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Exam 15: Working Capital Management

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Question 21

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Long-term loan agreements always contain provisions, or covenants, that constrain the firm's future actions. Short- term credit agreements are just as restrictive in order to protect the interest of the lender.

A) True
B) False

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Question 22

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

A) True
B) False

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Question 23

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Trade credit can be separated into two components: free trade credit, which is credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Which of the following statements is CORRECT?

Which of the following statements is NOT CORRECT?

Data on Shin Inc for 2013 are shown below, along with the inventory conversion period (ICP) of the firms against w it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year. Cost of goods sold = $85,000 Inventory = $20,000 Inventory conversion period (ICP) = 85) 88 Benchmark inventory conversion period (ICP) = 38) 00

Other things held constant, which of the following will cause an increase in net working capital?

Inmoo Company'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?

Data on Shick Inc. for 2013 are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year. Sales $110,000 Accounts receivable $16,000 Days sales outstanding (DSO) 53) 09 Benchmarks' days sales outstanding (DSO) 20) 00

The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm's lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.

Data on Wentz Inc. for 2013 are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks. The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average. If this were done, by how much would payables increase? Use a 365-day year. $\begin{array}{lr}\text { Cost of goods sold = } & \$ 75,000 \\\text { Payables = } & \$ 5,000 \\\text { Payables deferral period (PDP) = } & 24.33 \\\text { Benchmark payables deferral period = } & 30.00\end{array}$

Zarruk Construction's DSO is 50 days (on a 365-day basis) , accounts receivable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio?

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.

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: · EBIT is projected to equal $850 million. · Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million. · The tax rate is 40%. · 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 operating working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.

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.

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

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.

Shorter-term cash budgets (such as a daily cash budget for the next month) are generally used for actual cash control while longer-term cash budgets (such as a monthly cash budgets for the next year) are generally used for planning purposes.