Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 – T) + Depreciation – [Capital expenditures + ΔNOWC]), hence depreciation is set forth on a separate line in the cash budget.
b. If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget.
Answer: a. Depreciation is included in the estimate of free cash flows (FCF = EBIT(1 – T) + Depreciation – [Capital expenditures + ΔNOWC]), hence depreciation is set forth on a separate line in the cash budget.
Question: Which of the following statements is NOT CORRECT?
Answer Choices:
a. A company may hold a relatively large amount of cash and marketable securities if its future cash needs are volatile, sales, profits, and cash flows during the coming year.
b. Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
c. The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
d. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.
e. Managing working capital is important because it influences financing decisions and the firm’s profitability.
Answer: d. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60.
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 Choices:
a. True
b. False
Answer: b. False
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 Choices:
a. True
b. False
Answer: a. True
Question: Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. Thus, if the depreciation charge for the coming year doubled or halved, this would have no effect on the cash budget.
Answer Choices:
a. True
b. False
Answer: b. False
Question: 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.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?
Answer Choices:
a. Increases average inventory without increasing sales.
b. Take steps to reduce the DSO.
c. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
d. Sell common stock to retire long-term bonds.
e. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
Answer: b. Take steps to reduce the DSO.
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 constant at the current level, because the 10% cash sales can be used to support the 10% growth rate, other things held constant.
Answer Choices:
a. True
b. False
Answer: b. False
Question: A lockbox plan is most beneficial to firms that
Answer Choices:
a. have suppliers who operate in many different parts of the country.
b. have widely dispersed manufacturing facilities.
c. have a large marketable securities portfolio, and cash, to protect.
d. receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
Answer: a. have suppliers who operate in many different parts of the country.
Question: 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.
Answer Choices:
a. True
b. False
Answer: b. False
Question: 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.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Trade credit is provided only to relatively large, strong firms.
b. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
c. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.
d. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
e. Commercial paper is typically offered at a long-term maturity of at least five years.
Answer: b. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
Question: 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.
Answer Choices:
a. True
b. False
Answer: a. True
Question: 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.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Firms generally choose to finance temporary current assets with short-term debt because
Answer Choices:
a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
b. short-term interest rates have traditionally been more stable than long-term interest rates.
c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.
d. the yield curve is normally downward sloping.
e. short-term debt has a higher cost than equity capital.
Answer: a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.
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 Choices:
a. True
b. False
Answer: b. False
Question: Which of the following statements concerning the cash budget is CORRECT?
Answer Choices:
a. Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax payments.
b. Cash budgets do not include financial items such as interest and dividend payments.
c. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
d. Changes that affect the DSO do not affect the cash budget.
e. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.
Answer: a. Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax payments.
Question: Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm’s portfolio, assumed to be held for emergencies, should
Answer Choices:
a. consist mainly of long-term securities because they pay higher rates.
b. consist mainly of short-term securities because they pay higher rates.
c. consist mainly of U.S. Treasury securities to minimize interest rate risk.
d. consist mainly of short-term securities to minimize interest rate risk.
e. be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.
Answer: d. consist mainly of short-term securities to minimize interest rate risk.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.
b. In managing a firm’s accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
d. 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.
e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
Answer: b. In managing a firm’s accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.