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Exam 16: Working Capital Management

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Question 61

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A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality payments are concentrated at the beginning of each month.

A) True
B) False

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Question 62

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Not taking cash discounts is costly,and as a result,firms that do not take them are usually those that are performing poorly and have inadequate cash balances.

A) True
B) False

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Question 63

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Romano Inc.has the following data.What is the firm's cash conversion cycle? $\begin{array} { l l } \text { Inventory Conversion Period } = & 38 \text { days } \\\text { Receivables Collection Period } = & 19 \text { days } \\\text { Payables Deferral Period } = & 38 \text { days }\end{array}$ ?

Because money has time value,a cash sale is always more profitable than a credit sale.

A firm constructing a new manufacturing plant and financing it with short-term loans,which are scheduled to be converted to first mortgage bonds when the plant is completed,would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.

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.

Which of the following is NOT commonly regarded as being a credit policy variable?

A firm's peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that both cash receipts and cash payments occur uniformly over the month but in reality receipts are concentrated at the beginning of each month.

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.

Bumpas Enterprises purchases $4,562,500 in goods per year from its sole supplier on terms of 2/15,net 55.If the firm chooses to pay on time but does not take the discount,what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year. )

Exhibit 15.1 Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $4,400,000, 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 40%. 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 Exhibit 15.1 in the text .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? Do not round intermediate calculations.

Aggarwal Inc.buys on terms of 2/10,net 30,and it always pays on the 30th day.The CFO calculates that the average amount of costly trade credit carried is $350,000.What is the firm's average accounts payable balance? Assume a 365-day year.

Accruals arise automatically from a firm's operations and are "free" capital in the sense that no explicit interest must normally be paid on accrued liabilities.

Gonzales Company currently uses maximum trade credit by not taking discounts on its purchases.The standard industry credit terms offered by all its suppliers are 2/10,net 38 days,and the firm pays on time.The new CFO is considering borrowing from its bank,using short-term notes payable,and then taking discounts.The firm wants to determine the effect of this policy change on its net income.Its net purchases are $11,760 per day,using a 365-day year.The interest rate on the notes payable is 10%,and the tax rate is 40%.If the firm implements the plan,what is the expected change in net income? Do not round intermediate calculations.

Which of the following statements is CORRECT?

If a firm has set up a revolving credit agreement with a bank,the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

Helena Furnishings wants to reduce its cash conversion cycle.Which of the following actions should it take?

Soenen Inc.had the following data for last year (in millions) .The new CFO believes that the company could improve its working capital management sufficiently to bring its net working capital and cash conversion cycle up to the benchmark companies' level without affecting either sales or the costs of goods sold.Soenen finances its net working capital with a bank loan at an 8% annual interest rate,and it uses a 365-day year.If these changes had been made,by how much would the firm's pre-tax income have increased? Do not round your intermediate calculations. $\begin{array}{lr}&\text { Original Data}&\text { Related CCC}&\text { Benchmarks' CCC }\\\text { Sales } & \$ 99,000 \\\text { Cost of goods sold } & \$ 80,000 \\\text { Inventory (ICP) } & \$ 20,000 &91.25&38.00\\\text { Receivables (DSO) } & \$ 16,000&58.99&20.00 \\\text { Payables (PDP) } & \$ 5,000&22.81&30.00\\&&127.43&28.00\end{array}$ ?

Other things held constant,which of the following would tend to reduce the cash conversion cycle?

A firm buys on terms of 2/8,net 45 days,it does not take discounts,and it actually pays after 85 days.What is the effective annual percentage cost of its non-free trade credit? (Use a 365-day year. )