CHAPTER 17—WORKING CAPITAL MANAGEMENT

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket? a. Payment lags. b. Payment for plant construction. c. Cumulative cash. d. Repurchases of common stock. e. Writing off bad debts.

e POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

A lockbox plan is most beneficial to firms that a. have suppliers who operate in many different parts of the country. b. have widely dispersed manufacturing facilities. c. have a large marketable securities portfolio, and cash, to protect. d. receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks. e. have customers who operate in many different parts of the country.

e POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-6 Cash and Marketable Securities TOPICS: Lockbox KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Which of the following is NOT commonly regarded as being a credit policy variable? a. Credit period. b. Collection policy. c. Credit standards. d. Cash discounts. e. Payments deferral period.

e POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-8 Accounts Receivable TOPICS: Credit policy KEYWORDS: Bloom's: Knowledge OTHER: Multiple Choice: Conceptual

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. True b. False

False RATIONALE: Funds generated = Days saved × Checks per day = $375,000 Return on funds generated = Funds generated × Rate of return = $22,500 < $25,000 POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-6 Cash and Marketable Securities TOPICS: Lockbox KEYWORDS: Bloom's: Evaluation

If a firm buys on terms of 2/10, net 30, it should pay as early as possible during the discount period to lower its cost of trade credit. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit KEYWORDS: Bloom's: Comprehension

Net operating working capital, defined as current assets minus the difference between current liabilities and notes payable, is equal to the current ratio minus the quick ratio. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-1 Background on Working Capital TOPICS: Net operating working capital KEYWORDS: Bloom's: Knowledge

Net working capital is defined as current assets divided by current liabilities. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-1 Background on Working Capital TOPICS: Net working capital KEYWORDS: Bloom's: Knowledge

An increase in any current asset must be accompanied by an equal increase in some current liability. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-1 Background on Working Capital TOPICS: Working capital KEYWORDS: Bloom's: Comprehension

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower than the revolving credit agreement. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-10 Bank Loans TOPICS: Bank loans KEYWORDS: Bloom's: Knowledge

The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm's working capital needs. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-12 Accruals (Accrued Liabilities) TOPICS: Accruals KEYWORDS: Bloom's: Knowledge

If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC) and cause a deterioration in its cash position. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Comprehension

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC). a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Comprehension

Inventory management is largely self-contained in the sense that very little coordination among the sales, purchasing, and production personnel is required for successful inventory management. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-7 Inventories TOPICS: Inventory management KEYWORDS: Bloom's: Knowledge

"Stretching" accounts payable is a widely accepted, entirely ethical, and costless financing technique, which is particularly useful when suppliers' production plants are at full capacity. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Stretching accts payables KEYWORDS: Bloom's: Knowledge

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. a. True b. False

False POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit KEYWORDS: Bloom's: Knowledge

The prime rate charged by big money center banks at any one time is likely to vary greatly (for example, as much as 2 to 4 percentage points) across banks due to banks' ability to differentiate themselves and because different banks operate in different parts of the country. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-10 Bank Loans TOPICS: Prime rate KEYWORDS: Bloom's: Knowledge

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. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Aggressive financing KEYWORDS: Bloom's: Comprehension

The maturity matching, or "self-liquidating," approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates. When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Maturity matching KEYWORDS: Bloom's: Knowledge

Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions. Short- term credit agreements are just as restrictive in order to protect the interest of the lender. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Short-term financing KEYWORDS: Bloom's: Knowledge

The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash and capital budgets KEYWORDS: Bloom's: Knowledge

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Knowledge

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget and depreciation KEYWORDS: Bloom's: Knowledge

The target cash balance is typically (and logically) set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Seasonal cash patterns KEYWORDS: Bloom's: Knowledge

If a firm sells on terms of 2/10, net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-8 Accounts Receivable TOPICS: DSO and past due accounts KEYWORDS: Bloom's: Evaluation

Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-8 Accounts Receivable TOPICS: Receivables balance KEYWORDS: Bloom's: Comprehension

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Stretching accts payables KEYWORDS: Bloom's: Comprehension

If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet. a. True b. False

False POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit KEYWORDS: Bloom's: Comprehension

Dimon Products' sales are expected to be $5 million this year, with 90% on credit and 10% for cash. Sales are expected to grow at a stable, steady rate of 10% annually in the future. Dimon's accounts receivable balance will remain constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant. a. True b. False

False RATIONALE: Accounts receivable will increase by 10%. That percentage increase would occur regardless of the level of the cash sales. Even if cash sales were 90%, receivables would still increase by 10% under the assumptions in the question. POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-8 Accounts Receivable TOPICS: Receivables and growth KEYWORDS: Bloom's: Analysis

Because money has time value, a cash sale is always more profitable than a credit sale. a. True b. False

False RATIONALE: Department stores, auto dealers, and many others sell on credit, using interest-bearing notes payable. The interest rate on this credit can exceed the firm's cost of capital, making credit sales more profitable than cash sales. POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-8 Accounts Receivable TOPICS: Cash vs. credit sales KEYWORDS: Bloom's: Knowledge

