Finance ch. 14,15, 16 questions
RAM corporation: Accts. Rec. $160,000 Total credit sales $2,500,000 Accts. Pay. $220,000 What is RAM's receivables collection period (DSO)? 360 days in a year
$160,000 / ($2,500,000/360) = 23.04 days
Lobo Corporation: Cash $20,000 Acct Rec. $50,000 Marketable securities $65,000 Notes Payable: $10,000 Accrued wages $5,000 Based on this info, the net working capital of the company is:
$20,000 + $50,000 + $65,000 = 135,000 $10,000 + $5,000 = $15,000 $135,000 - $15,000 = $120,000
The following information relates to Zync Corporation: Current assets $200,000 Current liabilities: $150,000 Long term assets $600,000 Long term liabilities: $400,000 Based on this info, the net working capital of the company is:
$200,000 - $150,000= $50,000
A firm utilizes 75 percent of its plant capacity to produce the current year's sales of $3,000,000. What is the firm's full-capacity sales?
$3,000,000 / .75 = $4,000,000
Sunshine Inc. recently tightened its credit policy. The credit policy change resulted in an increase of $5 per day on a net present value (NPV) basis. Sunshine's required rate of return is 8 percent. What was the effect of the credit policy change on the firm's value? In your computations, assume a 360-day year.
$5 / (.08 / 360)= $22,500
LoGo corporation: Accts. payable $650,000 Credit purchases: $21,000,000 Accts. Receivable $2,100,000 What is their payables deferral period (DPO)? 360 days in a year
$650,000 / ($21,000,000/ 360) = 11.14 days
Rodeo Corporation: Current Assets $70,000 Current liabilities $52,500 Long term assets $210,000 Long term liabilities $140,000 Based on this info, the amount of current assets financed by the long-term liabilities is:
$70,000 - $52,500 = $17,500
A firm has an accts. rec. turnover equal to 33.5 days, an average inventory equal to $120,000, and an average payable balance equal to $52,000. What is the firms receivables collection period? 360 days in a year
360/ 33.5 = 10.75 days
Gear corporation: Inventory conversion period 68.2 days Receivables collection period 35.8 days Payables deferral period 24.6 days Which of the following is the cash conversion cycle of the company?
68.2 + 35.8 - 24.6= 79.4 days
Which of the following mathematical expressions computes the annual percentage rate (APR) for short-term financing?
APR = Percentage cost per period × Number of borrowing (interest) periods in one year
______ are short-term liabilities, which include wages payable and taxes payable, that change spontaneously as the firm's normal operations change.
Accruals
Which of the following mathematical equations is used to compute the payables deferral period (DPO)?
DPO= Accts. Payable / Daily credit purchases
Which of the following mathematical equations is used to calculate days sales outstanding (DSO)?
DSO= Receivables/ Daily credit sales
If a firm wants to decrease its cash conversion cycle, which of the following actions should it take?
Delay payments made to suppliers so that the firm pays later
Which of the following mathematical equations is used to compute the effective annual rate (EAR)?
EAR = (1 + Periodic rate of interest)number of borrowing (interest) periods in one year - 1
New World Manufacturing has determined that its degree of financial leverage (DFL) is 3.0 when sales equal $750,000, which happens to be its operating breakeven point (i.e., SOpBE = $750,000). At sales equal to $750,000, which of the following conditions must exist for New World Manufacturing? Assume everything else is equal.
Earnings per share (EPS) < 0
When constructing pro forma financial statements, which of the following equations can be used to estimate additional funds needed (AFN)?
Estimated AFN = Forecasted increase in assets - Forecasted increase in liabilities - Forecasted increase in retained earnings
Computation of the annual percentage rate (APR) recognizes interest compounding, whereas computation of the effective annual rate (EAR) does not.
False
The task of managing working capital accounts in multinational corporations is far simpler than in purely domestic firms because domestic firms are not affected by different languages, different cultures, different political environments, different economic conditions, and so forth.
False
The threat of expropriation creates an disincentive for a multinational firm to minimize inventory holdings and to bring goods into a foreign country only as needed.
False
Compared to other current asset investment policies, a restricted current asset investment policy prescribes that a firm should hold maximum levels of safety stocks for cash and inventories and should have a liberal credit policy.
False- (hold minimal levels of safety stock)
All else equal, firms that hold greater proportions of their total assets as short-term assets are considered riskier than firms that hold greater proportions of their total assets as long-term assets.
False- (short-term is less risky)
multinational corporations is correct?
Multinational corporations can take advantage of the best interest rates available in the international financial markets by using global concentration banks.
Which of the following account balances generally will not change when sales change?
Notes Payable
operating breakeven analysis is correct?
Operating breakeven analysis involves determining the point at which sales revenues equal operating costs.
The _____ current asset investment policy calls for relatively large amounts of current assets to be carried by a company.
Relaxed
The lower the level of current assets that is required to support its operations, the more closely a firm can adhere to a __________ current asset investment policy.
Restricted
Which of the following current asset investment policies emphasizes holding minimal current assets?
Restricted current asset investment policy
Which of the following mathematical equations represents the operating breakeven point, QOpBEP, for a firm?
Sales = Total variable costs + Total fixed costs
Which of the following statements about the financial planning process is correct?
The decision as to how a firm should raise additional funds needed (AFN) to meet its financial goals depends on the ability of the firm to handle additional debt, conditions in financial markets, and restrictions imposed by existing debt agreements.
Venus Inc. recently borrowed $750,000 from its bank at a simple interest rate of 10 percent. The loan is for six months. The loan agreement requires the interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. What is the loan's effective annual rate (EAR)?
