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Which of the following will have a favorable impact on cash flow? A. Reduce the customer collection period B . Accelerate payments to creditors C. Increase depreciation rates D. Increase spending on fixed assets E. Repurchasing equity

Reduce the customer collection period

The Toy World case illustrated that level production usually requires lower COGS T/F

TRUE

Which ONE of the following statements is correct? a) The Balance Sheet and the Income Statement are like a snapshot (photo), but the Cash Flow statement is like a movie. b) The Balance Sheet and the Cash Flow Statement are like a snapshot, but the Income statement is like a movie. c) The Cash Flow Statement and the Income Statement are like a snapshot, but the Balance Sheet is like a movie. d) The Balance Sheet and the Income Statement are like a snapshot, but the Cash Flow statement is like a movie. e) The Cash Flow Statement and the Income Statement are like a movie, but the Balance Sheet is like a snapshot. f) The Balance Sheet and the Cash Flow Statement are like a movie, but the Income statement is like a snapshot.

The Cash Flow Statement and the Income Statement are like a movie, but the Balance Sheet is like a snapshot.

Data show that low-rated debt issuers have smaller EBITDA Interest coverage ratios than firms with higher ratings. T/F

True

For any given minimum EBIT interest coverage ratio (for example 2), the corresponding minimum EBITDA interest coverage ratio must be a greater number (for example, greater than 2) T/F

True

Forecasting Accounts Receivable for next year by assuming the same collection period as this year, leads to the same A/R forecast as if one had instead used this year's value of A/R as a percentage of Sales and used this percentage for next year's A/R forecast. T/F

True

In the Horizon Lines case, it was not necessary to subtract operating lease payments from adjusted EBITDA to verify if a payment default would occur. T/F?

True

In the Snyder Gardens case, we saw how the company's fast growth caused it to borrow heavily from its banker. Fortunately, the interest rate was a manageable 7% per year, which was reasonable for that time period. However, had the interest rate been much higher, a profitability ratio such as Snyder's net profit margin would have looked weaker. T/F?

True

In the Toy World case, the difference between the level and seasonal production systems was that a seasonal production system is less likely to create a cash shortage. T/F

True

Managing its fixed assets more efficiently would be a way for a firm to increase its sustainable growth rate. T/F

True

Other things equal, HIGHER interest rates would decrease the desirability of the level production system relative to the seasonal production system in the Toy World case T/F

True

The inclusion of a cost in the Income statement depends on whether the resource has been consumed, not whether it has been paid for.

True

When creating a forecasted income statement and balance sheet for a future year, a circular reference will occur in a spreadsheet when Cash is the plug figure and excess cash earns interest. T/F

True

The borrowing rates in the Toy World case were about 9%. If those interest rates had been lower, say around 5%, then Toy World could afford a somewhat greater level of inventory obsolescence before it no longer pays to switch to level production, all else being equal. T/F?

True (lower borrowing rates reduce the extra financing costs that comes with level production, and increase profits more than if rates were 9%. With somewhat greater profits relative to a 9% environment, more inventory write-offs are possible before the extra profits are offset by obsolete inventory).

If a company collects faster from its customers next year, compared to this year, it implies that all else being equal, working capital changes will increase the company's free cash flows next year, compared to this year. T/F

True - faster collection implies a smaller accounts receivable balance, and a smaller increase in NWC

You are creating a pro forma financial statement where Bank Debt is the plug. The firm you are modeling has a 100% dividend payout policy: all profits are paid out as dividends. Therefore, there will not be a circularity problem in Excel. T/F?

True: with full earnings payout, Equity this year is the same as equity last year. Bank debt, as a plug, requires you to first know equity, but if equity does not depend on this year's profits (because they are not reinvested), the circularity disappears.

20. A distressed startup pharmaceutical company in Chapter 11 owes its lenders $500 million in debt. The firm became financially distressed because it spent much more cash than was expected developing a new drug. This drug (the firm's only product) allows college students to forego sleep for several days (with no side effects) so that they can spend more time studying for their exams in a series of all-nighters just before the test. The drug, having now been approved by the relevant authorities, is ready for production and sale. The firm's investment bankers estimate that annual FCF from the commercialization of the drug, should be approximately $25 million per year (starting one year from now, with an annual growth in FCF of about 2% thereafter). Similar firms have a cost of total capital of 8% per year. Alternatively, it is also estimated that the patent rights for this sensational drug could be sold to other pharma companies for about $600 million net of transactions and liquidation costs.

