Managerial Finance - Smartbook
Sellers may offer even ______ credit periods for off-season sales. Multiple choice question. longer shorter
longer
Liquidation occurs when ____________ directs the sale of all of the firm's assets.
the court
If company XYZ needs 1,000 units of inventory per year, has ordering costs F of $10, and carrying costs CC of $2, which of the following is true?
EOQ = 100 units Number of orders = 10
If float can be reduced from $3,000 to $1,000 at a cost of $2,500, should the firm do this?
No, NPV is negative $500
The property of value ______ implies that the contribution of any project to a firm's value is simply the NPV of the project.
The property of value additivity implies that the contribution of any project to a firm's value is simply the NPV of the project. Correct Answer additivity
If the variable cost is $20, the price is $50, and the required return is 25%, then the break-even probability of default for a one-time customer is:
1 - $20/$50 × 1.25 = 50% Correct Answer 50%
Multiple Choice Question If 1,000 items of inventory are ordered per period and carrying costs CC are $5 per item, find the total carrying costs. Multiple choice question. $500 $2,500 $5,000 $250
1,000/2 × $5 = $2,500 $2,500
Long-term debt + Equity + Current liabilities - Current assets other than cash - Fixed assets = ____
Cash
Which of the following refers to an asset pledged in the case of default? Multiple choice question. Collateral Capacity Capital Character
Collateral
Multiple Choice Question What is the another term for a promissory note? Multiple choice question. Deposit Interest Credit IOU
IOU
In granting credit, a firm must assume some:
In granting credit, a firm must assume some:
In which case would a firm probably choose ACH transfers
More and smaller payments
A project with a positive NPV should be:
accepted
Accept a project if its NPV is ______ zero.
greater than
The practice of ______ management is more general than cash management.
liquidity
The sum of total collection and disbursement floats is the ______ float.
net float
Issuing credit to customers will:
promote sales make an investment in a customer
The type of inventory a firm uses as a starting point in its production process is:
raw materials
The credit period will be shorter when:
the buyer's operating cycle is shorter the buyer's inventory period is shorter
When might shareholders be inclined to invest in negative NPV projects?
When the project increases the standard deviation of the firm's return on assets When the call option on the firm is far out of the money
What is an unfinished product in a manufacturing process called? Multiple choice question. Work-in-progress Construction-in-progress Inventory-in-progress Sale-in-progress
Work-in-progress
Multiple Choice Question ABC Onions was worth $450 and CBA Onions had a market value of $375. ABC acquired CBA for $425 because they thought the new combined firm was worth $925. What is the NPV of the merger of ABC and CBA? Multiple choice question. $0 $450 $50 $425
`NPV = $925 - ($450 + $425) = $50 Correct Answer $50
Multiple Select Question Select all that apply In practice, firms that grant credit often contract the credit function to: Multiple select question. a payday loan company a captive finance company a factor an insurance company
a captive finance company a factor an insurance company
Which of the following are opportunity costs of refusing to grant credit? Multiple select question. the costs of managing credit and collections losses from bad debts a decrease in quantity sold losing the ability to charge a higher price
a decrease in quantity sold losing the ability to charge a higher price
Whether the firm sells for cash or credit, it will still have to
acquire or produce the merchandise and pay for it
Multiple Choice Question The main problem with promissory notes is that they are signed: Multiple choice question. along with the delivery of goods after the delivery of goods before the delivery of goods
after the delivery of goods
Multiple Choice Question A(n) ______ is used to monitor accounts receivable based on their age. Multiple choice question. age collection table aging schedule mortality table average collection period
aging schedule
A firm will place orders before inventories run down to zero in order to: Multiple choice question. minimize carrying costs minimize restocking costs maximize total revenue allow for delivery time
allow for delivery time
Examples of work-in-progress inventory would be: Multiple select question. a car that has not been driven an airplane without wings a car without a motor an airplane not flying
an airplane without wings a car without a motor
While a check the firm wrote is clearing, the ______ could be temporarily invested in marketable securities.
available balance
The net float is the difference between the ______ balance and the ______ balance.
available; book
Materials requirements planning (MRP)gives production managers ability to schedule _____ from finished goods inventories.
backward
When a draft is signed and stamped by the bank it is called a _____ _____.
bankers acceptance
A commercial draft is a way to obtain a credit commitment from a customer ______ the goods are delivered.
before
A firm should be more concerned with its net float and available balance than with its ______ balance because it can keep a lower cash balance.
book
Multiple Choice Question The literal meaning of kanban is Multiple choice question. "just-in-time." "supply." "card." "order."
card
Extending more than the cost-minimizing amount of credit will not cover the ______ costs of the investment in receivables.