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-8 Accounts Receivable TOPICS: Receivables balance KEYWORDS: Bloom's: Knowledge

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Knowledge

The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-10 Bank Loans TOPICS: Bank loans KEYWORDS: Bloom's: Knowledge

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-10 Bank Loans TOPICS: Line of credit KEYWORDS: Bloom's: Knowledge

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-10 Bank Loans TOPICS: Revolving credit KEYWORDS: Bloom's: Knowledge

Accruals are "spontaneous" funds arising automatically from a firm's operations, but unfortunately, due to law and economic forces, firms have little control over the level of these accounts. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-12 Accruals (Accrued Liabilities) TOPICS: Accruals KEYWORDS: Bloom's: Knowledge

Accruals arise automatically from a firm's operations and are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-12 Accruals (Accrued Liabilities) TOPICS: Accruals KEYWORDS: Bloom's: Knowledge

The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-2 Current Assets Investment Policies TOPICS: Current asset investment KEYWORDS: Bloom's: Knowledge

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Conservative financing KEYWORDS: Bloom's: Comprehension

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. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Current asset financing KEYWORDS: Bloom's: Comprehension

a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Permanent current assets KEYWORDS: Bloom's: Comprehension

Shorter-term cash budgets (such as a daily cash budget for the next month) are generally used for actual cash control while longer-term cash budgets (such as a monthly cash budgets for the next year) are generally used for planning purposes. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Knowledge

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-6 Cash and Marketable Securities TOPICS: Lockbox KEYWORDS: Bloom's: Knowledge

Changes in a firm's collection policy can affect sales, working capital, and profits. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-8 Accounts Receivable TOPICS: Collection policy KEYWORDS: Bloom's: Knowledge

The four primary elements in a firm's credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-8 Accounts Receivable TOPICS: Credit policy KEYWORDS: Bloom's: Knowledge

When deciding whether or not to take a trade discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit KEYWORDS: Bloom's: Knowledge

The calculated cost of trade credit can be reduced by paying late. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Cost of trade credit KEYWORDS: Bloom's: Comprehension

The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Cost of trade credit KEYWORDS: Bloom's: Comprehension

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise, other things held constant. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Cost of trade credit KEYWORDS: Bloom's: Knowledge

Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Taking discounts KEYWORDS: Bloom's: Knowledge

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit KEYWORDS: Bloom's: Comprehension

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease other things held constant. a. True b. False

True POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit KEYWORDS: Bloom's: Comprehension

The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer. Still, suppliers have some flexibility in the credit terms they offer. If a supplier lengthens the credit period offered, this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Comprehension

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. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-10 Bank Loans TOPICS: Revolving credit KEYWORDS: Bloom's: Knowledge

A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Aggressive financing KEYWORDS: Bloom's: Comprehension

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Maturity matching KEYWORDS: Bloom's: Knowledge

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. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Short-term financing KEYWORDS: Bloom's: Comprehension

A firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Short-term financing KEYWORDS: Bloom's: Comprehension

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Short-term financing KEYWORDS: Bloom's: Knowledge

The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the receivables collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Knowledge

Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm's profitability. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-6 Cash and Marketable Securities TOPICS: Cash flow synchronization KEYWORDS: Bloom's: Knowledge

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-8 Accounts Receivable TOPICS: Collection policy KEYWORDS: Bloom's: Knowledge

For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently. a. True b. False

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-8 Accounts Receivable TOPICS: Receivables and growth KEYWORDS: Bloom's: Analysis

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

True POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Stretching accts payables KEYWORDS: Bloom's: Comprehension

Which of the following statements is NOT CORRECT? a. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. b. Accruals are "free" in the sense that no explicit interest is paid on these funds. c. A conservative approach to working capital management will result in most if not all permanent assets being financed with long-term capital. d. The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt. e. Bank loans generally carry a higher interest rate than commercial paper.

a POINTS: 1 DIFFICULTY: MODERATE REFERENCES: Comprehensive TOPICS: Current asset financing KEYWORDS: Bloom's: Knowledge OTHER: Multiple Choice: Conceptual

Firms generally choose to finance temporary current assets with short-term debt because a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short- term debt is often less expensive than long-term capital. b. short-term interest rates have traditionally been more stable than long-term interest rates. c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term. d. the yield curve is normally downward sloping. e. short-term debt has a higher cost than equity capital.

a POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Current asset financing KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Which of the following actions would be likely to shorten the cash conversion cycle? a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days. b. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50. c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30. d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days. e. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.

a POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Conceptual

Which of the following statements concerning the cash budget is CORRECT? a. Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments. b. Cash budgets do not include financial items such as interest and dividend payments. c. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. d. Changes that affect the DSO do not affect the cash budget. e. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.

a POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Roton Inc. purchases merchandise on terms of 2/15, net 40, and its gross purchases (i.e., purchases before taking off the discount) are $800,000 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.) a. $53,699 b. $56,384 c. $59,203 d. $62,163 e. $65,271

a RATIONALE: Discount 2% Gross purchases $800,000 Discount days 15 Days in year 365 Net days 40 Net purchases = Gross(1 − Disc. %) = $784,000 Net per day = Net/365 = $2,148 Total trade credit = Net days × Net per day = $85,918 Free credit = Net per day × Discount days = $32,219 Costly credit = Total credit − Free credit = $53,699 POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Costly trade credit KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Which of the following statements is CORRECT? a. Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk. b. Conservative firms generally use no short-term debt and thus have zero current liabilities. c. A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt. d. If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10, net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet. e. If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.

a POINTS: 1 DIFFICULTY: MODERATE REFERENCES: Comprehensive TOPICS: Short-term financing KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Soenen Inc. had the following data for last year (in millions). The new CFO believes that the company could improve its working capital management sufficiently to bring its net working capital and cash conversion cycle up to the benchmark companies' level without affecting either sales or the costs of goods sold. Soenen finances its net working capital with a bank loan at an 8% annual interest rate, and it uses a 365-day year. If these changes had been made, by how much would the firm's pre-tax income have increased? Original Benchmarks' Data Related CCC CCC Sales $100,000 Cost of goods sold $80,000 Inventory (ICP) $20,000 91.25 38.00 Receivables (DSO) $16,000 58.40 20.00 Payables (PDP) $5,000 22.81 30.00 126.84 28.00 a. $1,901 b. $2,092 c. $2,301 d. $2,531 e. $2,784

a RATIONALE: POINTS: 1 DIFFICULTY: CHALLENGING REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Zervos Inc. had the following data for last year (in millions). The new CFO believes (1) that an improved inventory management system could lower the average inventory by $4,000, (2) that improvements in the credit department could reduce receivables by $2,000, and (3) that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered? Original Revised Annual sales: unchanged $110,000 $110,000 Cost of goods sold: unchanged $80,000 $80,000 Average inventory: lowered by $4,000 $20,000 $16,000 Average receivables: lowered by $2,000 $16,000 $14,000 Average payables: increased by $2,000 $10,000 $12,000 Days in year 365 365 a. 34.0 days b. 37.4 days c. 41.2 days d. 45.3 days e. 49.8 days

a RATIONALE: Change = 34.01 days POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Refer to Exhibit 16.1. Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies? a. 2.24% b. 2.46% c. 2.70% d. 2.98% e. 3.27%

a RATIONALE: Restricted: TATO = Sales/Total assets 2.5 = $3,060,000/Total assets Total assets = $1,224,000 Balance Sheet: Restricted Total assets $1,224,000 Debt $612,000 Equity 612,000 Total liab. & equity $1,224,000 Income Statement: Restricted EBIT $135,000 Interest 61,200 EBT $73,800 Taxes 29,520 Net income $44,280 ROE = Net income/Equity = 7.24% Relaxed ROE: 5.00% Difference in ROE = 2.24% POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: WC investment, ROE KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Multiple Parts

Ingram Office Supplies, Inc., buys on terms of 2/15, net 50 days. It does not take discounts, and it typically pays on time, 50 days after the invoice date. Net purchases amount to $450,000 per year. On average, what is the dollar amount of costly trade credit (total credit − free credit) the firm receives during the year? (Assume a 365-day year, and note that purchases are net of discounts.) a. $43,151 b. $45,308 c. $47,574 d. $49,952 e. $52,450

a RATIONALE: Purchases/day = $450,000/365 = $1,233 Avg. trade credit = Average A/P = Days to payment × Net purchases/day = $61,644 Free trade credit = Discount days × Purchases/day = $18,493 Costly trade credit = Total credit − Free credit = $43,151 Alternatively, Costly TC = (Days to pmt. − Disc. days) × (Purchases/day) = $43,151 POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Costly trade credit KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Kirk Development 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 $550,000 per year. On average, what is the dollar amount of total trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365- day year, and note that purchases are net of discounts.) a. $ 90,411 b. $ 94,932 c. $ 99,678 d. $104,662 e. $109,895

a RATIONALE: Purchases/day = $550,000/365 = $1,507 Average trade credit = Average A/P = Days to payment × Net purchases/day = $90,411 POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Total trade credit KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days. What was its average receivables balance, based on a 365-day year? a. $335,616 b. $352,397 c. $370,017 d. $388,518 e. $407,944

a RATIONALE: Receivables = (Sales per day)(DSO) = Sales/365 × DSO = $335,616 POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-8 Accounts Receivable TOPICS: Accounts receivable balance KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

A firm buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after 60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year? a. 25.09% b. 27.59% c. 30.35% d. 33.39% e. 36.73%

a RATIONALE: Discount % 3% Net days 45 Discount days 15 Actual days to payment 60 Nom. % cost = Disc. %/(100 − Disc. %) × (365/(Actual days − Disc. days)) Nom. % cost = 3.09% × 8.11 = 25.09% The effective discount % is earned N times per year; the product is the nominal annual cost rate. POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit: nom. cost KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