Will enter Chap 11 because the enterprise value does not cover debt ---> 416.67 = 25/(.08-.02)

A supplier offers its customers payment terms of 1.75% 20, net 50. Customer XYZ is always paying late, however: XYZ typically pays the supplier on day 65 (instead of on day 50). So far, the supplier has allowed this. What is the exact equivalent annual borrowing rate of the customer now? (a year has 360 days) a) 14.9% b) 21.8% c) 13.1% d) 6.8% e) 19.7%

a) 14.9%

14. The current ratio is defined as Current Assets divided by Current Liabilities. The quick ratio is a very similar liquidity ratio, except that Inventory is removed from the numerator. Therefore, if your lenders impose a minimum liquidity ratio, would you, as a borrower, prefer a requirement that your Current Ratio should always be at least 1.5, or would you prefer if you had to maintain a quick ratio of at least 1.5? a) The borrower will prefer a minimum current ratio of 1.5 b) The borrower will prefer a minimum quick ratio of 1.5

a) The borrower will prefer a minimum current ratio of 1.5

If P&G starts paying their suppliers 30 days later, then one of the things Fibria could in theory do to deal with this (instead of participating in the SCF program) would be to: a) pay its own suppliers more slowly b) increase its dividends c) extend more generous payment terms to its own customers d) repay some long term debt e) increase its inventory levels

a) pay its own suppliers more slowly

30. Regarding the Toy World case, which of the following statements is correct? a) under level production, COGS was much greater than the cash production costs during September-November. b) under seasonal production, COGS was much greater than the cash production costs during September-November. c) under level production, COGS was much smaller than the cash production costs during September-November. d) under seasonal production, COGS was much smaller than the cash production costs during September-November.

a) under level production, COGS was much greater than the cash production costs during September-November.

5. Assume a firm is expected to use its fixed assets less efficiently next year, compared to this past year. You are doing a pro forma financial analysis and are trying to forecast that firms' Fixed Assets for next year. You have already forecasted the Sales for next year. You want to use this past year's value of the ratio of Fixed Assets to Sales, adjust it, then and apply that adjusted percentage to next period's forecasted sales. The most appropriate adjustment would be to... a) increase the ratio of Fixed Assets to Sales b) decrease the ratio of Fixed Assets to Sales c) keep the ratio the same

a)*increase the ratio of Fixed Assets to Sales

11. Consider a firm with Sales of $360 million and total assets of $180 mm. The leverage ratio is 1/3 (defined as Debt divided by total assets). Next year, the firm expects Sales to grow by 30%. Assume that its asset turnover improves by 10 percent next year. Then, assuming constant leverage and no outside equity, what must the ROE be in order to allow this firm to finance its growth? a) about 45% b) about 3% c) about 38% d) about 18% e) about 5% f) about 26%

about 18% (build a BS)

36. Which of the following (all else equal) will have a favorable impact on cash flow? a)Reduce the customer collection period b)Delay payments to creditors c)Reduce Inventory days d)Improving asset turnover e) all of the above f) none of the above

all of the above

15. Consider two firms A and B, with the same EBITDA and Interest Expenses. If firm A is more capital intensive and therefore has more Depreciation than firm B, then.... a) both firms will have the same EBIT and EBITDA coverage ratios b) A will have a lower EBIT coverage ratio than B but the same EBITDA coverage ratio c) A will have a higher EBIT coverage ratio than B but the same EBITDA coverage ratio d) A will have a lower EBITDA coverage ratio than B but the same EBIT coverage ratio e) A will have a lower EBITDA coverage ratio than B but a higher EBIT coverage ratio

b) A will have a lower EBIT coverage ratio than B but the same EBITDA coverage ratio

17. From 2005 to 2007, Delphi was financially distressed. During that period, a) Delphi stretched payments to its suppliers but collected more slowly from its own customers b) Delphi stretched payments to its suppliers and collected faster from its own customers c) Delphi collected more slowly from its own customers but experienced a faster inventory turnover d) Delphi stretched payments to its suppliers but experienced a faster inventory turnover

b) Delphi stretched payments to its suppliers and collected faster from its own customers

