Intermediate Financial Management Quiz Two

Inventory turnover = ($948,000 × .68) / $23,000 = 28.0278 Inventory period = 365 / 28.0278 = 13.02 days

North Side Wholesalers has sales of $948,000. The cost of goods sold is equal to 68 percent of sales. The firm has an average inventory of $23,000. How many days on average does it take the firm to sell its inventory? A) 16.48 days B) 13.02 days C) 29.68 days D) 26.35 days E) 12.30 days

Payables turnover = ($387,000 × .79) / $32,800 = 9.3210 Payables period = 365 / 9.3210 = 39.16 days

The Mountain Top Shoppe has sales of $387,000, average accounts receivable of $28,600 and average accounts payable of $32,800. The cost of goods sold is equivalent to 79 percent of sales. How long does it take The Mountain Top Shoppe to pay its suppliers? A) 26.97 days B) 32.38 days C) 39.16 days D) 30.94 days E) 35.89 days

Payment of accounts = (60 / 90)(.65)($660) + (30 / 90)(.65)($590) = $413.83 Total disbursements = $413.83 + (.16 × $660) + $60 = $579.43

The Thunder Dan's Corporation's purchases from suppliers in a quarter are equal to 65 percent of the next quarter's forecasted sales. The payables period is 60 days. Wages, taxes, and other expenses are 16 percent of sales, and interest and dividends are $60 per quarter. No capital expenditures are planned. The projected sales for year 1 are $690, $660, $590, and $560 for quarters 1 to 4, respectively. Sales for the first quarter of year 2 are projected at $720. What is the amount of the total disbursements for quarter 2 of year 1? A) $564.27 B) $579.43 C) $585.30 D) $590.67 E) $582.15

accounts payable period

Which of these affects the length of the cash cycle but not the operating cycle? A. accounts payable period B. both the accounts receivable and inventory periods C. accounts receivable period D. inventory period E. both the accounts receivable and the accounts payable periods

the longer the cash cycle, the more likely a firm will need external financing

Which one of the following statements is correct concerning the cash cycle? A) Offering early payment discounts to customers will tend to increase the cash cycle. B) Accepting a supplier's discount for early payment decreases the cash cycle. C) The cash cycle can exceed the operating cycle if the payables period is equal to zero. D) The longer the cash cycle, the more likely a firm will need external financing. E) Increasing the accounts payable period increases the cash cycle.

paying employee wages

Which one of these is a use of cash? A. obtaining a bank loan B. making a cash sale C. purchasing inventory on credit D. paying employee wages E. collecting a receivable

decreasing the accounts receivable turnover rate

Which one of these will increase the cash cycle, all else held constant? A. decreasing the accounts receivable turnover rate B. decreasing the accounts receivable period C. decreasing the inventory period D. increasing the inventory turnover rate E. increasing the accounts payable period

Monthly interest = $50,000,000(.0045) = $225,000 Amount received = (1 - .03)$50,000,000 = $48,500,000 Periodic interest = $225,000 / $48,500,000 = .004639 EAR = (1 + .004639)12 - 1 = .0571, or 5.71 percent

You've worked out a line of credit arrangement that allows you to borrow up to $50 million at any time. The interest rate is .45 percent per month. In addition, 3 percent of the amount that you borrow must be deposited in a non-interest-bearing account. Assume your bank uses compound interest on its line of credit loans. What is the effective annual interest rate on this lending arrangement? A) 5.87 percent B) 6.94 percent C) 6.72 percent D) 6.02 percent E) 5.71 percent

Effective annual interest = (1.0015)12 - 1 = .0181, or 1.81 percent

Your bank offers you a $40,000 line of credit with an interest rate of 1.75 percent per quarter. The loan agreement also requires that 2 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Your short-term investments are paying .15 percent per month. What is your effective annual interest rate on this arrangement if you do not borrow any money on this credit line during the year? Assume any funds borrowed or invested use compound interest. A) 1.81 percent B) .87 percent C) 7.19 percent D) 3.18 percent E) .60 percent

Swap contract

A U.S. bank has an agreement with a German bank to exchange $500,000 for €397,000 on the first day of each of the next three calendar quarters. This agreement is best described as a: A) Floating exchange. B) Spot trade. C) Futures contract. D) Currency option. E) Swap contract.