carrying
Multiple Choice Question The required return on receivables is a Multiple choice question. opportunity cost of granting credit carrying cost of receiving credit carrying cost of granting credit
carrying cost of granting credit
The direct and opportunity costs of keeping inventory on hand are classified as:
carrying costs
Total credit cost is minimized when: Multiple choice question. both opportunity costs and carrying costs are minimized carrying costs are larger than opportunity costs carrying costs are less than opportunity costs carrying costs equal opportunity costs
carrying costs equal opportunity costs
Match the titles with the duties of short-term financial managers. Instructions Cash manager Credit manager Purchasing manager Payables manager Answers: Accounts receivable Marketable securities Accounts payable Inventory
cash - marketable credit - receivable purchasing - inventory payables - payable
The process of monitoring receivables to spot trouble and obtaining payment on past-due accounts is called ______ policy. Multiple choice question. collection intrusion rejection acceptance
collection
With a conditional sales contract, the selling firm will retain legal ownership of the goods until the customer:
completes the payment
Which of the following factors are used in evaluating credit policy? Multiple select question. the cost of debt quantity discounts revenue effects cost effects the cost of equity
cost of debt revenue effects cost effects
For which of the following types of sales would the firm be most likely to suffer nonpayment:
credit
The procedures businesses go through to determine if a customer is likely to pay is called:
credit analysis
The factor may have full responsibility for which of the following? Multiple select question. making short-term loans authorization the payables function credit checking
credit checking authorization but also... collection
The sum of the carrying costs and the opportunity costs of a particular credit policy is called the
credit cost curve
The process of calculating a numerical rating for a customer based on information collected is called:
credit scoring
Which of the following are not one of the 5 C's of credit? Multiple select question. creditors character capital conditions conscience
creditors conscience
if a firm must liquidate, the proceeds are distributed to: Multiple choice question. equity holders rank and file employees in order of seniority company management creditors in order of established priority
creditors in order of established priority
Multiple Choice Question Issuing credit is an investment in the: Multiple choice question. customer company employee
customer
Demand for an inventory item that becomes a part of another item is usually termed: Multiple choice question. relational variance inherited product derived demand derived supply
derived demand
Which of the following are steps in the credit-granting process? Multiple select question. determining creditworthiness setting up a collection policy gathering relevant information hiring a factor
determining creditworthiness gathering relevant information
When a cash discount is offered, the credit is free ______ period.
during the discount
Multiple Select Question Select all that apply The purpose of the EOQ inventory management model is to: Multiple select question. establish a minimum total cost point of carrying and shortage costs maximize the present value of the inventory establish an optimal inventory level minimize the cost of the inventory itself
establish a minimum total cost point of carrying and shortage costs establish an optimal inventory level
Match the inventory type to its liquidity level.
fairly liquid::raw materials quite illiquid:: work in progress depends on the product:: finished goods
All things equal, which firm characteristic will NOT usually lead to a firm granting more credit? the presence of excess capacity low variable operating costs fewer repeat customers
fewer repeat customers
The cost of debt matters in evaluating credit policy because the resulting receivables must be ______:
financed
Which of the following are sources of information for assessing creditworthiness? Multiple select question. bond indentures financial statements recommendation letters banks
financial statements banks
f a product is ready to ship or sell, it is called: Multiple choice question. rolling goods inventory finished goods inventory transition inventory shipment inventory
finished goods inventory
Multiple Choice Question Firms can sometimes achieve a lower over-all cost of debt by: Multiple choice question. forming a separate company to handle the credit function forming a separate company to borrow in the name of the parent company comingling production and financing portions of the business forming a separate company to handle the capital budget of the company
forming a separate company to handle the credit function
The role of the cash discount in credit policy is to:
get customers to pay early
Multiple Choice Question When a firm is liquidated, the result is that it ceases as a _____________. Multiple choice question. depreciable concern going concern marketable concern monopoly
going concern
Because of cash discounts, businesses that extend credit are able to charge ______ prices to customers that use credit.
higher
The marketing manager may want easier credit terms to increase sales, but the credit manager may worry about ______.
higher receivables and bad debt risk
Conditional sales contracts are usually paid
in installments
A firm that grants credit may experience an increase in revenue due to an increase in price and a(n) ______ in quantity sold.
increase
Multiple Choice Question The total restocking cost will tend to ______ as the number of orders increase. Multiple choice question. decrease increase
increase
The total restocking cost will tend to ______ as the number of orders increase.
increase
Multiple Choice Question Carrying costs ______ with inventory levels, whereas shortage costs ______ with inventory levels. Multiple choice question. increase; decrease decrease; increase
increase; decrease
The optimal amount of credit is determined when the ______ cash flows from increased sales are exactly equal to the incremental costs of carrying the increase in investment in accounts receivable.
incremental
Multiple Choice Question Granting credit results in delayed revenues, but the costs of sales is: Multiple choice question. an unknown factor delayed even longer incurred immediately
incurred immediately
Demand for finished goods inventory is sometimes said to be:
independent demand
Multiple Choice Question Demand for finished goods inventory is sometimes said to be: Multiple choice question. dependent demand independent demand derived demand
independent demand
The demand for some inventory types is derived from or dependent on other ______ needs.
inventory
Multiple Choice Question One assumption of the EOQ model is that Multiple choice question. inventory goes to zero before reordering occurs. selling price is a component of the restocking decision. cost is not important in determining reorder quantity. total cost = carrying cost - restocking cost.
inventory goes to zero before reordering occurs.
Financial managers often only have input into inventory decisions because
inventory management has become a specialization in its own right.