3. In the UST case, why was it useful to assume no growth in sales when comparing the pre-repurchase to the post-repurchase financials? a) because if sales had increased, the tax savings would have been greater than the increase in cash flows to all claimants b) because if sales had increased, the tax savings would have been smaller than the increase in cash flows to all claimants c) it does not matter whether sales grow or not, it will always be the case that the reduction in corporate taxes equals the cash flow available to all claimants

b) because if sales had increased, the tax savings would have been smaller than the increase in cash flows to all claimants

In the UST case, why was it useful to assume no growth in sales when comparing the pre-repurchase to the post-repurchase financials? a) because if sales had increased, the tax savings would have been greater than the increase in cash flows to all claimants b) because if sales had increased, the tax savings would have been smaller than the increase in cash flows to all claimants c) it does not matter whether sales grow or not, it will always be the case that the reduction in corporate taxes equals the cash flow available to all claimants

b) because if sales had increased, the tax savings would have been smaller than the increase in cash flows to all claimants

2. A firm's collection period (CP) over the last 3 years was 26 days last year, 23 days 2 years ago, and 20 days 3 years ago. There are various ways in which one can use these past CPs to forecast next year's. In that context, which of the following statements is correct? a) if you think the last 3 years reveal a continuing trend, the best CP forecast for next year would be 23 b) if you think the business model has changed recently in terms of what kind of products you sell, relative to a few years ago, and what type of customer you have, then the best CP forecast for next year is 26 c) if you think the last 3 years do not reveal a continuing trend, the best CP forecast for next year would be 29 d) one should always use the average of the last 3 years to generate a forecast of the next year's CP

b) if you think the business model has changed recently in terms of what kind of products you sell, relative to a few years ago, and what type of customer you have, then the best CP forecast for next year is 26

17. P&G calculates both a raw DPO and an adjusted DPO. In general, what is the relation between DPO and adjusted DPO? a) they must always be equal b) the adjusted DPO will always be smaller c) the raw DPO must always be smaller d) the adjusted DPO will always be 20% smaller than the raw DPO

b) the adjusted DPO will always be smaller

P&G calculates both a raw DPO and an adjusted DPO. In general, what is the relation between DPO and adjusted DPO? a) they must always be equal b) the adjusted DPO will always be smaller c) the raw DPO must always be smaller d) the adjusted DPO will always be 20% smaller than the raw DPO

b) the adjusted DPO will always be smaller

31. Viktor's Secrets Co., the well-known manufacturer of men's clothes, sells on credit terms of net 45. However, its accounts are on average 25 days past due. If annual credit sales are $5 million, what is the company's average balance in accounts receivable? (A year is defined as 365 days) a)$1,349,700 b)$958,904 c) $616,438 d) $342,466

b)$958,904 (=$5,000,000*70/365)

18. Which of the following payment terms offered by a supplier to its customers is the most expensive for the customer (if the customer does not pay early)? (A year has 360 days) a) 0.50% 40, net 60 b) 1.00% 20, net 50 c) 0.35% 60, net 70 d) 0.35% 50, net 65

c) 0.35% 60, net 70 (13.4% EAR

Which of the following three early payment terms offered by a supplier to its customers is the most expensive for the customer? a) 3% 20, net 80 b) 1.50% 15, net 40 c) 2.2% 25, net 60

c) 2.2% 25, net 60

37. Which of the following situations is most likely to lead to a positive net working capital? a) Collecting early from customers, paying suppliers early b) Collecting early from customers, paying suppliers late c) Collecting late from customers, paying suppliers early d) Collecting late from customers, paying suppliers late

c) Collecting late from customers, paying suppliers early

4. According to the trade-off theory of optimal capital structure, firms balance the costs and benefits of debt when choosing a capital structure. Whether this theory explains actual capital structure patterns is an interesting question. So, assume that we are doing a study comparing the relative amounts of debt (as a percent of total capital) used by non-financial corporations in the S&P 500 in 2020 versus their counterparts in the UK (where the corporate tax rate is currently lower than in the US). a) If we were to find that in 2020 S&P 500 firms borrow more than UK firms, that finding would reject the trade-off theory b) If we were to find that in 2020 S&P 500 firms borrow less than UK firms, that finding would support the trade-off theory c) If we were to find that in 2020 S&P 500 firms borrow more than UK firms, that finding would support the trade-off theory

c) If we were to find that in 2020 S&P 500 firms borrow more than UK firms, that finding would support the trade-off theory