Cashcycle=51-2+3-4=48days

A company currently has a 51-day cash cycle. Assume the firm changes its operations such that it decreases its receivables period by 2 days, increases its inventory period by 3 days, and increases its payables period by 4 days. What will the length of the cash cycle be after these changes? A) 49 days B) 51 days C) 42 days D) 45 days E) 48 days

Inventory turnover = $63,008/ [($9,049 + 7,850) / 2] = 7.457 times Inventory period = 365 / 7.457 = 48.947 days Receivables turnover = $91,200 / [($6,333 + 7,029) / 2] = 13.651 times Receivables period = 365 / 13.651 = 26.739 days Payables turnover = $63,008 / [($7,212, + 8,515) / 2] = 8.013 times Payables period = 365 / 8.013 = 45.553 days Cash cycle = 48.947 + 26.739 - 45.553 = 30.1 days

AC Corporation has beginning inventory of $9,049, accounts payable of $7,212, and accounts receivable of $6,333. The end of year values are $7,850 for inventory, $8,515 for accounts payable, and $7,029 for accounts receivable. Net sales are $91,200 and costs of goods sold are $63,008. How many days are in the cash cycle? A) 41.4 days B) 40.2 days C) 28.7 days D) 30.1 days E) 67.8 days

Gain time to adapt to changing market conditions

By hedging financial risk, a firm can: A) Ensure a steady rate of return for its shareholders. B) Gain time to adapt to changing market conditions. C) Eliminate its exposure to price increases in raw materials. D) Eliminate price changes over the long-term. E) Ensure its own economic viability.

cash cycle

Central supply purchased a toboggan for inventory this morning and paid cash for it. the time period between today and the day central supply will receive cash from the sale of this toboggan is called the: A. accounts payable period B. inventory period C. cash cycle D. operating cycle E. accounts receivable period

shortage

Costs that decrease as a firm acquires additional current assets are called ____ costs A. shortage B. debt C. payables D. carrying E. equity

carrying

Costs that increase as a firm acquires additional current assets are called ______ costs. A. shortage B. trading C. safety D. carrying E. order

Hedging

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk? A) Forwarding B) Hedging C) Manipulating D) Abating E) Deriving

Cash cycle = (365 / 18) + 53 - 68 = 5.28 days

Metal Products Co. has an inventory period of 53 days, an accounts payable period of 68 days, and an accounts receivable turnover rate of 18. What is the length of the cash cycle? A) 5.28 days B) 73.28 days C) 71.00 days D) 3.00 days E) 26.28 days

Derivative security

The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a: A) Junior security. B) Mezzanine asset. C) Contingent security. D) Forward agreement. E) Derivative security.

Decreasing inventory

Which one of these is a source of cash? A. decreasing inventory B. increasing accounts receivable C. decreasing accounts payable D. increasing fixed assets E. decreasing common stock

EAR = {1 + [.035 / (1 - .035)]}(365 / 47) - 1 = .3187, or 31.87 percent

Your firm has an average collection period of 47 days. Current practice is to factor all receivables immediately at a discount rate of 3.5 percent. Assume that default is extremely unlikely. What is the effective cost of borrowing? A) 31.87 percent B) 28.79 percent C) 36.20 percent D) 40.97 percent E) 37.78 percent

invest heavily in inventory

A firm with a flexible short-term financial policy will: A) Invest heavily in inventory. B) Only have minimal amounts, if any, invested in marketable securities. C) Have low cash balances. D) Maintain a low balance in accounts receivables. E) Have tight restrictions on granting credit to customers.

Option

An agreement that grants its owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time is called a(n) ________ contract. A) Forward B) Spot C) Option D) Futures E) Swap

Loan balance = $418 + 27 - 123 = $322

At the beginning of the year, BJ's had an outstanding short-term loan of $418. The interest charges for the year are $27. The projected net cash flow for this year is $123, prior to any payment of principal or interest on this loan. What is the anticipated loan balance at year-end? A) $176 B) $193 C) $322 D) $151 E) $189

Inventory period = 365 / 8 = 45.625 days Accounts receivable period = 365 / 11 = 33.182 days Operating cycle = 45.625 + 33.182 days = 78.81 days

Bradley's has an inventory turnover rate of 8, a payables turnover rate of 7, and a receivables turnover rate of 11. How long is the firm's operating cycle? A) 78.81 days B) 26.67 days C) 45.06 days D) 30.13 days E) 75.63 days

Cash = $9,800 + 5,600 - 1,600 - 11,700 = $2,100

Details Corp. has a book net worth of $9,800. Long-term debt is $5,600. Net working capital, other than cash, is $1,600 and fixed assets are $11,700. How much cash does the company have? A) $6,700 B) $5,900 C) $4,500 D) $5,300 E) $2,100

Amount borrowed = $82,000 / (1 - .04) = $85,416.67 Annual interest = $85,416.67 × .065 = $5,552.08 Effective interest rate = $5,552.08 / $82,000 = .0677, or 6.77 percent