Because most trade credit is offered on open account, the most used credit instrument is the: note payable invoice note receivable
invoice
In which of the following situations would a firm be concerned about an increase in its quarterly ACP? Multiple choice question. its customers are paying at the same rate as before the firm has not been keeping track of its ACP over time its business is seasonal its business is not seasonal
its business is not seasonal
Multiple Choice Question Materials requirements planning and _______________ are two methods for managing demand-dependent inventories. Multiple choice question. inventory reorder points just-in-time inventory management carrying cost inventory management safety stock inventory management
just-in-time inventory management
The net credit period is:
length of time the customer has to pay
Liquidation differs from reorganization in that: Multiple choice question. liquidation sells the profitable operations and reorganization sells the unprofitable operations liquidation is what cash can be raised to continue operations and reorganization only consolidates debt liquidation terminates business activity while reorganization allows the firm to continue operating reorganization terminates all operations while liquidation only eliminates unprofitable operations
liquidation terminates business activity while reorganization allows the firm to continue operating
Low demand products may have a _____ credit period to try to increase sales.
longer
With higher levels of competition, a _____ credit period is a good way of attracting customers.
longer
Which of the following represent carrying costs of inventory? Multiple select question. safety reserves losses from theft storage costs restocking insurance
losses from theft storage costs insurance
The goal of JIT inventory systems is to minimize inventories, thereby ______ turnover.
maximizing
The basic goal of inventory management is to:
minimize the sum of shortage costs and carrying costs
The EOQ model locates the _________ total cost point, Q*.
minimum
What are the two components of the credit period when a cash discount is offered? Multiple select question. the net income period the net credit period the cash discount period the expense period
net credit period cash discount period
Nominal cash flows should be discounted at the ______ rate of interest. Multiple choice question. nominal prime real average
nominal
Credit analysis is important simply because: Multiple choice question. it is always required by company policy and law of the potential losses on receivables the accounting entries must balance
of the potential losses on receivables
In order to entice buyers to pay early, a firm may:
offer a cash discount
Two major factors that affect the length of the credit period are the:
operating cycle buyer's inventory period
The management fee for money market mutual funds is compensation for:
professional expertise diversification
A(n) _____ note is essentially an IOU that a customer will sign when an order is large.
promissory
If the net present value of the incremental cash flows from leasing relative to purchasing is negative, the firm will prefer to _______ the asset. lease purchase
purchase
The terms of a sale would be labeled _____ if the credit period starts when the customer receives the order.
receipt of goods (ROG)
The operating cycle equals the sum of the inventory period and the ______ period. Multiple choice question. accounts payable cash accounts receivable credit
receivable
The focus of credit analysis is on losses incurred on: sales receivables payables purchases
receivables
If a firm grants credit there will be a delay in
revenue collections
Which of the five basic factors in evaluating credit policy is impacted by possible price and quantity effects? Cost effects Revenue effects The probability of nonpayment The cash discount
revenue effects
The two main types of shortage costs are: Multiple select question. tracking costs opportunity costs safety reserve costs restocking costs
safety reserve costs restocking costs
Firms that manage internal credit operations are _______ against default.
self-insured
The decision to forgo a trade discount almost surely works to the __________ advantage.
sellers
Multiple Choice Question Factoring is an arrangement where a firm ______ its receivables. Multiple choice question. sells donates reduces buys
sells
The primary reason to set up a credit function subsidiary is to ______ the production and financing of the firm's products for management, financing, and reporting.
separate
Finished goods are products that are ready to:
ship or sell
Multiple Choice Question The cost of ______ borrowing is a factor in the decision to grant credit. Multiple choice question. inventory short-term long-term receivables
short-term
By extending credit, the company finances part of the buyer's operating cycle and _____ the buyer's cash cycle.
shortens
A higher credit risk buyer will usually receive a _____ credit period.
shorter
A lower priced item will tend to have a _____ credit period.
shorter
If there is very little competition, the credit period offered is likely to be: Multiple choice question. longer shorter
shorter
Relatively standardized goods and raw materials tend to have ______ credit periods.
shorter
The smaller the account, the ______ the credit period.
shorter
There are two buyers, Sam and Bradley. Sam has a higher credit risk than Bradley. We can conclude that the credit period for Sam will be relatively:
shorter than Bradley's credit period
Immediate payment is required on a _____ draft.
sight
Raw materials are inventories that are used at the: Multiple choice question. beginning of the cash cycle starting point of the production process mid-point of the production process ending point of the production process
starting point of the production process
Multiple Choice Question The change in quantity sold under a new credit policy is Multiple choice question. the extra potential profit from credit sales that are lost because credit is refused a loss from bad debt the total cost of managing credit and credit collections the carrying cost of granting credit
the extra potential profit from credit sales that are lost because credit is refused
Multiple Choice Question If the level of receivables is below the minimum total credit costs then Multiple choice question. the firm is choosing the optimal investment in receivables the firm is forgoing valuable profit opportunities the firm is maximizing its investment in net receivables the firm will sell more product
the firm is forgoing valuable profit opportunities
Multiple Select Question Select all that apply Which of the following are forms of carrying costs when granting credit? Multiple select question. the losses from bad debts the opportunity costs of losing sales when credit is refused the costs of managing payables the required return on receivables
the losses from bad debts the required return on receivables
All things equal, which firm characteristics will usually lead to a firm granting more credit? Multiple select question. the presence of excess capacity fewer repeat customers the presence of high inventory costs low variable operating costs
the presence of excess capacity low variable operating costs
If a firm decides not to extend credit to a returning customer, it will collect:
the price
In practice, inventory is ordered when the level of inventory falls to: Multiple choice question. the safety stock level zero three months of sales
the safety stock level
Multiple Choice Question The credit period refers to: Multiple choice question. the time for which credit is granted the time until collection efforts begin the time for which the discount is offered the time it takes to do a credit check on a customer
the time for which credit is granted
The term 2/10, net 60 means: Multiple choice question. there is a 10% discount if the invoice is paid off in 2 days, otherwise the entire amount is due in 60 days there is a 2% discount if the invoice is paid off in 10 days, otherwise the entire amount is due in 60 days only 2/10 of the initial invoice is due in 60 days
there is a 2% discount if the invoice is paid off in 10 days, otherwise the entire amount is due in 60 days
If immediate payment is not required on a draft, then it is a ______ draft.
