuming a 365-day year? Do not round intermediate calculations.Round to the nearest whole day.

Inmoo Company's average age of accounts receivable is 68 days,the average age of accounts payable is 40 days,and the average age of inventory is 69 days.Assuming a 365-day year,what is the length of its cash conversion cycle?

Which of the following statements is most consistent with efficient inventory management? The firm has a

On average,a firm collects checks totaling $250,000 per day.It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm.Assume that (1)a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2)the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs $25,000 annually.

A revolving credit agreement is a formal line of credit.The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.​

The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.

If the yield curve is upward sloping,then short-term debt will be cheaper than long-term debt.Thus,if a firm's CFO expects the yield curve to continue to have an upward slope,this would tend to cause the current ratio to be relatively low,other things held constant.

The calculated cost of trade credit can be reduced by paying late.

Which of the following statements is CORRECT?

Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc,which is highly profitable but has been experiencing cash shortages due to its high growth rate.As one part of your analysis,you want to determine the firm's cash conversion cycle.Using the following information and a 365-day year,what is the firm's present cash conversion cycle? Do not round intermediate calculations. $\begin{array} { l r } \text { Average inventory } = & \$ 75,000 \\\text { Annual sales } = & \$ 775,000 \\\text { Annual cost of goods sold } = & \$ 465,000 \\\text { Average accounts receivable } = & \$ 160,000 \\\text { Average accounts payable } = & \$ 25,000\end{array}$ ?

Cass & Company has the following data.What is the firm's cash conversion cycle? $\begin{array} { l l } \text { Inventory Conversion Period } = & 47 \text { days } \\\text { Receivables Collection Period } = & 17 \text { days } \\\text { Payables Deferral Period } = & 25 \text { days }\end{array}$ ?

Roton Inc.purchases merchandise on terms of 2/15,net 40,and its gross purchases (i.e. ,purchases before taking off the discount) are $675,000 per year.What is the maximum dollar amount of costly trade credit the firm could get,assuming it abides by the supplier's credit terms? (Assume a 365-day year. ) Do not round intermediate calculations.

Data on Shick Inc.for last year are shown below,along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done,by how much would receivables decline? Use a 365-day year.Do not round your intermediate calculations. $\begin{array} { l r } \text { Sales } & \$ 111,000 \\\text { Accounts receivable } & \$ 16,000 \\\text { Days Sales Outstanding (DSO) } & 52.61 \\\text { Benchmarks' Days Sales Outstanding (DSO) } & 20.000\end{array}$ ?

Your company has been offered credit terms of 4/30,net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 145 days after the purchase? (Assume a 365-day year. )

Atlanta Cement,Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 65 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Although short-term interest rates have historically averaged less than long-term rates,the heavy use of short-term debt is considered to be an aggressive current asset financing strategy because of the inherent risks of using short-term financing.

Trade credit can be separated into two components: free trade credit,which is credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.