8. Which of the following could indicate "pure financial distress" but not necessarily "economic distress"? a) Sales have been declining the last few years b) Overhead (SG&A) has been increasing (as a % of Sales) in the last few years c) Interest expense exceeds EBIT d) The company booked an impairment charge on its goodwill because a small company that was acquired 2 years ago turns out to have little value

c) Interest expense exceeds EBIT

6. Which of the following does NOT belong with the others? a) The EBITDA interest coverage ratio should exceed 2.5 b) The dividends must be no more than 50% of the period's net income c) The ratio of equity to long-term debt must be no more than .65 d) The ratio of senior debt to EBITDA must remain below 3

c) The ratio of equity to long-term debt must be no more than .65

6. Non-investment grade firms ... a) Typically have high EBIT coverage ratios but low EBITDA coverage ratios b) Typically have low leverage but high profitability c) Typically have more leverage and lower profitability than investment grade firms d) Typically borrow less than AAA firms

c) Typically have more leverage and lower profitability than investment grade firms

The best way to forecast a firm's interest expense when creating pro forma financial statements is to... a) calculate an average of the past ratios of interest expense to cost of goods sold, and extrapolate that ratio for the forecast year b) calculate the annual year-on-year percentage growth rate of interest expense for the past few years, and use the average of these percentage growth rates for the forecast year c) multiply the interest rate the bank charges you by the expected dollar value of interest bearing loans in the forecast year

c) multiply the interest rate the bank charges you by the expected dollar value of interest bearing loans in the forecast year

35. In the Toy World case, a difference between the level and seasonal production systems was that... a) a seasonal production system is more likely to create a cash shortage b) a level production system leads to lower peak inventories c) a level production system leads to lower direct labor costs d) all of the above e) none of the above

c)* a level production system leads to lower direct labor costs [ that was the point of level production]

A supplier offers its customers payment terms of 1.75% 20, net 50. What is the exact equivalent annual borrowing rate if the customer were to never pay early, but pay on day 50? (a year has 360 days) a) 19.7% b) 26.8% c) 21% d) 23.1% e) 24%

d) 23.1%

7. In the Toy World case, under seasonal production, the monthly numbers for "Gross Margin" and "Accounts Payable" are exactly the same! Why? a) This is always the case in any pro forma, by definition b) Because we made a mistake in the derivation of the spreadsheet c) Because suppliers are only paid if the gross margin is sufficiently large d) Because Account Payable was 30% of Sales and COGS was 70% of Sales e) Because Account Payable would be the same amount each month

d) Because Account Payable was 30% of Sales and COGS was 70% of Sales

You are a junior lender to a firm currently in chapter 11. The POR offers you stock purchase rights in exchange for your old debt claims. These warrants give you the right to buy shares of the company for a 40% discount to the POR stock price (which has been set at $80 a share). Which of the following statements is correct? a) the exercise price of your warrant is $48 per share b) if the estimated enterprise value was overly optimistic, and the actual stock price of the firm turns out to be $40 per share (on the day that the firm exits chapter 11), then your warrants have no intrinsic value on that day c) if you ever decide to exercise the warrant, this will create a cash injection for the firm d) all of the listed answers are correct

d) all of the listed answers are correct

5. Firms with negative EVA a) are always unprofitable on an operating basis b) always earn negative returns on capital c) earn returns on capital that are zero d) none of the listed answers is correct

d) none of the listed answers is correct

13. Regarding the long term debt in the Toy World case, which of the following statements is correct? a) at the current pace, the long term debt will be fully repaid in another 3 years b) the amount recorded for "Long Term Debt Current Portion" will increase to $75 six months before the full repayment of the principal c) the amount recorded for "Long Term Debt Current Portion" will become $25 twelve months before the full repayment of the principal d) the amount recorded for "Long Term Debt" will be $0 six months before the full repayment of the principal

d) the amount recorded for "Long Term Debt" will be $0 six months before the full repayment of the principal

12. At year-end 2018, ABC Inc. had total assets of $300 million, and sales for 2018 were $900 million. The company has a 33.33% debt to total assets ratio. Sales for 2019 are expected to increase by 25%. Assuming constant asset turnover and leverage, and assuming an expected return on equity (ROE) at year-end 2019 of 30% (defined as Net Income divided by beginning-year Equity), what can you say about the expected 2019 dividend? (Also assume no external equity will be raised) a) no dividend can be paid out b) a dividend of $60mm can be paid out c) a dividend of $50mm can be paid out d) a dividend of $30mm can be paid out e) a dividend of $10mm can be paid out

e) a dividend of $10mm can be paid out

21. When selecting an enterprise value for the POR, the judge in the Delphi bankruptcy case picked an estimate of enterprise value towards the high end of the range of estimates... a) because the judge was an optimist. b) because the judge wished to create a plan stock price of $60. c) because the judge did not want Delphi to issue too many shares. d) because the judge did not want the actual post Chapter 11 stock price to be lower than the plan price e) because the judge did not want the actual post Chapter 11 stock price to be higher than the plan price f) because the judge did not understand present value

e) because the judge did not want the actual post Chapter 11 stock price to be higher than the plan price

10. In the UST case, the true benefit of the increase in debt showed up in... a) the higher EBIT b) the higher net income c) the higher dividends per shared) the higher earnings per share e) none of the answers mentioned is correct

e) none of the answers mentioned is correct

11. Regarding the Toy World case, which of the following statements is correct? a) Under seasonal production, COGS was much greater than the direct cash production costs during January-July. b) Under level production, COGS equals the direct cash production costs during January-July. c) Under seasonal production, COGS was much smaller than the direct cash production costs during September-December. d) Under level production, COGS was equal to the direct cash production costs during September - November. e) none of the listed answers are correct

e) none of the listed answers are correct

12. If P&G starts paying their suppliers 30 days later, then one of the things Fibria could in theory do to deal with this (instead of participating in the SCF program) would be to: a) pay its own suppliers faster b) increase its dividends c) extend more generous payment terms to its own customers d) repay some long term debt e) reduce its inventory levels

e) reduce its inventory levels

In the Snyder Gardens case, we did not directly verify whether this company created shareholder value for its owner. In fact, given that the company's after-tax profit margins are about 1.7% in 2007, it seems like Mr. Snyder should shut down the business and invest in the stock market instead, where returns have historically been much greater!

false No. The 1.3% is the profit margin, but the statement is about the owner's ROE. The ROE was about 12%, in line with the stock market (assuming equal risk).

The inclusion of a cost in the Income statement depends on whether the resource has been paid for, not whether it has been used.

false[when an input is paid for it shows up on the cash flow statement]

If a firm is expected to enjoy substantial scale economies in the future, the appropriate way to forecast that firms' Fixed Assets for next period would be to use the most recent period's value of the Fixed Assets turnover ratio, then, ... and apply the % to sales next forecasted period a. increase it b. decrease it c. keep it the same

increase it

The Cash conversion cycle (CCC) is defined as...

inventory days plus accounts receivable days minus accounts payable days

Which of the following (all else equal) will have an unfavorable impact on cash flow? a)Reduce the customer collection period b)Delay payments to creditors c)Reduce Inventory days d)Improving asset turnover e)all of the above f) none of the above

none of the above

The Toy World case illustrated that a)seasonal production usually requires lower COGS b)working capital funding needs grow very large with level production c)moving to level production would significantly affect customer collections d)inventory levels would greatly be reduced in the slow selling months with level production e)both (a) and (c) above f) both (b) and (d) above

working capital funding needs grow very large with level production

Assume a simple one-period world (today, and next year) where next year, a company's cash flows will either be $500,000 (with 60% probability) or $125,000 (with 40% probability). The firm owes the lenders $250,000 next year. For simplicity, assume no interest rates and no taxes. Now assume a risk free project comes along. It costs $90,000 now, and will produce a certain cash flow of $160,000 next year. Will the shareholders wish to fund this project with equity?

yes, shareholders will want to fund this because if they did, they would be better off by $20,000

A firm has EBIT of $65 million, Depreciation of $20 million (and an EBITDA of $85 million). How many more taxes will this firm pay in 2022 relative to 2021? The interest expense is $50 million.

$1.26 million

19. One of the requirements of a successful exit from chapter 11 is to provide sufficient exit financing to execute the POR. In the Delphi POR, what is the minimum amount of cash that needs to be raised in the exit financing (usually a combination of new debt and sometimes equity)?

$4.772 billion

40. Regarding the Toy World case, which of the following statements is correct? a) Under level production, COGS was much greater than the cash production costs during September-November. b) Under seasonal production, COGS was much greater than the cash production costs during September-November. c) Under level production, COGS was much smaller than the cash production costs during September-November. d) Under seasonal production, COGS was much smaller than the cash production costs during September-November.

*a) Under level production, COGS was much greater than the cash production costs during September-November.

11. An all-equity firm is subject to a 30% corporate tax rate, and its equity holders require a 20% return. Its total market value is initially $3,500,000. There are 175,000 shares outstanding. It then issues $1 million of bonds at 10% interest and uses the proceeds to buy back common stock (Assume no change in costs of financial distress). What is the change in the market value of the equity of the firm on a per-share basis?

1.71

4. Assume the following numbers obtained from the financial statements: Cash paid during the period to suppliers: $125 Accounts payable at end of period: $25 Accounts payable at start of period: $40 What was the amount of purchases from vendors during the period?a)$15 b)$65 c)$125 d) $110 e)$165

110

10. Assume the following numbers obtained from the financial statements: Purchases from vendors during the period: $200 Accounts payable at end of period:$115 Accounts payable at start of period: $40 What was the amount of cash paid during the period to suppliers?

125

Assume the following numbers obtained from the financial statements: Cash received during the period from customers: $125 Accounts receivable at end of period: $60 Accounts receivable at start of period:$45 What was the value of sales during the period?

140

14. Wildco, Inc. wants to borrow $1,000,000 today and repay the note in 1 year. The 1 yr T-Bill rate is 5%. There is a 20% chance of default, and if there is default, lenders expect to recoup only $500,000. The risk of default is diversifiable. What coupon interest rate must lenders charge to earn an expected 5% if the firm were to borrow the $1,000,000 today?

18.75% Expected payment=(.8)(1,000+coupon)+(.2)(500) To earn 5% on $1,000 loan: (.8)(1,000+C)+(.2)(500)=1,050 Then 1,000/C = Coupon %

14. A supplier offers its customers payment terms of 3% 20, net 70. What is the exact equivalent annual borrowing rate if the customers were to never take advantage of the early payment discount? (a year has 365 days)

24.9%

7. Consider a firm with a total asset turnover of 4. The leverage ratio is 50% (defined as Debt divided by Debt plus Equity), and Debt is currently $550 million. Next year, the firm expects Sales to grow by 15%. Assume that its total asset turnover worsens by 10 percent next year. Then, assuming a constant leverage ratio and no additional outside equity, what must the ROE be in order to allow this firm to finance its growth?

28%

5. Weiss Industries is considering whether some debt would create additional value. The firm is currently debt free. The CEO is convinced of the tax benefit of borrowing, but is not ready yet to issue permanent debt. To try out the benefits of debt with a small initial step, the company is planning to issue $100 million in bonds (which would be risk-free, as they would be a small percent of the company's asset base). Half of the principal amount would be repaid at the end of year 3, the rest of the outstanding principal would be repaid at the end of year 6 (in the other years, only the interest would be due at year-end). The interest payments to its lenders will be $4 million each year for the next 3 years, and half that in years 4, 5 and 6. These payments are risk free, and Weiss Industries' marginal corporate tax rate will remain at 21% throughout this period. If the risk-free interest rate is 4%, how much shareholder value will the company have created with its temporary leverage decision?

3.37

7. A firm has a debt-to-equity ratio of 3.0. If it had no debt, its cost of equity would be 14%. Its cost of debt is 8%. What is its cost of equity? (we are in an MM world)

32% ---> .14 = (.08)(.75)+(X)(.14)

Cash paid during the period to suppliers: $125 Accounts payable at end of period: $80 Accounts payable at start of period: $150 What was the value of purchases during the period?

55$

9. In year 2 of a project that you are analyzing, you expect accounts payable to DEcrease by $25,000, inventories to DEcrease by $15,000 and accounts receivable to INcrease by $8,000 (all relative to year end 1). Calculate the increase or decrease in net working capital (NWC) for year 2: A. NWC decreases by $2,000 B. NWC increases by $160,000 C. NWC increases by $18,000 D. NWC decreases by $32,000

C. NWC increases by $18,000

Which of the following situations is most likely to lead to a negative net working capital? A. Collecting early from customers, paying suppliers early B. Collecting early from customers, paying suppliers late C. Collecting late from customers, paying suppliers early D. Collecting late from customers, paying suppliers late

Collecting early from customers, paying suppliers late

3. Which of the following situations is most likely to lead to a POSITIVE net working capital? A. Collecting early from customers, paying suppliers early B. Collecting early from customers, paying suppliers late C. Collecting late from customers, paying suppliers early D. Collecting late from customers, paying suppliers late

Collecting late from customers, paying suppliers early

10. Regarding the Toy World case, which of the following statements is correct? a) Under seasonal production, COGS was much greater than the cash production costs during September-December. b) Under level production, COGS was much greater than the cash production costs during January-July. c) Under seasonal production, COGS was much smaller than the cash production costs during September-December. D) Under seasonal production, COGS was equal to the cash production costs during January-July.