time
The cash discount period is the:
time during which the discount is available
What is one of the reasons for offering discount for cash purchases? Multiple choice question. To reduce credit card expenses To reduce the volume of sales To reduce credit management To speed up collections
to speed up collections
Multiple Choice Question In bankruptcy liquidation, a bankruptcy trustee is elected by the creditors Multiple choice question. to take over the assets of the debtor corporation to find a way for the company to remain in business to distribute the assets of the debtor to shareholders to file a petition of bankruptcy
to take over the assets of the debtor corporation
If credit is extended to a returning customer, the ______ sales price is risked. Multiple choice question. discounted total marginal final
total
If credit is extended to a returning customer, the ______ sales price is risked. Multiple choice question. final discounted total marginal
total
Multiple Select Question Select all that apply Which of the following are true about a firm's total costs of inventory? Multiple select question. TC = 2(Q/CC) - FQ/T total costs = carrying costs + restocking costs TC = (Q/2) × CC + F × (T/Q) total costs = carrying costs - restocking costs
total costs = carrying costs + restocking costs TC = (Q/2) × CC + F × (T/Q)
True or false: A credit instrument is the basic evidence of indebtedness.
true
True or false: Banker's acceptances are common in international trade.
true
True or false: In analyzing repeat customers, it is often assumed that a customer who does not default the first time will never default. True false question. True False
true
True or false: Sellers frequently quote different credit terms to wholesale and retail customers.
true
Multiple Choice Question Cash discounts allow businesses to charge higher prices to customers that Multiple choice question. take the discount for paying early use the credit extended to them pay cash on delivery
use the credit extended to them
The three attributes of NPV are that it: Multiple select question. doesn't rely on a discount rate. uses all the cash flows of a project. discounts the cash flows properly. uses cash flows.
uses all the cash flows of a project. discounts the cash flows properly. uses cash flows.
Question Mode Multiple Choice Question The best predictor of whether or not someone will pay in the future is Multiple choice question. whether or not they've paid in the past an exaggerated probability of the acceptable default rate the amount of credit offered the probability of loss
whether or not they've paid in the past
Multiple Choice Question If the variable cost is $30, the price is $40, and the required return is 5%, then the break-even probability of default for a one-time customer is: Multiple choice question. 40% 21% 24% 30%
π = 1 - $30/$40 × 1.05 =21% Correct Answer 21%
If a company sells 1,000 items per year and orders 100 units at a time at a restocking cost of $20 per order, its restocking costs would be: Multiple choice question. $200 $20 $2,000 $1,000
$20 × 1,0001001,000100 = $200 Correct Answer $200
What is the NPV of a one year project that requires an initial investment of $10,000 and is expected to generate $16,000 next year if the discount rate is 12%? $16,000 $6,000 $4,285.71 $5,810.28
$4,285.71
If the cost of changing a credit policy is $5,000, and if the PV of the benefit is $4,500, then the NPV is:
-$500
If a company switches from all cash to net 30 sales, but there is no increase in sales (P × Q), then the NPV equals:
-PQ
List the steps involved in the collection process from first to last.
1. send a delinquency letter 2. call customer 3. hire collection agency 4. take legal action
If the benefit of changing credit policies is expected to be $100 per month forever, and if the monthly required return is 1%, the present value equals: Multiple choice question. $1,000 $100 $10,000 $100,000
100/0.01 = $10,000
Multiple Choice Question If the total inventory needed is 50,000 units, the fixed cost F is $40, and the restocking cost CC is $1, find the EOQ. Multiple choice question. 200 200,000 2,000 20,000
2,000
Multiple Choice Question If the reorder quantity Q equals 4,000 units and carrying costs are $2.00 per unit per year, then total carrying costs will be ______ per year. Multiple choice question. $5,000 $8,000 $2,000 $4,000
4,00024,0002 × $2 = $4,000 $4,000
The spreadsheet function for calculating net present value is ____. Multiple choice question. =MIRR() =IRR() =NPV() =PV()
=NPV()
Multiple Select Question Select all that apply Which of the following is true about bank acceptances? Multiple select question. They are actively traded in the capital market. A bank guarantees payment. They are actively traded in the money market. The bank accepts the customer's guarantee to make payment. They are commonly used in international trade.
