Answer Options:
a. True
b. False
Answer: a. True
Question: 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. a. True b. False
Answer: a. True
Question: Which of the following assumptions is embodied in the AFN equation? a. All balance sheet accounts are tied directly to sales. b. Accounts payable and accruals are tied directly to sales. c. Common stock and long-term debt are tied directly to sales. d. Fixed assets, but not current assets, are tied directly to sales. e. Last year’s total assets were not optimal for last year’s sales.
Answer: b. Accounts payable and accruals are tied directly to sales.
Question: The cash budget and the capital budget are handled separately, and although they are both important, they are developed completely independently of one another.
Answer Options:
a. True
b. False
Answer: False
Question: Net working capital is defined as current assets divided by current liabilities. a. True b. False
Answer: b. False
Question: 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. True b. False
Answer: b. False
Question: 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. a. True b. False
Answer: b. False
Question: Which of the following statements regarding factors that affect call option prices is CORRECT? a. The longer the time until the call option expires the smaller its value and the smaller its premium. b. An option on an extremely volatile stock is worth less than one on a very stable stock. c. The price of a call option increases as the risk-free rate increases. d. Two call options on the same stock will have the same value even if they have different strike prices. e. If you observe that a put option on a stock increases in value, then a call option on that same stock also increases in value.
Answer: c. The price of a call option increases as the risk-free rate increases.
Question: 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.
Answer Options:
a. True
b. False
Answer: False
Question: Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers. a. True b. False
Answer: a. True
Question: Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities? a. The firm must make a known future payment, such as paying for a new plant that is under construction. b. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline. c. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases. d. The firm has just sold long-term securities and has not yet invested the proceeds in operating assets. e. The firm just won a product liability suit one of its customers had brought against it.
Answer: c
Question: The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer. Still, suppliers have some flexibility in the credit terms they offer. If a supplier lengthens the credit period offered, this will shorten the customer’s cash conversion cycle but lengthen the supplier firm’s own CCC.
Answer Options:
a. True
b. False
Answer: True
Question: A firm’s collection policy, i.e., the procedures it follows to collect accounts receivable, plays an important role in keeping its average collection period short, although too strict a collection policy can reduce profits due to lost sales.
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following items should a company report directly in its monthly cash budget? 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.
Answer: b
Question: Net operating working capital, defined as current assets minus the difference between current liabilities and notes payable, is equal to the current ratio minus the quick ratio. a. True b. False
Answer: b. False
Question: A 100% stock dividend and a 2:1 stock split should, at least conceptually, have the same effect on the firm’s stock price.
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following statements is CORRECT? a. Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit department. b. If a firm that sells on terms of net 30 changes its policy to 2/10, net 30, and if no change in sales volume occurs, then the firm’s DSO will probably increase. c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then the firm probably has some past due accounts. d. If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July. e. If a firm changed the credit terms offered to its customers from 2/10, net 30 to 2/10, net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.
Answer: c
Question: The term “additional funds needed (AFN)” is generally defined as follows: a. Funds that are obtained automatically from routine business transactions. b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations. c. The amount of assets required per dollar of sales. d. The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth. e. A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
Answer: b. Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock, to support operations.
Question: 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 fixed.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT? a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings. b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales. c. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management’s historical performance is evaluated. d. The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets. e. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy and economies of scale exist.
Answer: b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.