Fancy Footwear has a line of credit with a local bank in the amount of $100,000. The loan agreement calls for annual interest of 6.5 percent with a compensating balance of 4 percent of the total amount borrowed. The compensating balance will be deposited into an interest-free account. What is the effective interest rate on the loan if the firm needs $82,000 to cover expenses for one year? A) 6.77 percent B) 10.50 percent C) 8.17 percent D) 6.50 percent E) 7.43 percent

Payables turnover = $458,000 / [($57,300 + 55,100) / 2] = 8.15 times

HG Livery Supply had a beginning accounts payable balance of $57,300 and an ending accounts payable balance of $55,100. Sales for the period were $610,000 and costs of goods sold were $458,000. What is the payables turnover rate? A) 8.15 times B) 10.85 times C) 9.02 times D) 9.86 times E) 8.39 times

little, if any, investment in marketable securities

If a firm adheres to a restrictive short-term financial policy, then the firm will generally have: A) Liberal credit terms for customers. B) Few, if any, stockouts. C) High cash balances. D) Low inventory turnover rates. E) Little, if any, investment in marketable securities.

Operating cycle = 64 + 3 - 6 = 61 days

Meryl Enterprises currently has an operating cycle of 64 days. The firm is analyzing some operational changes, which are expected to increase the accounts receivable period by 3 days and decrease the inventory period by 6 days. The accounts payable turnover rate is expected to increase from 9 to 11 times per year. If all of these changes are adopted, what will the firm's new operating cycle be? A) 68 days B) 61 days C) 54 days D) 51 days E) 64 days

Inventory turnover = $684,000 / [($43,000 + 48,000) / 2] = 15.0133 Inventory period = 365 / 15.0133 = 24.28 days

New Products has sales of $913,000 and cost of goods sold of $684,000. The firm had a beginning inventory of $43,000 and an ending inventory of $48,000. What is the length of the inventory period? A) 30.53 days B) 15.01 days C) 17.89 days D) 23.69 days E) 24.28 day

EAR = (1 + .013)4 - 1 = .053, or 5.3 percent

A bank offers your firm a revolving credit arrangement for up to $115 million at an interest rate of 2 percent per quarter. The bank also requires you to maintain a compensating balance of 5 percent against the unused portion of the credit line, to be deposited in a non-interest-bearing account. Assume you have a short-term investment account at the bank that pays 1.3 percent per quarter, and assume the bank uses compound interest on its revolving credit loans. What is the effective annual interest rate on the revolving credit arrangement if your firm does not borrow any money during the year? A) 5.5 percent B) 5.2 percent C) 0 percent D) 5.3 percent E) 5.0 percent

April cash balance = $386,200 + (.36 × $547,200) + (.61 × $302,400) - $224,640 - 57,240 - 16,410 119,520 = $349,846 May cash balance = $349,846 + (.36 × $570,240) + (.61 × $547,200) - $211,680 - 69,420 - 16,410 - 131,040 = $460,374

A firm has projected credit sales of $547,200 for April and $570,240 for May. Credit purchases are $211,680 for April and $252,720 for May. Interest is $16,410 a month. Wages and other expenses are projected at $57,240 for April and $69,420 for May. The firm plans to purchase $119,520 of equipment in April with additional purchases of $131,040 in May. The company predicts that 3 percent of its credit sales will never be collected, 36 percent of its sales will be collected in the month of sale, and the remaining 61 percent will be collected in the following month. Credit purchases will be paid in the month following the purchase. In March, credit sales were $302,400, and credit purchases were $224,640. The April 1 cash balance was $386,200. What is the cash balance at the end of May? A) $414,141 B) $460,374 C) $366,846 D) $440,777 E) $348,887

incurs more carrying costs than a restrictive policy

A flexible short-term financial policy: A) Requires only a minimum investment in current assets. B) Tends to decrease sales as compared to a restrictive policy. C) Maximizes cashouts. D) Increases shortage costs due to frequent cash-outs. E) Incurs more carrying costs than a restrictive policy.

Is a binding agreement on both the buyer and the seller and nets out as a zero sum game.

A forward contract: A) Is marked to the market daily at the seller's request. B) Is a binding agreement on both the buyer and the seller and nets out as a zero sum game. C) Requires that payment be made in full when the contract is originated. D) Allows for immediate delivery at an agreed upon price which is to be paid on the settlement date. E) Provides the buyer with an option to buy an asset on the settlement date at the forward price.

