Question 1

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

Accepted Answer

A)   Its monthly depreciation expense.
B)   Cash proceeds from selling one of its divisions.
C)   Accrued interest on zero coupon bonds that it issued.
D)   New shares issued in a stock split.
E)   New shares issued in a stock dividend.F) None of the above
G) C) and D)

Question 2

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Accepted Answer

A) True 
 B)False

Question 3

Madura Inc. wants to increase its free cash flow by $180 million during the coming year, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year:  ∙\bullet∙ EBIT is projected to equal $850 million.
 ∙\bullet∙ Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million.
 ∙\bullet∙ The tax rate is 40%.
 ∙\bullet∙ There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals.
What increase in net working capital (in millions of dollars)  would enable the firm to meet its target increase in FCF?

Accepted Answer

A)   $ 72
B)   $ 90
C)   $108
D)   $130
E)   $156 F) B) and E)
G) C) and E)

Question 4

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex.

Accepted Answer

A) True 
 B)False

Question 5

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.

Accepted Answer

A) True 
 B)False

Question 6

The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the average collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm's working capital management.

Accepted Answer

A) True 
 B)False

Question 7

Zervos Inc. had the following data for 2008 (in millions) . The new CFO believes (1)  that an improved inventory management system could lower the average inventory by $4,000, (2)  that improvements in the credit department could reduce receivables by $2,000, and (3)  that the purchasing department could negotiate better credit terms and thereby increase accounts payable by $2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods sold. If these changes were made, by how many days would the cash conversion cycle be lowered?

Accepted Answer

A)   34.0
B)   37.4
C)   41.2
D)   45.3
E)   49.8F) All of the above
G) B) and C)

Question 8

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

Accepted Answer

A) True 
 B)False

Exam 16: Working Capital Management

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

Correct Answer
verified

Correct Answer
verified

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.

Correct Answer
verified

Correct Answer
verified

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Correct Answer
verified

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex.

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

Exam 16: Working Capital Management

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If a firm's suppliers stop offering discounts, then its use of trade credit is more likely to increase than to decrease, other things held constant.

Correct AnswerverifiedShow Answer

Funds from short-term loans can generally be obtained faster than from long-term loans for two reasons: (1) when lenders consider long-term loans they must make a more thorough evaluation of the borrower's financial health, and (2) long-term loan agreements are more complex.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified