Answer Choices:
a. used to protect cash, i.e., to keep it from being stolen.
b. used to identify inventory safety stocks.
c. used to slow down the collection of checks our firm writes.
d. used to speed up the collection of checks received.
e. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
Answer: d. used to speed up the collection of checks received.
Question: The prime rate charged by big money center banks at any one time is likely to vary greatly (for example, as much as 2 to 4 percentage points) across banks due to banks’ ability to differentiate themselves and because different banks operate in different parts of the country.
Answer Choices:
a. True
b. False
Answer: b. False
Question: 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.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A firm’s peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that all its sales are on credit even though some sales are for cash.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is NOT CORRECT?
Answer Choices:
a. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
b. Accruals are “free” in the sense that no explicit interest is paid on these funds.
c. A conservative approach to working capital management will result in most if not all permanent assets being financed with long-term capital.
d. The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.
e. Bank loans generally carry a higher interest rate than commercial paper.
Answer: a. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
Question: Which of the following statements is most consistent with efficient inventory management? The firm has a
Answer Choices:
a. below-average inventory turnover ratio.
b. low incidence of production schedule disruptions.
c. below-average total assets turnover ratio.
d. relatively high current ratio.
e. relatively low DSO.
Answer: b. low incidence of production schedule disruptions.
Question: Other things held constant, which of the following will cause an increase in net working capital?
Answer Choices:
a. Cash is used to buy marketable securities.
b. A cash dividend is declared and paid.
c. Merchandise is sold at a profit, but the sale is on credit.
d. Long-term bonds are retired with the proceeds of a preferred stock issue.
e. Missing inventory is written off against retained earnings.
Answer: c. Merchandise is sold at a profit, but the sale is on credit.
Question: If a profitable firm finds that it simply must “stretch” its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.
Answer Choices:
a. True
b. False
Answer: a. True
Question: The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the receivables collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm’s working capital management.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Other things held constant, which of the following would tend to reduce the cash conversion cycle?
Answer Choices:
a. Carry a constant amount of receivables as sales decline.
b. Place larger orders for raw materials to take advantage of price breaks.
c. Take all discounts that are offered.
d. Continue to take all discounts that are offered and pay on the net date.
e. Offer longer payment terms to customers.
Answer: d. Continue to take all discounts that are offered and pay on the net date.
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Under normal conditions, a firm’s expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm’s risk.
b. Conservative firms generally use no short-term debt and thus have zero current liabilities.
c. A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt.
d. If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10, net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
e. If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.
Answer: a. Under normal conditions, a firm’s expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm’s risk.
Question: Because money has time value, a cash sale is always more profitable than a credit sale.
Answer Choices:
a. True
b. False
Answer: b. False