Wheat farmer and bakery

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure? A) Wheat farmer and bakery. B) Pastry bakery and cotton farmer. C) Oil producer and coal miner. D) Shoe manufacturer and coat manufacturer. E) Wheat grower and pharmaceutical firm.

accounts receivable turnover rate

An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive? A) Operating cycle. B) Accounts receivable period. C) Accounts receivable turnover rate. D) Credit sales. E) Bad debts.

inventory turnover rate

An increase in which one of the following will decrease the cash cycle, all else held constant? A. days sales in inventory B. payables turnover C. operating cycle D. accounts receivable period E. inventory turnover rate

Cash balance = $460 + 480 - 360 - 20 - 110 - 140 = $310

As of the beginning of the quarter, Callahan's, Inc. had a cash balance of $460. During the quarter, the company collected $480 from customers and paid suppliers $360. The company also paid an interest payment of $20 and a tax payment of $110. In addition, the company repaid $140 on its long-term debt. What is Callahan's cash balance at the end of the quarter? A) $350 B) -$110 C) $310 D) $490 E) $290

you may require additional funds from other sources to fund the cash cycle

Assume all else held constant. If you pay your suppliers five days sooner, then: A) Your operating cycle will increase. B) Your payables turnover rate will decrease. C) You may require additional funds from other sources to fund the cash cycle. D) The accounts receivable period will decrease. E) The cash cycle will decrease.

February, March, and April

Assume each month has 30 days and a firm has a 60-day accounts receivable period. During the second calendar quarter of the year, that firm will collect payment for the sales it made during which of the following months? A) December, January, and February B) January, February, and March C) October, November, and December D) February, March, and April E) November, December, and January

Accounts receivables Begin Q3 = (40 / 90)($7,100) = $3,156

Breakwater Aquatics has a 40-day accounts receivable period. The estimated quarterly sales for this year, starting with the first quarter, are $6,800, $7,100, $8,200, and $6,400, respectively. What is the accounts receivable balance at the beginning of the third quarter? Assume a year has 360 days. A) $3,156 B) $3,650 C) $3,644 D) $3,022 E) $3,308

accounts receivable financing

Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as: A. pledged financing B. capital financing C. accounts receivable financing D. capital funding E. daily funding

Futures contract

By definition, which one of the following contracts is marked to the market on a daily basis? A) Swap B) Spot contract C) Option contract D) Forward contract E) Futures contract

PaymentsQ2 = (60 / 90)(.40)($980) + (30 / 90)(.40)($1,040) = $400

DM Electronics has projected sales of $900, $980, $1,040, and $1,200 for quarters 1 to 4, respectively. Sales in the following year are projected to be 12 percent greater in each quarter. Assume the firm places orders during each quarter equal to 40 percent of projected sales for the next quarter. How much will the firm pay to its suppliers in quarter 2 if its accounts payable period is 60 days? A) $400.00 B) $312.67 C) $351.33 D) $433.33 E) $366.67

January collections = .55($120,000) + (.43 / .45)($22,000) + ($27,000 - 22,000) = $92,022

Duck-n-Run has projected sales of $120,000 for January, $118,000 for February, and $146,000 for March. The firm collects 55 percent in the month of sale, 43 percent in the month after sale, and 2 percent two months after sale. The accounts receivable balance at the end of the previous quarter was $27,000 of which $22,000 was uncollected December sales. What is the amount of the January collections? A) $100,311 B) $112,408 C) $122,356 D) $87,018 E) $92,022

Transactions exposure

Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he expects to harvest a record crop within the next two weeks. At present, he has no storage facilities and therefore must sell his crop as soon as it is harvested. Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time? A) Volatility exposure B) Futures risk C) Surplus risk D) Transactions exposure E) Translation exposure

Effective annual interest = (1.0045)4 - 1 = .0181, or 1.81 percent

Foods Galore has a line of credit of $250,000 with an interest rate of 1.75 percent per quarter. The credit line also requires that 1.5 percent of the unused portion of the credit line be deposited in a non-interest-bearing account as a compensating balance. Food Galore's short-term investments are earning .45 percent per quarter. What is the effective annual interest rate on this arrangement if the line of credit goes unused all year? Assume any funds borrowed or invested use compound interest. A) 4.26 percent B) 4.09 percent C) 1.92 percent D) 1.81 percent E) 6.14 percent

Operating cycle = 64 + 29 = 93 days

Interior Designs has an inventory period of 64 days, an accounts payable period of 38 days, and an accounts receivable period of 29 days. Management is considering an offer from their suppliers to pay within 10 days and receive a 2 percent discount. If the new discount is taken, the accounts payable period is expected to decline by 26 days. What will be the new operating cycle given the change in the payables period? A) 93 B) 62 C) 78 D) 81 E) 91

Cash deficit = $1,057 - 320 - 1,000 = -$263 The firm needs to borrow $263.