A bank guarantees payment. They are actively traded in the money market. They are commonly used in international trade.
Multiple Select Question Select all that apply Which of the following is true about kanban inventory systems? Multiple select question. A kanban is the cost-minimizing amount of inventory to order. Kanbans are associations of inventory suppliers. A kanban is a signal to a supplier to send more inventory. Kanbans are integral parts of JIT systems.
A kanban is a signal to a supplier to send more inventory. Kanbans are integral parts of JIT systems.
Suppose a firm currently offers terms of net 40 and has an average collection period (ACP) of 40 days. If it offers terms of 1/10, net 40, and if 40% of the customers pay in 10 days and 60% pay in 40 days, then the new ACP will be ______ days.
ACP = 0.60 × 40 + 0.40 × 10 = 28 days 28
What type of account is created when a firm issues credit?
Accounts receivable
Which of the following transactions is equivalent to entering a forward contract for an importing firm? Multiple choice question. Borrowing domestically and investing in the foreign currency of interest for the length of the forward contract Buying futures on the foreign currency Borrowing in the foreign currency of interest and investing in the domestic currency for the length of the forward contract Selling options on the foreign currency
Borrowing domestically and investing in the foreign currency of interest for the length of the forward contract
Which of the following inventory types is relatively more liquid? Multiple choice question. Commodity-like raw materials Unstandardized raw materials Work-in-progress
Commodity-like raw materials
What is the process of deciding whether or not to extend credit to a particular customer called?
Credit analysis
The three components of credit policy are: Credit analysis Collection policy How quickly to pay Terms of sale How much to ship
Credit analysis Collection policy Terms of sale
Which of the following are true? Multiple select question. Credit insurance offers coverage up to a preset dollar limit. Government credit insurance is not available. Firms with internal credit operations are self-insured against default. Higher insurance limits are given to lower credit rated accounts.
Credit insurance offers coverage up to a preset dollar limit. Firms with internal credit operations are self-insured against default.
When a demand for an inventory is dependent on other inventory needs, what is it called? Derived-demand inventory Spillover inventory Contagion inventory Dependant inventory
Derived-demand inventory
Which of the following are the most popular business credit reporting agencies? Multiple select question. Transunion Dun & Bradstreet Equifax Experian
Dun & Bradstreet Experian
True or False Question True or false: There is no downside to extending trade credit. True false question.TrueFalse
False
True or false: The standard credit period is normally between 6 to 12 months. True false question. True False
False 30 and 120 days...
Which of the following statements about inventory are true? Inventory management is not generally a large proportion of a manufacturing firm's assets. Functional areas such as purchasing, production, and marketing will often share control over inventory. The financial manager of the firm will often not have primary control over inventory. Inventory management is not an important function of firm management.
Functional areas such as purchasing, production, and marketing will often share control over inventory. The financial manager of the firm will often not have primary control over inventory.
Multiple Select Question Select all that apply Identify the real world captive finance companies. Multiple select question. GMAC ABC FMC FCC
GMAC FMC
Some examples of real world captive finance companies are: Multiple select question. Berkshire Hathaway Ford Motor Credit GMAC Reason: General Motors Acceptance Corporation, which is now known as Ally Financial. Fannie Mae
GMAC Ford Motor Credit
Which of the following are characteristics of the ABC inventory management approach? It monitors closely the large number of low value items. It is simple. It focuses exclusively on quantity over value. It divides inventory into a few groups.
It is simple. It divides inventory into a few groups.
Which of the following are methods for managing demand-dependent inventories? Multiple select question. Minimum order cost (MOC) Just-in-time inventories (JIT) Materials requirements planning (MRP) Economic order quantity (EOQ)
Just-in-time inventories (JIT) Materials requirements planning (MRP)
Multiple Choice Question Which of the following is not one of the major inventory types? Multiple choice question. Just-in-time inventory Finished goods Raw materials Work-in-progress
Just-in-time inventory
Which of the following are true about materials requirements planning (MRP) inventory systems? Multiple select question. MRP systems schedule backwards from finished goods. MRP systems rely on time value of money concepts. MRP systems are more important for simpler products. MRP systems are computer based.
MRP systems schedule backwards from finished goods. MRP systems are computer based.
Which of the following are part of collection policy procedures? Multiple select question. Monitoring receivables Collecting on past-due amounts Monitoring payables Settling outstanding debts
Monitoring receivables Collecting on past-due amounts
Which of the following statements are true about firms monitoring their average collection period (ACP)? Multiple select question. Most firms monitor receivables. Any fluctuation in ACP is cause for concern. Firms normally monitor their ACP over time. A larger ACP is a good sign.
Most firms monitor receivables. Firms normally monitor their ACP over time.
Firm Pancakes was worth $500 and Firm Waffles had a value of $400. Firm Pancakes acquired Firm Waffles because they thought the combination of the new Firm Panaffles was worth $1,000. What was the NPV of the merger?