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 $450,000 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.) a. $18,493 b. $19,418 c. $20,389 d. $21,408 e. $22,479

a RATIONALE: Purchases $450,000 Net days 60 Discount % 2% Days to payment 60 Discount days 15 Days/Year 365 Purchases/day = $450,000/365 = $1,233 Free credit = Disc. days × Purchases/day = $18,493 POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Free trade credit KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Which of the following statements is CORRECT? a. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased. b. 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 strategy because of the inherent risks associated with using short- term financing. c. If a company follows a 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. d. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased. e. If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.

b POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Current asset financing KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Which of the following items should a company report directly in its monthly cash budget? a. Its monthly depreciation expense. b. Cash proceeds from selling one of its divisions. c. Accrued interest on zero coupon bonds that it issued. d. New shares issued in a stock split. e. New shares issued in a stock dividend.

b POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Romano Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 38 days Receivables collection period = 19 days Payables deferral period = 20 days a. 33 days b. 37 days c. 41 days d. 45 days e. 49 days

b RATIONALE: Inventory conversion period = 38 days Receivables collection period = 19 days Payables deferral period = 20 days CCC = Inv. conv. period + Rec. coll. period − Pay. def. period = 37 days POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem

Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take? a. Increases average inventory without increasing sales. b. Take steps to reduce the DSO. c. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales. d. Sell common stock to retire long-term bonds. e. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.

b POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Conceptual

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket? a. Payments lags. b. Depreciation. c. Cumulative cash. d. Repurchases of common stock. e. Payment for plant construction.

b POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Which of the following statements is most consistent with efficient inventory management? The firm has a a. below-average inventory turnover ratio. b. low incidence of production schedule disruptions. c. below-average total assets turnover ratio. d. relatively high current ratio. e. relatively low DSO.

b POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-7 Inventories TOPICS: Inventory management KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Which of the following statements is CORRECT? a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate. b. In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently. c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales. d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio. e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.

b POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-8 Accounts Receivable TOPICS: Receivables management KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Which of the following statements is CORRECT? a. Trade credit is provided only to relatively large, strong firms. b. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies. c. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt. 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 typically offered at a long-term maturity of at least five years.

b POINTS: 1 DIFFICULTY: MODERATE REFERENCES: Comprehensive TOPICS: Current asset financing KEYWORDS: Bloom's: Knowledge OTHER: Multiple Choice: Conceptual

Which of the following statements is CORRECT? a. Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 − T) + Depreciation − [Capital expenditures + ΔNOWC]), hence depreciation is set forth on a separate line in the cash budget. b. If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget. c. Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 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. If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August.

b POINTS: 1 DIFFICULTY: MODERATE REFERENCES: Comprehensive TOPICS: Working capital concepts KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Edison Inc. has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. The firm's cost of goods sold is 75% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. The firm is looking for ways to shorten its cash conversion cycle. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day. a. −26 days b. −22 days c. −18 days d. −14 days e. −11 days

b RATIONALE: Cash conversion cycle = Inv. conversion period + Rec. collection period − Pay. deferral period CCCOrig = 120.00 + 80.00 − 35.00 = 165.00 days CCCNew = 106.67 + 71.11 − 35.00 = 142.78 days CCCNew − CCCOrig = 142.78 − 165.00 = −22.22 days POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Refer to Exhibit 16.1. What's the difference in the projected ROEs under the restricted and relaxed policies? a. 1.20% b. 1.50% c. 1.80% d. 2.16% e. 2.59%

b RATIONALE: Difference in ROEs = 1.50% POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: WC investment, ROE KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Multiple Parts

Madura Inc. wants to increase its free cash flow by $180 million during the coming year, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year: ∙ EBIT is projected to equal $850 million. ∙ Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. ∙ The tax rate is 40%. ∙ There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals. What increase in net operating working capital (in millions of dollars) would enable the firm to meet its target increase in FCF? a. $ 72 b. $ 90 c. $108 d. $130 e. $156

b RATIONALE: FCF = EBIT(1 − T) + Deprec. − Capex. − ΔNOWC $180 = $510 + $120 − $360 − ΔNOWC $180 = $270 − ΔNOWC −$90 = −ΔNOWC ΔNOWC = $90 POINTS: 1 DIFFICULTY: CHALLENGING REFERENCES: Comprehensive TOPICS: Working capital, FCF KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem Exhibit 16.1 Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2.

