Chapter 16: WORKING CAPITAL POLICY AND SHORT-TERM FINANCING

Of the accounts listed, the account(s) that is (are) NOT part of a firm's working capital is:

A. plant and equipment

Basically the overall working capital policy decision involves a ____ of alternative policies.

A. profit-risk tradeoff

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as

A. term structure of interest rates

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as the

A. term structure of interest rates

Borrowers (e.g., business firms) feel that there is more risk associated with short-term debt (as compared with long-term debt) because of the

A. uncertainty arising from interest rate fluctuations and B. risk of being unable to refund the debt

Lenders normally feel that the relative risk associated with short-term debt is ____ the risk associated with long-term debt.

A. lower than

The length of the operating cycle for a firm is equal to the length of the

A. payables deferral period and B. cash conversion cycle

Many ____ contain provisions requiring firms to maintain a minimum net working capital provision

A. loan agreements with commercial banks and B. bond indentures

Last year Bizmart had credit sales of $32 million and a net profit margin of 8%. If Bizmart had accounts receivable of $4.5 million, what was the length of the receivables conversion period?

A. 51.3 days

If Swatch's inventory conversion period is 45 days, its payables deferral period is 35 days, and its receivables conversion period is 50 days, then its cash conversion cycle must be ____ days.

A. 60

Net working capital represents:

A. The amount of current assets financed by noncurrent sources of funds.

The firm's receivables conversion period (measured in days) is equal to its accounts receivable divided by its ____.

A. annual credit sales/365

The size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except

A. how efficient the firm manages its fixed assets

The length of the operating cycle is equal to the length of the

A. inventory conversion period and B. receivables conversion period

A firm's operating cycle is equal to its ____.

A. inventory conversion period plus receivables conversion period

Tefft Industries has an average inventory of $170,000, sells on terms of 2/10, net 30, and its cost of sales is $540,000. What is Tefft's inventory conversion period?

B. 115 days

Laserscope has an inventory conversion period of 45 days, a receivables conversion period of 42 days, and a payables deferral period of 51 days. What is the length of its cash conversion cycle?

B. 36 days

Sherwood Packing had sales of $3.2 million and a gross profit margin of 35% last year. If Sherwood's inventory averaged $0.4 million last year, what was the length of the inventory conversion period?

B. 70.2 days

The ____ shows the time interval over which additional non-spontaneous sources of working capital financing must be obtained to carry out the firm's activities.

B. Cash conversion cycle

Computerized financial planning models may be classified as any of the following except:

B. Optimistic

All other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ expected profitability or rate of return on the total assets of the firm.

B. Small, higher

All other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ risk of the firm encountering financial difficulties.

B. Small, higher

Net working capital is defined as:

B. current assets minus current liabilities

When the level of working capital is increased, all of the following are expected to occur except.

B. expected profitability increases

The rate of return on fixed assets is normally assumed to be ____ the rate of return on current assets (especially cash and marketable securities).

B. greater than

The aggressive approach to the financing of a firm's current assets uses a ____ proportion of short-term debt and a ____ proportion of long-term debt.

B. relatively high, relatively low

Which of the following factors does not directly affect the firm's level of investment in working capital?

B. the age of the firm's plant and equipment

Runners Ink, Inc. had sales last year of $700,000 and 35 percent of its sales are for cash, with the remainder buying on terms of net 30 days. If the receivables conversion period is actually 38 days, what is Runners Ink's accounts receivable?

C. $47,370

What is the length of the cash conversion cycle for a firm with annual sales (all cash) of $280,000, an inventory conversion period of 35 days, and a payables deferral period of 25 days.

C. 10 days

Crystal Oil has $9 million in accounts payable, $1.8 in salaries and taxes payable, and $10.4 in other current liabilities. If Crystal Oil had a cost of sales of $54 million and selling, general, and administrative expense of $18 million, what is the length of its payables deferral period?

C. 54.75 days

A firm's net working capital position is a widely used measure of its ____.

C. Risk

The firm's inventory conversion period (measured in days) is equal to its average inventory divided by its

C. cost of sales/365

Which of the following working capital financing policies subjects the firm to the greatest risk?

C. financing permanent current assets with short-term debt

The ____ assets are those that are affected by the seasonal or cyclical nature of company sales.

C. fluctuating current

If a firm uses only short-term debt to finance the fluctuating level of current assets, the firm is said to be using the ____ approach to asset financing.

C. matching

The optimal level of working capital investment is the level that is expected to

C. maximize shareholder wealth

A firm's cash conversion cycle is equal to its operating cycle minus its

C. payables deferral period

The operating cycle begins with the ____ and ends with the ____.

C. purchases of resources, receipt of cash

Historically, the yield curve has generally been ____, which indicates that long-term interest rates usually have been ____ short-term interest rates.

C. upward sloping, higher than

Great Skot expects to have cash receipts in June of $532,160. Skot's cash disbursements in June are $581,720, including an interest payment on a bond issue of $32,000. If Skot wishes to maintain a cash balance of $40,000, how much will Skot have to borrow if it started the month with a cash balance of $52,000?

D. $37,560

Linear Technology had sales (all on credit) of $36 million and a gross profit margin of 30% last year. If Linear Technology's inventory averaged $3.9 million, and its accounts receivable were $5.0 million, what was the length of its operating cycle?

D. 107.2 days

Which of the following factors affect the firm's level of investment in working capital? a. the length of the firm's operating cycle b. the firm's sales level c. the firm's inventory and credit policies d. all of the above

D. All of the above

If a firm shows a profit on the quarterly income statement, then

D. All the above may be correct

Under a conservative approach to working capital management, a firm tends to hold a relatively ____ proportion of its total assets in the form of current assets.

D. Large

All other things being equal, a policy of financing its assets with a relatively ____ proportion of short-term debt will tend to ____ the variability (or risk) of the after-tax earnings of the firm.

D. Large, increase

The ____ is the optimal working capital investment and financing policy a. aggressive policy b. moderate policy c. conservative policy d. none of the above

D. Non of the above

Which of the following assets (if any) are not part of a firm's working capital investment?

D. None of the above

An anticipated need for short-term borrowed funds is best shown in

D. a cash budget

All other things being equal, a policy of financing its assets with a relatively ____ proportion of short-term debt will tend to result in ____ expected after-tax earnings for the firm.

D. large, higher

With the matching approach to meeting the financing needs of the firm, fixed and permanent current assets are financed with

D. long-term debt and equity funds

The size of a firm's investment in current assets is a function of all of the following factors except

D. stockholders equity

What is the inventory conversion period for O'Brian's if it has sales of $320,000, an average inventory of $5,333, and a cash conversion cycle of 20 days? Assume that the cost of sales is 55 percent of sales.

c. 13.5 days