Ch. 15- EXAM 3

Since easing the credit policy generally lengthens the collection period and worsens the aging schedule, why do firms ever ease their credit policies? A. Easing normally stimulates sales. B. Easing helps them collect on sales quicker. C. Easing increases the deferral period for payables. D. Easing decreases the current ratio. E. Easing decreases the DSO.

A. Easing normally stimulates sales.

Other things held constant, it is better to have a relatively short than a relatively long cash conversion cycle. (a follow-up: how to shorten CCC?)

True

True or false: A low level of current assets given a certain level of sales can increase the asset turnover ratio of a firm and thus boost the firm's ROE.

True

Ashwell Corp has $1,600,000 of sales, $200,000 of inventories, $150,000 of receivables, and $100,000 of payables. Its cost of goods sold is 70% of sales. Assume a 365-day year. What is Ashwell's payable deferral period

32.59 days 100,000/ ((1600000*.7)/365)= 32.59

Ashwell Corp has $1,600,000 of sales, $200,000 of inventories, $150,000 of receivables, and $100,000 of payables. Its cost of goods sold is 70% of sales. Assume a 365-day year. What is Ashwell's cash conversion cycle (CCC)?

66.81 days Inv. Conv. Per.: 200,000/ ((1600000*.7)/365)= 65.18 Rec. Coll. Per: 150,000/ (1600000/365) = 34.22 Pay. Def. Per: 100,000/ ((1600000*.7)/365)= 32.59 CCC: 65.18+ 34.22-32.59== 66.81

Net working capital is defined as current assets minus current liabilities.

True

Temporary current assets are current assets that fluctuate with seasonal or cyclical variations in sales.

True

If a company follows an aggressive financing policy, long-term debt and equity might be used to finance temporary current assets.

False: SHORT-TERM financing is used to finance PERMANENT current and fixed assets

Which of the following statements is CORRECT? A. Net working capital is defined as current assets minus current liabilities. B. Gross working capital is defined as the current liabilities used in operations. C. The current ratio is calculated as net working capital divided by current liabilities. D. Working capital represents the fixed assets a firm uses to support its operations.

A. Net working capital is defined as current assets minus current liabilities.

Which of the following statements is CORRECT? A. Other things held constant, it is better to have a relatively short than a relatively long cash conversion cycle. B. Other things held constant, it is better to have a relatively long than a relatively short cash conversion cycle. C. Other things held constant, the length of the cash conversion cycle has no effect on a firm's profitability. D. Other things held constant, the length of the cash conversion cycle might have an effect on a firm's profitability, but it is impossible to state if that effect is positive or negative. E. Since firms have no control over their cash conversion cycles, there is little point in studying these cycles.

A. Other things held constant, it is better to have a relatively short than a relatively long cash conversion cycle. *The shorter the CCC, the higher the profitability (assuming sales and operating costs are constant).

Which of the following statements is correct? A. A restricted current asset investment policy refers to a policy under which firms hold relatively large amounts of current assets. B. If a company follows a current asset financing policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. C. Working capital represents the fixed assets a firm uses to support its operations. D. If a company follows an aggressive financing policy, long-term debt and equity might be used to finance temporary current assets. E. Net working capital is defined as current assets minus current liabilities.

E. Net working capital is defined as current assets minus current liabilities.

Companies should always prefer short-term financing to long-term financing.

False: Firms need to choose based on their specific condition and risk tolerance. Aggressive managers may lean more towards short-term financing, because it is of lower cost (which can translate to higher return). Conservative managers may lean towards long-term financing to avoid potential renewal problems.

The relaxed working capital investment policy is safer, but yields a lower expected return.

True

Ashwell Corp has $1,600,000 of sales, $200,000 of inventories, $150,000 of receivables, and $100,000 of payables. Its cost of goods sold is 70% of sales. Assume a 365-day year. What is Ashwell's receivable collection period?

34.22 days Rec. coll. period: accts rec/ (sales/365) 150,000 / (1,600,000/365)

Ashwell Corp has $1,600,000 of sales, $200,000 of inventories, $150,000 of receivables, and $100,000 of payables. Its cost of goods sold is 70% of sales. Assume a 365-day year. What is Ashwell's inventory conversion period?

65.18 days 200,000/ ((1600000*.7)/365)= 65.18

Ashwell Corp has $1,600,000 of sales, $200,000 of inventories, $150,000 of receivables, and $100,000 of payables. Its cost of goods sold is 70% of sales. Assume a 365-day year. Ashwell's wants to reduce its cash conversion cycle. Which of the following steps would help it accomplish that goal? A.It increases its average inventory while holding sales constant. B.It tightens its credit policy while holding sales constant. C. It starts paying its bills faster, thus reducing its average accounts payable. Sales are not affected by this action. D.It loosens its credit policy while holding sales constant.

B.It tightens its credit policy while holding sales constant. *tighter credit policy shortens the receivables collection period which shortens the CCC

If a company follows a current asset financing policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.

False: For current asset financing policy of "matching maturities", companies Match the maturity of the assets with the maturity of the financing. So all of the fixed assets plus the permanent current assets are financed with long-term capital (that is, long-term debt and equity), but temporary current assets are financed with short-term debt.

Since easing the credit policy generally lengthens the collection period, no company would ever want to ease their credit policies.

False: easing the credit policy can stimulate sales

True or False: Cards 11- A restricted current asset investment policy refers to a policy under which firms hold relatively large amounts of current assets.

False: firms hold relatively large amounts of current assets under a RELAXED policy

Working capital represents the fixed assets a firm uses to support its operations

False: refers to the CURRENT assets