NPV = $1,000 -($500 + $400) = $100 Correct Answer $100
If the variable cost is $20 per unit, the price is $40, the probability of default is 30%, and the discount rate on receivables is 3%, then the NPV of granting credit to a one-time customer is: Multiple choice question. $7.18 $10 $26.41 $18.43
NPV = -$20 + (1 - 0.3) × $40/(1.03) = $7.18 Correct Answer $7.18
If the variable cost is $30 per unit, the price is $50, the probability of default is 16%, and the discount rate on receivables is 5%, then the NPV of granting credit to a one-time customer is: Multiple choice question. $15 $5 $20 $10
NPV = -$30 + (1 - 0.16) × $50/(1.05) = $10 $10
What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6 percent?
NPV = -$95 + ($107/1.06) = $5.94 Correct Answer $5.94
What fraction of all the assets of US industrial firms are in the form of accounts receivable?
One-sixth
If granting credit results in an increase of sales of 20 items per month while the gross profit per unit remains constant at $30, then the present value of this perpetual change at a required return of 0.5% per month forever is:
PV = (20 × $30)/0.005 =$120,000 Correct Answer $120,000
Suppose Veeco charges $150 per unit, its variable costs are $100 per unit, and it sells 1000 units per month. The company is considering extending credit to its customers, allowing them 30 days to pay. Doing this is expected to increase sales to 120 units per month. What is the NPV of this proposal if its required rate of return is 3%?
PV Benefit: (120-100)*(150-100)/0.03= 33,333 PV Cost: (120-100)*100+(150*100)=17000 Correct Answer $16,333
Which of the following are classified as inventory? Multiple select question. Cost of goods sold Sold goods Raw materials Finished goods
Raw materials Finished goods
What is the break-even sales increase a company needs if its current sales level is $5,400, its price and variable cost per unit are $30 and $20 respectively, and the discount rate is 5% per period?
Reason: $5,400/(10/0.05 - 20) = 30 units 30 units
Multiple Choice Question If the variable cost is $6, the probability of default is 50%, the price is $12, and the rate of return is 10%, the NPV of extending credit to a new customer who has the potential to be a repeat customer is: Multiple choice question. $20 $24 $30 $28
Reason: NPV = -$6 + (1 - 0.5)($12 - $6)/0.10 = $24 Correct Answer $24
What is the term used to describe the times at which the firm places its inventory orders?
Reorder points
Which of the following statements are true about extending credit? Multiple select question. Repeat business is a crucial consideration The amount of initial credit is not important Extending credit to everyone is not a bad strategy The best predictor of default is the customer's character
Repeat business is a crucial consideration Extending credit to everyone is not a bad strategy
Which of the following are true about JIT inventory systems? Multiple select question. Restocking is more frequent than in most other methods. It does not matter where suppliers are located. JIT requires much cooperation among suppliers. JIT calculations rely strongly on the time value of money.
Restocking is more frequent than in most other methods. JIT requires much cooperation among suppliers.
Multiple Select Question Select all that apply Which of the following statements are true about the use of aging schedules? Multiple select question. Seasonal sales affect the aging schedule. High current sales lower the percentage of older accounts. Eventually, all accounts can be collected. It is not important to monitor older accounts
Seasonal sales affect the aging schedule. High current sales lower the percentage of older accounts.
Which of the following statements are true about the use of aging schedules? Multiple select question. Eventually, all accounts can be collected. It is not important to monitor older accounts Seasonal sales affect the aging schedule. High current sales lower the percentage of older accounts.
Seasonal sales affect the aging schedule. High current sales lower the percentage of older accounts.
Alpha Co. imports raw materials and uses forward contracts to reduce which of the following risks? Short-run exposure to exchange rate risk Long-term exposure to exchange rate risk Home currency approach risks Triangle arbitrage risks
Short-run exposure to exchange rate risk
Suppose a company uses the ABC approach to inventory management. The A group consists of very few items, but constitutes 50% of the value of inventory. The C group consists of a large quantity of crucial, but inexpensive items. The B group is in between the A and C group in cost and quantity. Which type will receive the most attention from inventory managers? Multiple choice question. The A group The C group The B group Need
The A group
Which of the following describe a firm that takes advantage of a reorganization? Multiple select question. The business must have its reorganization approved by its creditors. It must liquidate its assets and end its operations. It is allowed to issue new securities. The firm continues to operate.
The business must have its reorganization approved by its creditors. It is allowed to issue new securities. The firm continues to operate.
What does it imply if the buyer is presented with a draft and the buyer "accepts" it? The buyer accepts the goods sold The buyer agrees to buy on credit The buyer promises to pay it in the future The buyer promises not to buy from any other seller for a specific period
The buyer promises to pay it in the future
What are shortage costs?
The costs associated with not having enough inventory on hand
What does a credit score show? Multiple choice question. The creditworthiness of a customer The capital currently available to a customer The credit currently accessible by a customer The loan amount currently outstanding against a customer
The creditworthiness of a customer
Multiple Select Question Select all that apply Which of the following are true about restocking costs in the EOQ model? Multiple select question. The firm will place T/Q orders per year. They assumed to be variable. The firm orders TQ units each restocking period. They are assumed to be fixed.
The firm will place T/Q orders per year. They are assumed to be fixed.
What are the two components of the operating cycle (in order of occurrence)?
The inventory period and the accounts receivable period
Which short-term financial managers are involved with selling on credit?
The marketing manager The credit manager The controller
Which of the following are true? Multiple select question. The net present value computation ignores the initial investment. The present value computation includes all the cash flows. The present value computation ignores the initial investment. The net present value computation includes all the cash flows.