Total interest charge = ($750,000 × 0.10) × (6/12) = $37,500 Total amount to be repaid in six equal installments = $750,000 + $37,500 = $787,500 Monthly installment = $787,500/6 = $131,250 Using a financial calculator, enter N = 6, PV = 750,000, and PMT = -131,250, and then solve for r The monthly rate equals 1.41207% When we annualize the monthly rate, EAR = [(1 + 0.0141207)12] - 1 = 0.1832 = 18.32%
The ______ is minimized when a company uses the economic ordering quantity (EOQ) model for its inventory management.
Total inventory cost
Which of the following securities is an appropriate investment to include in the marketable securities account.. choose 1
Treasury bill
Which of the following securities is an appropriate investment to include in the marketable securities account?
Treasury bills, commercial paper, and negotiable certificates of deposit are a few examples of marketable securities, or short-term investments.
Commercial paper is a discount interest loan.
True
Compared to other current asset investment policies, a restricted current asset investment policy prescribes that a firm should hold minimal levels of safety stocks for cash and inventories and should have a tight credit policy.
True
Decisions made by multinational corporations to manage working capital accounts can have significant consequences on the long-run survival of the firms.
True
For the most part, the techniques used to manage working capital accounts in multinational corporations are same as the techniques used in purely domestic corporations.
True
If a firm that has fixed costs in its operations does not meet its forecasted sales level, its operating leverage will result in a magnified decrease in net income compared to what is expected.
True
Net working capital represents the amount of current assets that is financed with long-term funds.
True
The inventory conversion period of a firm is equivalent to the average age of its inventory.
True
Which of the following is a common method that is used to manage/control cash disbursements?
Zero-balance account
If a firm is operating at its full capacity, future increases in sales will require _____.
additional fixed assets
A(n) ______ is a report that shows how long accounts receivable have been outstanding; it divides receivables into specified periods that provide information regarding the proportions of receivables that are due for specific periods of time.
aging schedule
The maturity matching approach calls for matching the maturities of the firm's:
assets and liabilities
A ______ balance is a minimum checking account balance that a firm must maintain with a bank to help offset the costs and services, such as check clearing and cash management advice, that the bank offers with a loan.
compensating
Which of the following current asset financing policies/approaches asserts that all of a firm's fixed assets, all of its permanent current assets, and some of its temporary current assets should be financed with long-term capital?
conservative approach
Net working capital is equal to:
current assets minus current liabilities.
________ is a model that a firm's management can use to determine the amount of inventory that should be ordered and carried to minimize its total inventory costs.
economic ordering quantity (EOQ)
Marketable securities are:
extremely liquid investments and serve as a substitute for cash balances.
A firm should scale back its projected level of operations if the funds required to meet the forecasted sales are readily available.
false
Operating costs that do not change when production levels change are called ______ costs
fixed
The "redline method" that is used in inventory management is a:
inventory control procedure where a red line is drawn around the inside of an inventory-stocked bin to indicate the reorder point level.
Which of the following situations would most likely exist if a firm adheres to a moderate current asset investment policy?
lies between the relaxed and restrictive current asset investment policies
A ______ is an arrangement in which a bank agrees to permit a firm to borrow any amount up to a specified maximum during a designated time period.
line of credit
Which of the following arrangements helps a firm both to accelerate the collection of its customers' payments and to convert those payments into cash?
lockbox
The percentage change in earnings before interest and taxes (EBIT) associated with a given percentage change in sales is known as the degree of _____ leverage.
operating
A firm examines the relationship between its sales volume and its operating profitability by conducting a(n) _____ analysis.
operating breakeven (cost-volume-profit)
A firm that follows a restricted current asset investment policy generally has:
relatively low levels of accounts receivables.
The primary reason the income statement is forecast prior to the balance sheet in the financial planning process is because ______ must be estimated.
the amount of retained earnings the company expects to generate during the year
Because multinational corporations operate in countries with different languages, different cultures, different political environments, and different economic conditions, _____.
their decisions regarding the management of their working capital accounts often significantly affect their abilities to survive in the long-run.
The inventory conversion period refers to the average length of time required:
to convert materials into finished goods and then to sell those goods
Yesterday, Mars Inc. borrowed $225,000 from its bank at a simple interest rate of 12 percent. The loan is for nine months and the loan agreement requires the interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. What is the loan's approximate annual percentage rate (APR).
total interest charge = ($225,000 * .12) * (9 / 12) = $20,250 Monthly payment = ($225,000 + $20,250) / 9 = $245,250 / 9 = $27,250 Amount of interest in the monthly payment = $20,250 / 9= $2,250 Amount of principal in the monthly payment = $27,250 - $2,250= $25,000 Average outstanding balance= ($225,000 + $25,000) / 2= $125,000 Approximate rate per period = $20,250/ $125,000 = .1620 = 16.20% APR = 16.20% * (12 / 9)= 21.60%
Which of the following sources of financing is considered spontaneous because it fluctuates naturally with changes in ordinary business operations/transactions without management making formal decisions?
trade credit
At the extreme, a firm that adheres to the conservative approach to finance current assets will finance all of its seasonal needs with long-term financing alternatives, thereby eliminating the need to use short-term financing. Such a firm will have extra permanent funds during off-peak periods, allowing it to store liquidity in the form of short-term investments during the off-season.
true
If a firm discovers that the days sales outstanding (DSO) of its credit customers is increasing, management should consider tightening the firm's credit policy.
true