D) Under seasonal production, COGS was equal to the cash production costs during January-July.

Accounts receivables is always a use of funds. T/F

FALSE

The Toy World case illustrated that working capital funding needs grow very large with seasonal production, relative to level production. T/F

FALSE

A way for Snyder Gardens to improve its cash flow (all else being equal) would be to reduce its inventory turnover. T/F?

False

An example of a payment covenant violation would be if a firm's interest coverage ratio exceeded a pre-specified number imposed by the lenders

False

An example of a technical debt covenant violation would be if a firm's interest coverage ratio exceeded a pre-specified number imposed by the lenders T/F

False

Convertible debt should have a higher interest rate than non-convertible debt in order to compensate the bondholders for the conversion option. T/F

False

If P&G were to pay Fibria 30 days later (and without SCF), one of the ways that Fibria could deal with that is by reducing its own inventory turnover.

False

If a company's interest coverage ratio were equal to 0.8, this would be evidence of a technical covenant violation, but not of a payment covenant violation. T/F?

False

If a firm is expected to become less efficient next year relative to this past year in terms of fixed asset utilization, an appropriate way to forecast that firms' Fixed Assets would be to use the most recent period's ratio of Fixed Assets to Sales, reduce it, and apply that percentage to forecasted sales. T/F

False

If the amount of cash on the balance sheet is smaller at the end of 2018 than at the end of 2017, it means that during 2018, cash was a use of funds. T/F?

False

In an MM world, the various parties are much more concerned about the magnitude of indirect bankruptcy costs than direct bankruptcy costs. T/F

False

In the UST case, with the 38% tax rate, changing the amount of new debt from $1 billion to, say, $300 million, was useful because only that approach revealed that "Cash flows to all claimants" increased T/F?

False

Increasing the dividends would be one way that a firm could increase its sustainable growth rate. T/F

False

The Delphi POR required its former parent GM to accept a large number of call options on the reorganized Delphi, in satisfaction of the old GM debt claims. T/F?

False

The Delphi POR required the old shareholders to accept a large number of put options on the reorganized Delphi, in satisfaction of their old equity claims. T/F

False

The UST case illustrated that DPS will only increase after the debt recapitalization if sales also increase T/F?

False

The inclusion of a cost in the Income statement depends on whether the resource has been paid for, not whether it has been used. T/F

False

To suppliers like Fibria, the annualized costs of the SCF program were comparable to P&G's in house early payment discount program.

False

Under the new tax law passed at the end of 2017 (the Tax Cut and Jobs Act), interest expenses will be deductible from taxable income only if they do not exceed 21% of Sales T/F?

False

When creating a forecasted income statement and balance sheet for a future year, a circular reference will not occur in a spreadsheet when bank debt is the plug figure. T/F

False

If Toy World had adopted a level production system, it does not really matter when during the year they make the switch. T/F

False, demand was too high during summer

In the Toy World case, the difference between the level and seasonal production systems was that a level production system leads to greater direct labor costs

False, level production decreases cogs

In year 2 of a project that you are analyzing, you expect accounts payable to increase by $40,000, inventories to increase by $100,000 and accounts receivable to increase by $60,000. Calculate the increase or decrease in net working capital (NWC) for year 2: A.NWC decreases by $120,000 B.NWC increases by $160,000 C.NWC increases by $120,000 D.NWC decreases by $160,000

NWC increases by $120,000

38. In the past, your key supplier quoted payment terms of "2% 20/net 100". That supplier however just notified you of a change in the terms: starting next year, the payment terms will become "4% 20, net 60". The supplier's CFO defends the change as a neutral move, because even though the maximum payment terms declined from 100 days to 60 days, the discount for prompt payment doubled from 2% to 4%. Is the CFO correct?

No, EAR increased a lot