Josie's Craft Shack has a beginning cash balance for the quarter of $1,057. The store has a policy of maintaining a minimum cash balance of $1,000 and is willing to borrow funds as needed to maintain that balance. Currently, the firm has a loan balance of $360. How much will the store borrow or repay if the net cash flow for the quarter is -$320? A) Borrow $263 B) Repay $126 C) Borrow $320 D) Neither borrow nor repay E) Repay $28

Amount borrowed = $115,000 / (1 - .025) = $117,948.72 Annual interest = $117,948.72 × .075 = $8,846.15 Effective interest rate = $8,846.15 / $115,000 = .0769, or 7.69 percent

Juno Industrial Supply has a line of credit of $150,000 with an interest rate of 7.5 percent. The loan agreement requires a compensating balance of 2.5 percent of the total amount borrowed, which will be held in an interest-free account. What is the effective interest rate if the firm borrows $115,000 for one year? A) 8.01 percent B) 8.42 percent C) 7.53 percent D) 7.69 percent E) 7.38 percent

January ending A/P balance = .71($4,700) + .71($6,400) = $7,881

Kid's Delight expects to sell $15,900 of toys in December, $4,700 in January, $6,400 in February, and $8,100 in March. The wholesale cost is 71 percent of the retail price. The firm has a receivables period of 30 days, a payables period of 60 days, and buys inventory one month prior to selling it. What is the accounts payable balance at the end of January? Assume a year has 360 days. A) $4,544 B) $4,700 C) $7,881 D) $6,168 E) $3,337

Generally results from changes in the underlying economics of a business

Long-run financial risk: A) Can generally be hedged such that the financial viability of a firm is protected. B) Is related more to near-term transactions than to advancements in technology. C) Generally results from changes in the underlying economics of a business. D) Can frequently be hedged on a permanent basis. E) Is best hedged on a division by division basis within a conglomerate.

decrease the cash cycle

Metal Designs, Inc., historically produced products for inventory. Now, the firm only produces a product when it receives an actual order from a customer. All else equal, this change will: A. shorten the accounts payable period B. increase the operating cycle C. lengthen the accounts receivable period D. decrease the inventory turnover rate E. decrease the cash cycle

Inventory turnover = $769,000 / [($74,300 + 69,800) / 2] = 10.67 times

Mid-Western Markets has sales of $947,000 and costs of goods sold of $769,000. At the beginning of the year, the inventory was $74,300. At the end of the year, the inventory balance was $69,800. What is the inventory turnover rate? A) 14.22 times B) 12.78 times C) 12.70 times D) 10.67 times E) 9.37 times

compensating balance

Money deposited by a borrower with the bank in a low or non-interest-bearing account as a condition of a loan agreement is called a: A. letter of credit B. secured credit deposit C. pledge D. compensating balance E. line of credit

Receivables turnover = $914,900 / $121,300 = 7.5425 Receivables period = 365 / 7.5425 = 48.39 days

Morning Star has credit sales of $914,900, costs of goods sold of $764,800, average accounts receivable of $121,300, and average accounts payable of $127,600. On average, how long does it take for the firm's credit customers to pay for their purchases? A) 31.88 days B) 48.39 days C) 60.90 days D) 57.89 days E) 39.24 days

Disbursement = (30 / 90)(.70)($4,600) + (60 / 90)(.70)($4,100) = $2,986.67

Nadine's Boutique has a 30-day accounts payable period. The firm expects quarterly sales of $3,300, $3,400, $4,600, and $4,100, respectively, for next year. The quarterly cost of goods sold is equal to 70 percent of the next quarter's sales. The firm has a beginning accounts payable balance of $975 as of quarter 1. What is the amount of the projected cash disbursements for accounts payable for quarter 3 of next year? Assume a year has 360 days. A) $2,203.33 B) $2,986.67 C) $2,940.00 D) $2,546.67 E) $2,380.00

Cash balance = $175 + 430 - 110 - 290 = $205

On May 1, your firm had a beginning cash balance of $175. Your sales for April were $430 and your May sales were $480. During May, you had cash expenses of $110 and payments on your accounts payable of $290. Your accounts receivable period is 30 days. What is your firm's beginning cash balance on June 1? A) $215 B) $265 C) $155 D) $145 E) $205

Operating cycle = 27 + 4 = 31 days

On average, Furniture & More is able to sell its inventory in 27 days. The firm takes 87 days on average to pay for its purchases. On the other hand, its average customer pays with a credit card which allows the firm to collect its receivables in 4 days. Given this information, what is the length of operating cycle? A) 31 days B) 56 days C) 38 days D) 62 days E) 45 days

Cashcycle=26-2+4-3=25days

Peterson's Antiquities currently has a 26-day cash cycle. Assume the firm changes its operations such that it decreases its receivables period by 2 days, increases its inventory period by 4 days, and increases its payables period by 3 days. What will the length of the cash cycle be after these changes? A) 25 days B) 22 days C) 18 days D) 17 days E) 37 days

In April, the firm would collect March sales of $580.

Plant Mart has a beginning receivables balance on February 1 of $965. Sales for February through May are $510, $580, $820, and $1,450, respectively. The accounts receivable period is 30 days. What is the amount of the April collections? Assume a year has 360 days. A) $580 B) $510 C) $545 D) $700 E) $820

March ending receivables = (26 / 30) $720 = $624

S&S Sporting Goods has expected sales of $980, $720, $640, and $950 for the months of January through April, respectively. The accounts receivable period is 26 days. What is the accounts receivable balance at the end of February? Assume each month has 30 days. A) $720 B) $624 C) $980 D) $849 E) $555

opportunity costs related to high levels of working capital

Shortage costs are least associated with: A) The disruption of production schedules. B) Lost customer goodwill. C) Inventory ordering costs. D) Brokerage costs. E) Opportunity costs related to high levels of working capital.

Sold a call option

Steve has an option with a payoff profile that depicts a line that is constant at zero up until some point after which the line slopes downward. What type of action did Steve take to obtain this profile? A) Entered a swap contract B) Purchased a call option C) Sold a put option D) Purchased a put option E) Sold a call option

cash budget

Steve has estimated the cash inflows and outflows for his hardware store for next year. the report that he has prepared recapping thesis cash flows is called a: A. pro forma income statement B. receivables analysis C. credit analysis D. sales projection E. cash budget

Purchased a put option

Sue has a contract that grants her a right that she may or may not decide to exercise. This right increases in value as the value of the asset underlying her contract declines. Which one of these did she do to create this situation? A) Entered a swap contract B) Sold a put option C) Purchased a call option D) Purchased a put option E) Sold a call option

Q4 collections = (45 / 90)($2,500) + (45 / 90)($2,300) = $2,400

Tall Guys Clothing has a 45-day collection period. Sales for the next calendar year are estimated at $2,100, $1,600, $2,500 and $2,300, respectively, by quarter, starting with the first quarter of the year. Given this information, which one of the following statements is correct? Assume a year has 360 days. A) The firm will collect a total of $800 in Quarter 2. B) The firm will have an accounts receivable balance of $2,300 at the end of the year. C) The firm will collect a total of $2,400 in Quarter 4. D) The firm will collect a total of $2,000 in Quarter 3. E) The accounts receivable balance at the beginning of Quarter 4 will be $1,150.

line of credit

Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 at any time over the next year. This arrangement is called a(n): A. compensating balance B. line of credit C. floor loan D. bank note E. open loan

April collections = (15 / 30)($480) + (15 / 30)($690) = $585

The Athletic Sports Store has a beginning receivables balance on January 1 of $410. Sales for January through April are $440, $480, $690, and $720, respectively. The accounts receivable period is 45 days. How much did the firm collect in the month of April? Assume a year has 360 days. A) $585 B) $460 C) $690 D) $705 E) $445

Receivables turnover = $811,000 / [($41,000 + 38,000) / 2] = 20.5317 Receivables period = 365 / 20.5317 = 17.78 Days

The Bear Rug has sales of $811,000. The cost of goods sold is equal to 63 percent of sales. The beginning accounts receivable balance is $41,000 and the ending accounts receivable balance is $38,000. How long on average does it take the firm to collect its receivables? A) 20.44 days B) 17.78 days C) 18.58 days D) 29.77 days E) 17.26 days

Cash surplus (deficit) = $1,000 + 3,957 - 3,761 - 1,000 = $196 The firm will repay $196 this quarter.

The Cement Works has a beginning cash balance for the quarter of $1,000. Susie, the firm's president, requires a minimum cash balance of $1,000 be maintained and requires borrowing be used to maintain that balance. If funds have been borrowed, then she requires that those loans be repaid as soon as excess funds are available. Currently, the firm has a loan outstanding of $1,260. How much will the firm borrow or repay this quarter if the quarterly receipts are $3,957 and the quarterly disbursements are $3,761? A) Borrow $144 B) Borrow $128 C) Repay $144 D) Borrow $16 E) Repay $196

Interest rate for 39 days = .018 / (1 - .018) = .01833 Number of periods per year = 365 / 39 = 9.35897 Effective annual rate = 1.018339.35897 - 1 = .1853, or 18.53 percent

The Delta Fish Hatchery factors its accounts receivables immediately at a discount rate of 1.8 percent. The average collection period is 39 days. Assume all accounts are collected in full. What is the effective annual interest rate on this arrangement? A) 16.04 percent B) 18.53 percent C) 21.78 percent D) 20.36 percent E) 17.20 percent

August collections = .80($960) +.15($920) + .03($760) = $928.80

The Dog House expects sales of $480, $760, $920, and $960 for the months of May through August, respectively. The firm collects 80 percent of sales in the month of sale, 15 percent in the month following the month of sale, and 3 percent in the second month following the month of sale. The remaining 2 percent of sales is never collected. How much money does the firm expect to collect in the month of August? A) $525.60 B) $774.80 C) $643.20 D) $928.80 E) $882.50

60 percent of March sales

The Harvester collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect: A) 15 percent of March sales. B) 25 percent of February sales. C) 15 percent of April sales. D) 60 percent of February sales. E) 60 percent of March sales.

March collections = (10 / 30)$580 + (20 / 30)$680 = $647 March disbursements for payables = .70($680) = $476 March ending cash balance = $515 + 647 - 476 - 148 = $538

The Mish Mash Store has a beginning cash balance of $515 on March 1. The firm has projected sales of $580 in February, $680 in March, and $750 in April. The cost of goods sold is equal to 70 percent of sales. Goods are purchased one month prior to the month of sale. The accounts payable period is 30 days and the accounts receivable period is 10 days. The firm has monthly cash expenses of $148. What is the projected ending cash balance at the end of March? Assume every month has 30 days. A) $538 B) $461 C) $621 D) $567 E) $507

Q3 disbursements = (45 / 90)(.55)($89,000) + (45 / 90)(.55)($145,000) = $64,350

The Purple House has projected sales of $48,000, $61,000, $89,000, and $145,000 for quarters 1 through 4 of next year, respectively. Inventory is purchased at 55 percent of the sales price and is purchased one quarter prior to the quarter of sale. The accounts payable period is 45 days. The accounts payable balance at the beginning of the year is $62,000. What is the amount of the expected disbursements for the third quarter? A) $60,250 B) $41,250 C) $46,750 D) $54,550 E) $64,350

Accounts payable period

The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for that purchase is called the: A. accounts receivable period B. operating cycle C. cash cycle D. inventory period E. accounts payable period

Accounts receivable period

The length of time between the sale of inventory and the collection of the payment for that sale is called the: A. cash cycle B. accounts receivable period C. accounts payable period D. inventory period E. operating cycle

Inventory period

The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the: A. accounts payable period B. cash cycle C. inventory period D. operating cycle E. accounts receivable

moves through the current asset accounts

The operating cycle describes how a product: A. is sold B. generates a profit C. is priced D. moves through the production process E. moves through the current asset accounts

inventory period plus the accounts receivable period

The operating cycle is equal to the: A. accounts payable period minus the cash cycle B. accounts payable period plus the accounts receivable period C. inventory period plus the accounts payable period D. inventory period plus the accounts receivable period E. cash cycle plus accounts receivable period

the total costs of holding current assets is minimized

The optimal investment in current assets for an operating firm occurs at the point where: A) Carrying costs exceed shortage costs. B) Both shortage costs and carrying costs equal zero. C) Carrying costs are equal to zero. D) Shortage costs are equal to zero. E) The total costs of holding current assets is minimized.

Is obligated to make delivery and accept the forward price

The seller of a forward contract: A) Has the option of either making delivery or accepting delivery. B) Is obligated to take delivery and pay the forward price. C) Has the option of making delivery and receiving the greater of the spot price or the contract price. D) Is obligated to make delivery and accept the forward price. E) Is obligated to take delivery and pays the lower of the spot market price or the contract price.

Forward contract

This morning a national bakery agreed to pay a farmer $7.10 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from now. What is this legally binding agreement called? A) Forward contract B) Call option contract C) Swap D) Spot contract E) Put option contract

A/RQ3 end = (15 / 90) × $850 = $141.67

Wake-Up Coffee has projected next year's quarterly sales at $820, $850, $780, and $910 for quarters 1 to 4, respectively. Accounts receivable at the beginning of the year are $200. Wake-Up has a collection period of 15 days. What is the amount of the accounts receivable balance at the end of quarter 2? Assume a year has 360 days. A) $35.42 B) $425.00 C) $212.50 D) $141.67 E) $73.33

Cash cycle = (365 / 17.5) + 36 - (365 / 11) = 23.68 days

West Chester Automation has an inventory turnover of 17.5 and an accounts payable turnover of 11. The accounts receivable period is 36 days. What is the length of the cash cycle? A) 5.67 days B) 58.81 days C) 23.68 days D) 52.00 days E) 41.00 days

paying a payment on a long-term debt

Which of the following will decrease the net working capital of a firm? assume the current ratio is greater than 1.0. A. selling inventory at cost B. paying a supplier for the purchase of an inventory item C. collecting payment from a customer D. selling a fixed asset for book value E. paying a payment on a long-term debt

eliminating the discount for early payment by credit customers

Which one of the following actions will tend to increase the accounts receivable period from its current 34 days? A) Tightening the standards for granting credit to customers. B) Eliminating the discount for early payment by credit customers. C) Granting discounts for cash sales. D) Refusing to grant additional credit to any customer who pays late. E) Increasing the finance charges applied to all customer balances outstanding over 30 days.

increasing inventory selection to attract more customers

Which one of the following actions will tend to increase the inventory period? A) Discontinuing all slow-selling merchandise. B) Increasing inventory selection to attract more customers. C) Buying raw materials only as needed for the manufacturing process. D) Producing goods on demand versus for inventory. E) Selling obsolete inventory below cost just to get rid of it.

Reduce the price volatility the firm faces

Which one of the following can a firm do if it effectively manages its financial risks? A) Totally eliminate all financial risks. B) Guarantee the firm's financial success. C) Avoid all long-term financial risks. D) Reduce the price volatility the firm faces. E) Eliminate all of the risks faced by the firm.

accepting credit from a supplier

Which one of the following increases cash? A. making a payment on a bank loan B. granting credit to a customer C. accepting credit from a supplier D. purchasing new machinery E. purchasing inventory

a cumulative cash deficit indicates a borrowing need

Which one of the following statements is correct concerning the cash balance of a firm? A) A cumulative cash deficit indicates a borrowing need. B) On a cash balance report, the cumulative cash surplus at the end of May is used as June's beginning cash balance. C) Most firms attempt to maintain a zero cash balance at all times. D) The cumulative cash surplus shown on a cash budget is equal to the ending cash balance plus the minimum desired cash balance. E) The ending cash balance must equal the minimum desired cash balance.

A financially sound firm can become financially distressed as the result of its short-run exposure to financial risk.

Which one of the following statements is correct in relation to a firm's short-run financial risk? A) Each segment of a business entity should be responsible for hedging its own short-run financial risk. B) A financially sound firm can become financially distressed as the result of its short-run exposure to financial risk. C) Short-run financial risk is defined as changes resulting from fundamental shifts in the underlying economics of a business. D) Short-run financial risk results from permanent changes in prices due to new technology. E) Thus far, hedging techniques have been unsuccessful in reducing short-run financial risk.

increasing the accounts receivable turnover rate

Which one of the following will decrease the operating cycle? A. decreasing the inventory turnover rate B. decreasing the accounts payable period C. increasing the accounts receivable period D. increasing the accounts receivable turnover rate E. increasing the accounts payable period

selling inventory at a profit on credit

Which one of the following will increase net working capital? Assume the current ratio is greater than 1.0. A. selling inventory at cost B. paying a supplier for a previous purchase C. selling inventory at a profit on credit D. purchasing inventory on credit E. paying off a long-term debt

an increase in the ending accounts payable balance

Which one of the following will increase the accounts payable period, all else held constant? A) An increase in the cash cycle. B) A decrease in the operating cycle. C) An increase in the accounts payable turnover rate. D) An increase in the cost of goods sold account value. E) An increase in the ending accounts payable balance.

Decreasing the receivables turnover rate

Which one of these actions will increase the operating cycle? Assume all else held constant. A. decreasing the receivables turnover rate B. decreasing the average inventory level C. decreasing the payables period D. increasing payables period E. increasing the inventory turnover rate

a negative cash cycle is preferable to a positive cash cycle

Which one of these statements is correct? Assume all else held constant. A) A negative cash cycle is preferable to a positive cash cycle. B) The cash cycle plus the accounts receivable period is equal to the operating cycle. C) A decrease in the accounts receivable turnover rate decreases the cash cycle. D) A decrease in the accounts payable period shortens the cash cycle. E) The cash cycle is equal to the operating cycle minus the inventory period.

The buyer of a forward contract on corn benefits if the price of corn increases during the contract period

Which one of these statements related to forward contracts is correct? A) Forward contracts recognize profits and losses on a daily basis. B) The buyer of a forward contract has the right, but not the obligation, to execute the contract any time up to and including the settlement date. C) The price at which a forward contract closes is set equal to the closing spot price on the settlement date. D) Forward contracts cannot be sold but must be executed by the original parties to the contract. E) The buyer of a forward contract on corn benefits if the price of corn increases during the contract period.