The present value computation ignores the initial investment. The net present value computation includes all the cash flows.
What does it mean if the NPV for a project is $18,000? Assume the cash flows from the project were discounted at 12%. The project is expected to generate 12% plus $18,000. The project is expected to generate 12% minus $18,000. The project is expected to generate $18,000. The project is expected to generate 12%.
The project is expected to generate 12% plus $18,000.
What does it mean if the NPV for a project is $18,000? Assume the cash flows from the project were discounted at 12%. Multiple choice question. The project is expected to generate 12% minus $18,000. The project is expected to generate $18,000. The project is expected to generate 12%. The project is expected to generate 12% plus $18,000.
The project is expected to generate 12% plus $18,000.
What is the inventory period?
The time from acquisition of inventory to sale of inventory
Why would a company plan to reorder before its inventory goes to zero? Multiple select question. Doing so will minimize ordering costs. There is a time lag before inventory arrives. The firm wishes to avoid a stockout. Doing so will minimize carrying costs.
There is a time lag before inventory arrives. The firm wishes to avoid a stockout.
You are given the following financial projections for 2011. Sales = $140,000; Cash flow from operations =$65,000; Increase in working capital = $45,000. What is the net cash flow? Multiple choice question. $20,000 $160,000 Reason: Net cash flow = $65,000 - $45,000 = $20,000 $250,000 Reason: Net cash flow = $65,000 - $45,000 = $20,000 -$21,000 Reason: Net cash flow = $65,000 - $45,000 = $20,000. Correct Answer $20,000
$20,000
The typical sequence of events that occur when a firm grants credit is: Instructions Choice 1 of 4. the firm deposits the check toggle button the firm deposits the check Choice 2 of 4. the credit sale is made toggle button the credit sale is made Choice 3 of 4. the customer sends a check to the firm toggle button the customer sends a check to the firm Choice 4 of 4. the firm's account is credited toggle button the firm's account is credited
credit sale is made customer mails check firm deposits check in bank bank credits firm's account
If the credit terms are 1/10, net 30, then the buyer can pay full price in 30 days or take a ______ discount and pay in 10 days.
1%
If the benefits of reducing float are $3,000 and the costs are $2,000, what is the NPV of such an action?
1,000
Multiple Choice Question With 2/15, net 40 terms, a rational buyer either pays in ___ days or in ___ days. If he gives up the discount, he gets ___ days of free credit. Multiple choice question. 40; 15; 40 15; 40; 25 15; 25; 40 15; 40; 40
15; 40; 25
If the operating cycle is 200 days and the accounts receivable period is 80 days, then the inventory period is ______ days.
200-80= 120 days
If the terms of sales are 3/15, net 60, what is the discount available?
3% if paid within 15 days
If the inventory period is 40 days and the accounts receivables period is 60 days, then the operating cycle is ______ days. Multiple choice question. 50 20 100
40+60= 100
Where do credit sales appear in the balance sheet?
As accounts receivable under current assets
How can the receivables period be reduced?
By speeding up cheque mailing By reducing processing float
The manager who deals with monitoring and control of accounts receivable is called the Multiple choice question. cash manager. purchasing manager. production manager. credit manager.
Credit manager
In which case would a firm probably choose wire transfers
Fewer but larger payments
Firms with high holdings of liquid assets are characterized by: Multiple select question.
High-growth opportunities High-risk investments small firms low-credit firms
What is an important drawback of traditional NPV analysis?
It ignores embedded options in investment decisions.
What is the danger of extending credit? Multiple choice question. It may lead to loss of customers It may lead to delays in payment It will reduce default risk It will help accelerate collections
It may lead to delays in payment
Multiple Choice Question ______ management concerns the optimal quantity of liquid assets a firm should have on hand. Multiple choice question. Derivative Liquidity Cash Investment
Liquidity
New Era Engines, Inc. sold a 3-month call option contract to buy 100,000 gallons of oil at $2.50 per gallon to Trinity Transportation Corporation. When will this call option benefit New Era Engines, Inc? Multiple select question. New Era Engines, Inc. will benefit if the option is exercised by Trinity Transportation Corporation. New Era Engines, Inc. will benefit if the price of oil remains below $2.50 per gallon New Era Engines, Inc. will benefit if the option is not exercised by Trinity Transportation Corporation. New Era Engines, Inc. will benefit if the price of oil exceeds $2.50 per gallon
New Era Engines, Inc. will benefit if the price of oil remains below $2.50 per gallon New Era Engines, Inc. will benefit if the option is not exercised by Trinity Transportation Corporation.
If the credit terms are 1/10, net 30, then the buyer can pay $1,000 in 30 days or ______ in 10 days.
Reason: $1,000 × 0.99 = $990 $990 Correct Answer $990
Multiple Select Question Select all that apply What trade-offs are made when trade credit is issued? Multiple select question. Sales may increase but the probability of defaults will also increase Sales may increase but the cost of carrying receivables will also increase Sales will decrease but the cost of carrying receivables will also decrease Sales will increase and the probability of defaults will also decrease
Sales may increase but the probability of defaults will also increase Sales may increase but the cost of carrying receivables will also increase
Question Mode Multiple Select Question Select all that apply Which of the following are not ways to reduce the receivables period? Multiple select question. Speed up check processing Slow down check processing Slow down check clearing Speed up check mailing Need
Slow down check processing Slow down check clearing
Which of the following are true about money market preferred stock? Multiple select question. This type of stock has existed since the 1940s. This is not a popular short-term investment. The dividend is reset fairly often This type of stock has less volatility than ordinary preferred stock.
