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Exam 17: Supply Chains and Working Capital Management

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Question 41

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A lockbox plan is most beneficial to firms that

A) have widely dispersed manufacturing facilities.
B) have a large marketable securities portfolio and cash to protect.
C) receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
D) have customers who operate in many different parts of the country.
E) have suppliers who operate in many different parts of the country.

F) B) and E)
G) B) and C)

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Question 42

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Tierney Enterprises is constructing its cash budget.Its budgeted monthly sales are $5,000, and they are constant from month to month.40% of its customers pay in the first month and take the 2% discount, while the remaining 60% pay in the month following the sale and do not receive a discount.The firm has no bad debts.Purchases for next month's sales are constant at 50% of projected sales for the next month."Other payments," which include wages, rent, and taxes, are 25% of sales for the current month.Construct a cash budget for a typical month and calculate the average net cash flow during the month.

A) $1,092
B) $1,150
C) $1,210
D) $1,271
E) $1,334

F) None of the above
G) B) and E)

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Question 43

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Freeman Builders, Inc.buys on terms of 2/15, net 30.It does not take discounts, and it typically pays 60 days after the invoice date.Net purchases amount to $720,000 per year.What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day year?

The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature.However, if the borrower's financial situation deteriorates, then the bank may refuse to roll over the loan.

Whitson Co.is looking for ways to shorten its cash conversion cycle.It has annual sales of $36,500,000, or $100,000 a day on a 365-day basis.The firm's cost of goods sold is 75% of sales.On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

Krackle Korn Inc.had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days.What was its average receivables balance, based on a 365-day year?

A lockbox plan is

Which of the following statements is CORRECT?

Mark's Manufacturing's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days.Assuming a 365-day year, what is the length of its cash conversion cycle?

An increase in any current asset must be accompanied by an equal increase in some current liability.

As a rule, managers should try to always use the free component of trade credit but should use the costly component only if the cost of this credit is lower than the cost of credit from other sources.

The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.

The overriding goal of inventory management is to ensure that the firm never suffers a stock-out, i.e., never runs out of an inventory item.

If a firm busy on terms of 2/10 net 30, it should pay as early as possible during the discount period.

Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis.

Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days.Your firm is not taking discounts, but is paying after 25 days instead of waiting until Day 30.You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37%.But since your firm is neither taking discounts nor paying on the due date, what is the effective annual percentage cost (not the nominal cost) of its costly trade credit, using a 365-day year?

Safety Window and Door Co.buys on terms of 2/15, net 60 days.It does not take discounts, and it typically pays on time, 60 days after the invoice date.Net purchases amount to $450,000 per year.On average, how much "free" trade credit does the firm receive during the year? (Assume a 365-day year, and note that purchases are net of discounts.)

Which of the following items should a company report directly in its monthly cash budget?

Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should