Weiss Inc. arranged a $9,000,000 revolving credit agreement with a group of banks. The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment. On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis. The prime rate was 9% during the year. If the firm borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver? a. $612,750 b. $645,000 c. $677,250 d. $711,113 e. $746,668

b RATIONALE: Interest rate on borrowed funds = Prime + Premium = 10.5% Cost of used portion = Amount borrowed × Rate = $630,000 Cost of unused portion: Unused balance × Fee = $15,000 Total annual cost of loan agreement = $645,000 Alternative solution: Rate per day = 10.5%/365 = 0.0287671% Interest per day = (Rate per day)(Amount borrowed) = $1,726 Interest per year = (Interest per day)(365) = $630,000 Cost of unused portion: Unused balance × Fee = $15,000 Total annual cost of loan agreement = $645,000 POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-10 Bank Loans TOPICS: Revolving credit agreement KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem

Suppose the credit terms offered to your firm by its suppliers are 2/10, net 30 days. Your firm is not taking discounts, but is paying after 25 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%. But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost (not the nominal cost) of its costly trade credit, using a 365-day year? a. 60.3% b. 63.5% c. 66.7% d. 70.0% e. 73.5%

b RATIONALE: Discount % 2% Net days 30 Discount days 10 Actual days to payment 25 EAR = [1 + Disc. %/(100 − Disc. %)][365/(Actual days − Disc. Period)] −1 = 63.49% POINTS: 1 DIFFICULTY: CHALLENGING REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit: EAR cost KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

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 120 days after the purchase? (Assume a 365-day year.) a. 16.05% b. 16.90% c. 17.74% d. 18.63% e. 19.56%

b RATIONALE: Discount % 4% Net days 90 Discount days 30 Actual days to payment 120 Nom. % cost = Disc. %/(100 − Disc. %) × (365/(Actual days − Disc. days)) = 16.90% POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit: nom. cost KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 41 days Receivables collection period = 31 days Payables deferral period = 38 days a. 31 days b. 34 days c. 37 days d. 41 days e. 45 days

b RATIONALE: Inventory conversion period = 41 days Receivables collection period = 31 days Payables deferral period = 38 days CCC = Inv. conv. period + Rec. coll. period − Pay. def. period = 34 days POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem

Zarruk Construction's DSO is 50 days (on a 365-day basis), accounts receivable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio? a. 4.73 b. 5.26 c. 5.84 d. 6.42 e. 7.07

c RATIONALE: DSO 50 Days/year 365 Receivables $100 Inventory $125 Use DSO equation to find sales: DSO = Receivables/(Sales/365) Sales = 365(Receivables)/DSO = $730 Inventory turnover = Sales/Inventory = 5.84 POINTS: 1 DIFFICULTY: CHALLENGING REFERENCES: Comprehensive TOPICS: Inventory turnover and DSO KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Other things held constant, which of the following will cause an increase in net working capital? a. Cash is used to buy marketable securities. b. A cash dividend is declared and paid. c. Merchandise is sold at a profit, but the sale is on credit. d. Long-term bonds are retired with the proceeds of a preferred stock issue. e. Missing inventory is written off against retained earnings.

c POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-1 Background on Working Capital TOPICS: Net working capital KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Conceptual

Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets and liabilities at peak and off-peak seasons (in thousands of dollars): Peak Off-Peak Cash $50 $30 Marketable securities 0 20 Accounts receivable 40 20 Inventories 100 50 Net fixed assets 00 500 Total assets $690 $620 Payables and accruals $30 $10 Short-term bank debt 50 0 Long-term debt 300 300 Common equity 310 310 Total claims $690 $620 From this data we may conclude that a. Swim Suits' current asset financing policy calls for exactly matching asset and liability maturities. b. Swim Suits' current asset financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt. c. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital. d. Without income statement data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy. e. Without cash flow data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy.

c POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Current asset financing KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Conceptual

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities? a. The firm must make a known future payment, such as paying for a new plant that is under construction. b. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline. c. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases. d. The firm has just sold long-term securities and has not yet invested the proceeds in operating assets. e. The firm just won a product liability suit one of its customers had brought against it.

c POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-6 Cash and Marketable Securities TOPICS: Marketable securities KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Which of the following statements is CORRECT? a. Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. b. If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase. c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then the firm probably has some past due accounts. d. If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July. e. If a firm changed the credit terms offered to its customers from 2/10, net 30 to 2/10, net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.

c POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-8 Accounts Receivable TOPICS: Days sales outstanding (DSO) KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Which of the following statements is CORRECT? a. Accruals are an expensive but commonly used way to finance working capital. b. A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds. c. If a company receives trade credit under terms of 2/10, net 30, this implies that the company has 10 days of free trade credit. d. One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget. e. If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high.