The dividend is reset fairly often This type of stock has less volatility than ordinary preferred stock.
Multiple Choice Question What is the buyer's receivables period? Multiple choice question. The time it takes the buyer to collect on the sale. The time it takes to deposit a cheque in the bank. The time it takes the buyer to make payment for merchandise. The time it takes to process a cheque in the bank.
The time it takes the buyer to collect on the sale.
Multiple Choice Question Why do firms perform credit analysis? Multiple choice question. To review the firm's credit history To determine the creditworthiness of customers To assess how much credit the firm can afford to give to its customers To survey the cost of credit in the market
To determine the creditworthiness of customers
New Era Engines, Inc. sold a 3-month call option contract to buy 100,000 gallons of oil at $2.50 per gallon to Trinity Transportation Corporation. When will this call option contract benefit Trinity Transportation Corporation? Multiple choice question. Trinity Corporation financially benefits regardless of the market price of oil. Trinity Corporation does not benefit from this option contract. Trinity Corporation will benefit if the price of oil does not exceed $2.50. Trinity Corporation will benefit if the price of oil exceeds $2.50.
Trinity Corporation will benefit if the price of oil exceeds $2.50.
Which of the following are types of money market securities? US T-bills Corporate bonds Stocks Certificates of deposit
US T-bills Certificates of deposit
When are the shareholders likely to take greater risk and even invest in negative NPV projects? Multiple choice question. When the firm has no debt. When the equity option on the firm is in the money. When the equity option on the firm is far out of the money. When there are no dividends to be paid.
When the equity option on the firm is far out of the money.
The credit period generally increases: if the product is perishable as the size of an account decreases as competition decreases as the size of an account increases
as the size of an account increases
Multiple Choice Question The invoice date represents the: Multiple choice question. beginning of the credit period end of the credit period end of the discount period
beginning of the credit period
The amount of time it takes the buyer to collect on a sale is known as the:
buyer's receivables period
The time it takes the buyer to acquire inventory, process it and sell it is known as the: buyer's accrual period collection period seller's inventory period buyers inventory period
buyers inventory period
A delay in payment can occur when a company extends _____.
credit
What is the length of time for which credit is granted called?
credit period
Multiple Select Question Select all that apply The terms of sale specify the: cash discount employee discount period discount period credit period type of credit instrument corporation benefits
credit period cash discount discount period type of credit instrument
Multiple Choice Question The accounts receivable period indicates the time it takes to collect on: Multiple choice question. credit sales cash sales cash disbursements bad debt
credit sales
Multiple Choice Question If a firm decides to grant credit to its customers, then it must Multiple choice question. establish procedures for extending credit and collecting. determine what level of sales they need to meet fixed costs. hire an accountant to send the invoices. calculate cost of goods sold as a percent of sales.
establish procedures for extending credit and collecting.
rue or false: A seller cannot offer different terms to different buyers. True false question. True False
false
One way in which a negative NPV can misstate the true value of a project is Multiple choice question. if the project contains options that have not been accounted for. if the managers of the firm do not consider NPV an appropriate measure for capital budgeting purposes. if the IRR is greater than the cost of capital.
if the project contains options that have not been accounted for.
Issuing credit to customers should:
increase sales
The major reason for issuing credit is to:
increase sales
Multiple Choice Question A(n) _____ is a written account of merchandise shipped to the buyer. Multiple choice question. memoir diary journal invoice
invoice
What is the beginning of the credit period called?
invoice
What provides a written documentation of merchandise shipped to a buyer?
invoice
With seasonal dating, the _______ date may be later than the actual order date.
invoice
Issuing credit creates a trade off between increased sales and the cost of:
issuing credit
Perishable items usually have a relatively _____ collateral value.
low
Money market securities generally have:
low risk of default
Multiple Choice Question The market for short-term financial assets is called the: Multiple choice question. capital market derivatives market open market money market
money market
The main difference between ordinary preferred stock and money market preferred stock is:
money market preferred stock has a floating dividend
Click and drag on elements in order Place the steps of the operating cycle in order from first to last. Instructions Choice 1 of 3. sell the finished product toggle button sell the finished product Choice 2 of 3. order inventory toggle button order inventory Choice 3 of 3. collect cash from the sale toggle button collect cash from the sale
order, sell, collect
Cash discounts encourage early payment which reduces the firm's investment in: receivables mutual funds certificate of deposits payables
receivables
If our credit period exceeds the buyer's inventory period, then we are financing not only the buyer's inventory purchases, but part of the buyer's ______ as well:
receivables
Perishable items usually have a ____ credit period. Multiple choice question. longer shorter
shorter
Some problems with issuing credit are:
the cost of carrying receivables. the risk of the customer not paying
True or false: Studies have shown that firms behave according to the static trade-off model with regard to their holdings of liquid assets.
true