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Exam 16: Working Capital Management

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Question 1

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Suppose the credit terms offered to your firm by its suppliers are 2/10,net 30 days.Your firm is not taking discounts,but is paying after 13 days instead of 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?

A) 1,089.5%
B) 1,303.1%
C) 822.5%
D) 982.7%
E) 1,068.1%

F) A) and E)
G) C) and D)

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Question 2

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Whittington Inc.has the following data.What is the firm's cash conversion cycle? ​

A) 28 days
B) 32 days
C) 29 days
D) 25 days
E) 34 days

F) A) and B)
G) A) and D)

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Question 3

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The target cash balance is typically (and logically)set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.

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

"Stretching" accounts payable is a widely accepted,entirely ethical,and costless financing technique,which is particularly useful when suppliers' production plants are at full capacity .

The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.

Romano Inc.has the following data.What is the firm's cash conversion cycle? ​

Inventory management is largely self-contained in the sense that very little coordination among the sales,purchasing,and production personnel is required for successful inventory management.

Accruals are "spontaneous" funds arising automatically from a firm's operations,but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

Dimon Products' sales are expected to be $5 million this year,with 90% on credit and 10% for cash.Sales are expected to grow at a stable,steady rate of 10% annually in the future.Dimon's accounts receivable balance will remain constant at the current level,because the 10% cash sales can be used to support the 10% growth rate,other things held constant.

If the yield curve is upward sloping,then short-term debt will be cheaper than long-term debt.Thus,if a firm's CFO expects the yield curve to continue to have an upward slope,this would tend to cause the current ratio to be relatively low,other things held constant.

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 than the revolving credit agreement.

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

The four primary elements in a firm's credit policy are (1)credit standards, (2)discounts offered, (3)credit period,and (4)collection policy.

Synchronization of cash flows is an important cash management technique,as proper synchronization can reduce the required cash balance and increase a firm's profitability.​

Net operating working capital,defined as operating current assets minus the difference between current liabilities and notes payable,is equal to the current ratio minus the quick ratio.

Ingram Office Supplies,Inc. ,buys on terms of 2/15,net 50 days.It does not take discounts,and it typically pays on time,50 days after the invoice date.Net purchases amount to $300,000 per year.On average,what is the dollar amount of costly trade credit (total credit - free credit) the firm receives during the year? (Assume a 365-day year,and note that purchases are net of discounts. ) Do not round intermediate calculations.

The calculated cost of trade credit for a firm that buys on terms of 2/10,net 30,is lower (other things held constant)if the firm plans to pay in 40 days than in 30 days.

Which of the following statements is CORRECT?

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