Question 1

Hardwig Inc.
Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 25%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2.

-Refer to the data for Hardwig, Inc.Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same.In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?

Accepted Answer

A)   2.79%
B)   3.07%
C)   3.38%
D)   3.72%
E)   4.09%F) C) and D)
G) A) and D)

Question 2

Newsome Inc.buys on terms of 3/15, net 45.It does not take the discount, and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Accepted Answer

A)   25.09%
B)   27.59%
C)   30.35%
D)   33.39%
E)   36.73%F) A) and B)
G) A) and E)

Question 3

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

Accepted Answer

A) True 
 B)False  False

Question 4

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Accepted Answer

A)   The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline.
B)   The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.
C)   The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
D)   The firm just won a product liability suit one of its customers had brought against it.
E)   The firm must make a known future payment, such as paying for a new plant that is under construction.F) C) and D)
G) A) and B) B

Question 5

Which of the following statements is most consistent with efficient inventory management? The firm has a

Accepted Answer

A)   low incidence of production schedule disruptions.
B)   below average total assets turnover ratio.
C)   relatively high current ratio.
D)   relatively low DSO.
E)   below average inventory turnover ratio.F) A) and D)
G) A) and E)

Question 6

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements is CORRECT?

Accepted Answer

A)   In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO)  sufficiently.
B)   Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
C)   Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
D)   Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
E)   A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually.Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.F) C) and E)
G) D) and E)

Question 8

Which of the following statements is NOT CORRECT?

Accepted Answer

A)   Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
B)   The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
C)   If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60.
D)   Managing working capital is important because it influences financing decisions and the firm's profitability.
E)   A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.F) B) and D)
G) A) and B)

Question 9

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Accepted Answer

A) True 
 B)False

Question 10

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Accepted Answer

A) True 
 B)False

Question 11

Andrews Corporation buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

Accepted Answer

A)   14.34%
B)   15.10%
C)   15.89%
D)   16.69%
E)   17.52%F) None of the above
G) A) and B)

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A)   A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.
B)   If a company receives trade credit under terms of 2/10 net 30, this implies that the company has 10 days of free trade credit.
C)   One cannot tell if a firm uses a current asset financing policy that matches maturities, is conservative, or is aggressive without an examination of its cash budget.
D)   If a firm has a relatively aggressive current asset financing policy vis-á-vis other firms in its industry, then its current ratio will probably be relatively high.
E)   Accruals are an expensive but commonly used way to finance working capital.F) A) and E)
G) A) and D)

Question 13

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Accepted Answer

A) True 
 B)False

Question 14

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Accepted Answer

A) True 
 B)False

Question 15

A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.

Accepted Answer

A) True 
 B)False

Question 16

The company you just started has been offered credit terms of 4/30, net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Accepted Answer

A)   16.05%
B)   16.90%
C)   17.74%
D)   18.63%
E)   19.56%F) A) and B)
G) C) and E)

Question 17

Which of the following actions would be likely to shorten the cash conversion cycle?

Accepted Answer

A)   Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
B)   Begin to take cash discounts on inventory purchases; the terms are 2/10 net 30.
C)   Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
D)   Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
E)   Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.F) A) and E)
G) C) and E)

Question 18

The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.

Accepted Answer

A) True 
 B)False

Question 19

Famous Farm's payables deferral period (PDP)  is 50 days (on a 365-day basis) , accounts payable are $100 million, and its balance sheet shows inventory of $125 million.What is the inventory turnover ratio?

Accepted Answer

A)   4.73
B)   5.26
C)   5.84
D)   6.42
E)   7.07F) A) and B)
G) B) and D)

Question 20

The calculated cost of trade credit can be reduced by paying late.

Accepted Answer

A) True 
 B)False  True

Exam 17: Supply Chains and Working Capital Management

Correct Answer
verified

Newsome Inc.buys on terms of 3/15, net 45.It does not take the discount, and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Correct Answer
verified

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

Correct Answer
verified
False

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Correct Answer
verified
B

Which of the following statements is most consistent with efficient inventory management? The firm has a

Correct Answer
verified

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is NOT CORRECT?

Correct Answer
verified

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Correct Answer
verified

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Correct Answer
verified

Andrews Corporation buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Correct Answer
verified

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Correct Answer
verified

A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.

Correct Answer
verified

The company you just started has been offered credit terms of 4/30, net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Correct Answer
verified

Which of the following actions would be likely to shorten the cash conversion cycle?

Correct Answer
verified

The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.

Correct Answer
verified

Famous Farm's payables deferral period (PDP) is 50 days (on a 365-day basis) , accounts payable are $100 million, and its balance sheet shows inventory of $125 million.What is the inventory turnover ratio?

Correct Answer
verified

The calculated cost of trade credit can be reduced by paying late.

Correct Answer
verified
True

Exam 17: Supply Chains and Working Capital Management

Correct AnswerverifiedShow Answer

Newsome Inc.buys on terms of 3/15, net 45.It does not take the discount, and it generally pays after 60 days.What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

Correct AnswerverifiedShow Answer

Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.

Correct AnswerverifiedFalse

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?

Correct AnswerverifiedB

Which of the following statements is most consistent with efficient inventory management? The firm has a

Correct AnswerverifiedShow Answer

An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is NOT CORRECT?

Correct AnswerverifiedShow Answer

If a firm has a large percentage of accounts over 30 days old, this is proof positive that its receivables manager is not doing a good job.

Correct AnswerverifiedShow Answer

A firm's collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.

Correct AnswerverifiedShow Answer

Andrews Corporation buys on terms of 2/8, net 45 days, it does not take discounts, and it actually pays after 58 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year.)

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment.Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Correct AnswerverifiedShow Answer

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

Correct AnswerverifiedShow Answer

A promissory note is the document signed when a bank loan is executed, and it specifies financial aspects of the loan.

Correct AnswerverifiedShow Answer

The company you just started has been offered credit terms of 4/30, net 90 days.What will be the nominal annual percentage cost of its non-free trade credit if it pays 120 days after the purchase? (Assume a 365-day year.)

Correct AnswerverifiedShow Answer

Which of the following actions would be likely to shorten the cash conversion cycle?

Correct AnswerverifiedShow Answer

The twin goals of inventory management are (1) to ensure that the inventories needed to sustain operations are available, but (2) to hold the costs of ordering and carrying inventories to the lowest possible level.

Correct AnswerverifiedShow Answer

Famous Farm's payables deferral period (PDP) is 50 days (on a 365-day basis) , accounts payable are $100 million, and its balance sheet shows inventory of $125 million.What is the inventory turnover ratio?

Correct AnswerverifiedShow Answer

The calculated cost of trade credit can be reduced by paying late.

Correct AnswerverifiedTrue

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False

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B

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True