Chapter 18 LS Intermediate Corporate Finance

Operating Cycle Steps

1. Order Inventory 2. Sell the Finished Product 3. Collect Cash from the Sale

Payables Manager

Accounts Payable

Buy raw materials

What is the desired level of inventory?

A firm borrows $1,000 with a compensating balance requirement of 3 percent in addition to the 10 percent annual interest rate. As a result, the effective interest rate is ____ percent 10.06 10.31 9.67 10.42

10.31 (.1*$1,000)/[$1,000&(1-.03)]=10.31%

Which of the following are examples of current liabilities? Accounts Payable Accrued Wages Materials Inventory Accrued Taxes

Accounts Payable Accrued Wages Accrued Taxes

Credit Manager

Accounts Receivable

The two types of accounts receivable financing are _____ and _____ Assignment Accepting Securing Factoring

Assignment Factoring

The time between paying cash for inventory and receiving cash from selling a product is called the _____________ Accounts Receivable Period Accounts Payable Period Operating Cycle Cash Cycle

Cash Cycle

Short-term finance is primarily concerned with Current liabilities Current assets Retained Earnings

Current liabilities Current assets

Which of the following are activities that increase cash? Decreasing fixed assets Decreasing current liabilities Increasing fixed assets Increasing long-term debt

Decreasing fixed assets Increasing long-term debt

Shortage costs are those that _______________ when the level of investment in current assets is high Fall Undulate Rise Inflate

Fall

Compensating balances effectively _____________ the interest rate being paid on a loan Eliminate Increase Decrease

Increase

Purchasing Manager

Inventory

The operating cycle is composed of which periods? Inventory Period Cash Cycle Accounts Receivable Period Accounts Payable Period

Inventory Period Accounts Receivable Period

Loans financed with inventory as collateral are called Inventory loans Flexible loans Noncommitted loans Marketable loans

Inventory loans

Cash Manager

Marketable Securities

Some examples of restrictive short-term financial policies include __________ No (or few) credit sales Low investment in inventory Low cash balances High dividend payouts

No (or few) credit sales Low investment in inventory Low cash balances

Carrying Costs involve ____________ Cash-out Costs Depreciation Costs Stock-out Costs Opportunity Costs

Opportunity Costs

Sell a product

Should credit be extended?

Pay cash for purchases

Should money be borrowed or cash reserves used?

If the investment in accounts receivable is lower, then __________ Total inventory is lower Total assets are higher Total payable are higher Total assets are lower

Total assets are lower

Make a product

What technology should be used?

Another name for short-term financial management is _________ management Current liability Current asset Total earnings Working capital

Working capital

The optimal balance of current assets occurs where the sum of the carrying costs and the shortage costs is at ___________ a maximum a minimum

a minimum

Non-committed lines of credit ___________ are informal arrangements generally specify a maximum amount that can be borrowed are formal legal arrangements require commitment fees

are informal arrangements generally specify a maximum amount that can be borrowed

Being low on cash can force a firm to ____________ pay higher dividends default on debt borrow money sell marketable securities

default on debt borrow money sell marketable securities

The operating cycle is the sum of the ___________ period and the accounts receivable period cash notes payable inventory accounts payable

inventory

Current liabilities are firm obligations that will require payment within the ___________ cycle if it is longer than a year operating investing replacement business

operating