c POINTS: 1 DIFFICULTY: MODERATE REFERENCES: Comprehensive TOPICS: Working capital concepts KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Margetis Inc. carries an average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its receivables collection period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. Its new CFO wants to decrease the cash conversion cycle by 10 days, based on a 365-day year. He believes he can reduce the average inventory to $647,260 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of its cash conversion cycle? a. $123,630 b. $130,137 c. $136,986 d. $143,836 e. $151,027

c RATIONALE: Reduction in A/R = Orig. A/R − New A/R = $136,986 POINTS: 1 DIFFICULTY: CHALLENGING REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Data on Shick Inc. for 2013 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. Sales $110,000 Accounts receivable $16,000 Days sales outstanding (DSO) 53.09 Benchmarks' days sales outstanding (DSO) 20.00 a. $ 8,078 b. $ 8,975 c. $ 9,973 d. $10,970 e. $12,067

c RATIONALE: POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Days sales outstanding (DSO) KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Edwards Enterprises follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies. a. 4.25% b. 4.73% c. 5.25% d. 5.78% e. 6.35%

c RATIONALE: Restricted Relaxed CA $ 60,000 $100,000 FA 100,000 100,000 Total assets $160,000 $200,000 Debt $ 80,000 $100,000 Equity 80,000 100,000 Total liab. & capital $160,000 $200,000 EBIT $ 35,000 $ 35,000 Interest 8,000 10,000 EBT $ 27,000 $ 25,000 Taxes 10,800 10,000 NI $16,200 $15,000 ROE 20.25% 15.00% Difference in ROE = 5.25% POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-2 Current Assets Investment Policies TOPICS: ROE and WC policy KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

A firm buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days. What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.) a. 14.34% b. 15.10% c. 15.89% d. 16.69% e. 17.52%

c RATIONALE: EAR = [1 + Disc. %/(100 − Disc. %)][365/(Actual days − Disc. Period)] −1 = 15.89% POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit: EAR cost KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Nogueiras Corp's budgeted monthly sales are $5,000, and they are constant from month to month. 40% of its customers pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount. The firm has no bad debts. Purchases for next month's sales are constant at 50% of projected sales for the next month. "Other payments," which include wages, rent, and taxes, are 25% of sales for the current month. Construct a cash budget for a typical month and calculate the average cash gain or loss during the month. a. $1,092 b. $1,150 c. $1,210 d. $1,271 e. $1,334

c RATIONALE: Month Month Month Sales $5,000 $5,000 $5,000 Collections, same month's sales (% of Sales)(Sales)(1 − Discount) $1,960 Collections (last month's sales) 3,000 Total collections $4,960 Purchases payments 2,500 Other payments 1,250 Total payments $3,750 Net cash gain (loss) $1,210 POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem

A lockbox plan is a. used to protect cash, i.e., to keep it from being stolen. b. used to identify inventory safety stocks. c. used to slow down the collection of checks our firm writes. d. used to speed up the collection of checks received. e. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.

d POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-6 Cash and Marketable Securities TOPICS: Lockbox KEYWORDS: Bloom's: Knowledge OTHER: Multiple Choice: Conceptual

Other things held constant, which of the following would tend to reduce the cash conversion cycle? a. Carry a constant amount of receivables as sales decline. b. Place larger orders for raw materials to take advantage of price breaks. c. Take all discounts that are offered. d. Continue to take all discounts that are offered and pay on the net date. e. Offer longer payment terms to customers.

d POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Conceptual

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should a. consist mainly of long-term securities because they pay higher rates. b. consist mainly of short-term securities because they pay higher rates. c. consist mainly of U.S. Treasury securities to minimize interest rate risk. d. consist mainly of short-term securities to minimize interest rate risk. e. be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.

d POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-6 Cash and Marketable Securities TOPICS: Marketable securities KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

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.

d POINTS: 1 DIFFICULTY: MODERATE REFERENCES: Comprehensive TOPICS: Working capital policy KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Dewey Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $31,500 Inventory = $4,000 Accounts receivable = $2,000 Accounts payable = $2,400 a. 25 days b. 28 days c. 31 days d. 35 days e. 38 days

d RATIONALE: CCC = Inv. conv. period + Rec. coll. period − Pay. def. period = 34.76 days POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem

Refer to Exhibit 15.1. If the firm adopts a restricted policy, how much lower would its interest expense be than under the relaxed policy? a. $ 8,418 b. $ 8,861 c. $ 9,327 d. $ 9,818 e. $10,309

d RATIONALE: FA turnover = Sales/Net FA 4.0 = $3,600,000/Net FA Net FA = $900,000 Restricted: TATO = Sales/Total assets 2.5 = $3,600,000/Total assets Total assets = $1,440,000 Relaxed: TATO = Sales/Total assets 2.2 = $3,600,000/Total assets Total assets = $1,636,364 Balance Sheets: Restricted Relaxed Current assets $540,000 $736,364 Fixed assets 900,000 900,000 Total assets $1,440,000 $1,636,364 Debt $720,000 $818,182 Equity 720,000 818,182 Total liab. & equity $1,440,000 $1,636,364 Interest: $72,000 $81,818 POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-3 Current Assets Financing Policies TOPICS: WC investment policy KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Multiple Parts

Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March? a. $24,057 b. $26,730 c. $29,700 d. $33,000 e. $36,300

d RATIONALE: Collections Sales for Mos. January February March January $30,000 $6,000 $12,000 $12,000 February 35,000 7,000 14,000 March 35,000 7,000 Total collections for month: $6,000 $19,000 $33,000 POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and the firm pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements the plan, what is the expected change in net income? a. $32,964 b. $34,699 c. $36,526 d. $38,448 e. $40,370

d RATIONALE: A/PNo disc. = Net purchases/day × Actual days to payment A/PNo disc. = $11,760 × 30 = $352,800 A/PDisc. = Net purchases/day × Discount days A/PDisc. = $11,760 × 10 = $117,600 Amount needed to be financed = A/PNo disc. − A/PDisc. Amount needed to be financed = $352,800 − $117,600 = $235,200 Additional interest cost = Amount needed to be financed × Annual interest rate Additional interest cost = $235,200 × 10.00% = $23,520 Gross purchases = (Net purchases/day × 365)/(1 − Disc. %) Gross purchases = $11,760 × 365/98.00% = $4,380,000 Discounts lost = Gross purchases × Discount % Discounts lost = $4,380,000 × 2.00% = $87,600 Pre-tax savings = Discounts lost − Additional interest Pre-tax savings = $87,600 − $23,520 = $64,080 After-tax savings = Pre-tax savings × (1 − T) After-tax savings = $64,080 × 60.00% = $38,448 POINTS: 1 DIFFICULTY: CHALLENGING REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Fin. stmts. and trade credit KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Desai Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle? Annual sales = $45,000 Annual cost of goods sold = $30,000 Inventory = $4,500 Accounts receivable = $1,800 Accounts payable = $2,500 a. 28 days b. 32 days c. 35 days d. 39 days e. 43 days

d RATIONALE: Annual sales $45,000 Annual cost of goods sold (COGS) $30,000 Inventory $4,500 Accounts receivable $1,800 Accounts payable $2,500 Days in year 365 Sales per day = $123.29 COGS per day = $82.19 Inv. conv. period = Inv./COGS per day = 54.75 days Rec. coll. period = Receivables/Sales per day = 14.60 days Pay. def. period = Accounts payable/COGS per day = 30.42 days CCC = Inv. conv. period + Rec. coll. period − Pay. def. period = 38.93 days POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem

Whitmer Inc. sells to customers all over the U.S., and all receipts come in to its headquarters in New York City. The firm's average accounts receivable balance is $2.5 million, and they are financed by a bank loan at an 11% annual interest rate. The firm is considering setting up a regional lockbox system to speed up collections, and it believes this would reduce receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would be realized? a. $29,160 b. $32,400 c. $36,000 d. $40,000 e. $44,000

d RATIONALE: Average accounts receivable balance $2,500,000 Annual interest rate to finance A/R 11.00% % Reduction in A/R 20.00% Annual lockbox cost $15,000 Reduction in A/R = % reduction in A/R × Avg. A/R balance Reduction in A/R = 20.00% × $2,500,000 Reduction in A/R = $500,000 Annual int. savings = Reduction in A/R × Annual interest rate Annual int. savings = $500,000 × 11.00% Annual int. savings = $55,000 Pre-tax net annual savings = Annual interest savings − Annual lockbox cost Pre-tax net annual savings = $55,000 − $15,000 Pre-tax net annual savings = $40,000 POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-6 Cash and Marketable Securities TOPICS: Lockbox KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Inmoo Company's average age of accounts receivable is 45 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? a. 63 days b. 67 days c. 70 days d. 74 days e. 78 days

d RATIONALE: CCC = Inv. conv. period + Rec. coll. period − Pay. deferral period Age of receivables = Rec. conv. period = 45 days Age of inventory = Inv. conv. period = 69 days Age of payables = Pay. def. period = 40 days CCC = Inv. conv. period + Rec. coll. period − Pay. deferral period = 74 days POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15, net 50. If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.) a. 20.11% b. 21.17% c. 22.28% d. 23.45% e. 24.63%

d RATIONALE: Discount % 2% Net days 50 Discount days 15 Actual days to payment 50 EAR = [1 + Disc. %/(100 − Disc. %)][365/(Actual days − Disc. Period)] −1 = 23.45% POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit: EAR cost KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Cass & Company has the following data. What is the firm's cash conversion cycle? Inventory conversion period = 50 days Receivables collection period = 17 days Payables deferral period = 25 days a. 31 days b. 34 days c. 38 days d. 42 days e. 46 days

d RATIONALE: Inventory conversion period = 50 days Receivables collection period = 17 days Payables deferral period = 25 days CCC = Inv. conv. period + Rec. coll. period − Pay. def. period = 42 days POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem

Your firm's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period? a. 11.7 days b. 13.0 days c. 14.4 days d. 15.2 days e. 16.7 days

d RATIONALE: Monthly COGS = $2,000,000 Inventory/COGS = 50.0% Annual COGS = $24,000,000 Avg. inventory = $1,000,000 Inv. conv. period = Inv/COGS per day = Inv./(Annual COGS/365) = 15.2 days POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Inventory conv. period KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Which of the following statements is CORRECT? a. Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual cash control. b. The cash budget and the capital budget are developed separately, and although they are both important to the firm, one does not affect the other. c. Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. d. The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm's operations. e. The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts.

e POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-5 The Cash Budget TOPICS: Cash budget KEYWORDS: Bloom's: Comprehension OTHER: Multiple Choice: Conceptual

Van Den Borsh Corp. has annual sales of $50,735,000, 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? a. −26.6 days b. −29.5 days c. −32.8 days d. −36.4 days e. −40.5 days

e RATIONALE: Cash conversion cycle = Inv. conversion period + Rec. collection period − Pay. deferral period CCCOrig = 127.06 + 72.00 − 30.00 = 169.06 days CCCNew = 110.59 + 58.00 − 40.00 = 128.59 days CCCNew − CCCOrig = 128.59 − 169.06 = −40.47 days POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Data on Shin Inc for last year are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year. Cost of goods sold = $85,000 Inventory = $20,000 Inventory conversion period (ICP) = 85.88 Benchmark inventory conversion period (ICP) = 38.00 a. $ 7,316 b. $ 8,129 c. $ 9,032 d. $10,036 e. $11,151

e RATIONALE: POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Inventory conv. period KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Data on Wentz Inc. for last year are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks. The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average. If this were done, by how much would payables increase? Use a 365-day year. Cost of goods sold = $75,000 Payables = $5,000 Payables deferral period (PDP) = 24.33 Benchmark payables deferral period = 30.00 a. $ 764 b. $ 849 c. $ 943 d. $1,048 e. $1,164

e RATIONALE: POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Payables deferral period KEYWORDS: Bloom's: Evaluation OTHER: Multiple Choice: Problem

Aggarwal Inc. buys on terms of 2/10, net 30, and it always pays on the 30th day. The CFO calculates that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance? Assume a 365-day year. a. $458,160 b. $482,273 c. $507,656 d. $534,375 e. $562,500

e RATIONALE: Costly trade credit = Purchases per day × (Days credit is outstanding − Discount period) $375,000 = Purchases per day × 20 Purchases per day = $18,750 Free trade credit = Purchases per day × Discount period Free trade credit = $18,750 × 10 Free trade credit = $187,500 Total trade credit = Costly trade credit + Free trade credit Costly trade credit + Free trade credit Total trade credit = $375,000 + $187,500 Total trade credit = $562,500 POINTS: 1 DIFFICULTY: CHALLENGING REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Accounts payable balance KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

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? Average inventory = $75,000 Annual sales = $600,000 Annual cost of goods sold = $360,000 Average accounts receivable = $160,000 Average accounts payable = $25,000 a. 120.6 days b. 126.9 days c. 133.6 days d. 140.6 days e. 148.0 days

e RATIONALE: Inv Conv. period = Inv/(COGS/365) 76.0 days + DSO = Receivables/(Sales/365) 97.3 days - Payables deferral = Payables/(COGS/365) −25.3 days Cash conversion cycle (CCC) 148.0 days POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-4 The Cash Conversion Cycle TOPICS: Cash conversion cycle KEYWORDS: Bloom's: Application OTHER: Multiple Choice: Problem

Affleck Inc.'s business is booming, and it needs to raise more capital. The company purchases supplies on terms of 1/10, net 20, and it currently takes the discount. One way of acquiring the needed funds would be to forgo the discount, and the firm's owner believes she could delay payment to 40 days without adverse effects. What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year.) a. 10.59% b. 11.15% c. 11.74% d. 12.36% e. 13.01%

e RATIONALE: Discount % 1% Net days 20 Discount days 10 Actual days to payment 40 EAR = [1 + Disc. %/(100 − Disc. %)][365/(Actual days − Disc. Period)] −1 = 13.01% POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Stretching accts payable KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Atlanta Cement, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 60 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? a. 10.86% b. 12.07% c. 13.41% d. 14.90% e. 16.55%

e RATIONALE: Discount % 2% Net days 30 Discount days 15 Actual days to payment 60 Nom. % cost = Disc. %/(100 − Disc. %) × (365/(Actual days − Disc. days)) Nom. % cost = 2.04% × 8.11 = 16.55% The effective discount % is earned N times per year; the product is the nominal annual cost rate. POINTS: 1 DIFFICULTY: MODERATE REFERENCES: 17-9 Accounts Payable (Trade Credit) TOPICS: Trade credit: nom. cost KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem

Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital? a. $260,642 b. $274,360 c. $288,800 d. $304,000 e. $320,000

e RATIONALE: Lower total asset range $320,000 Upper total asset range $410,000 Minimum total assets = FA + Min. CA = $320,000 = LT Debt + Equity A maturity matching policy implies that fixed assets and permanent current assets are financed with long-term sources. This is its most likely level of long-term financing. POINTS: 1 DIFFICULTY: EASY REFERENCES: 17-3 Current Assets Financing Policies TOPICS: Maturity matching KEYWORDS: Bloom's: Analysis OTHER: Multiple Choice: Problem