Answer Options:
a. True
b. False
Answer:
a. True
Question: The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower’s financial situation deteriorates, then the bank may refuse to roll over the loan.
Answer Options:
a. True
b. False
Answer:
a. True
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.
Answer Options:
a. True
b. False
Answer:
b. False
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 Options:
a. True
b. False
Answer:
b. False
Question: The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm’s working capital needs.
Answer Options:
a. True
b. False
Answer:
b. False
Question: A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.
Answer Options:
a. True
b. False
Answer:
a. True
Question: The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is CORRECT? a. If a firm has high current and quick ratios, this always indicates that the firm is managing its liquidity position well. b. If a firm sold some inventory for cash and left the funds in its bank account, its current ratio would probably not change much, but its quick ratio would decline. c. If a firm sold some inventory on credit, its current ratio would probably not change much, but its quick ratio would decline. d. If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change. e. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
Answer:
e. The inventory turnover ratio and days sales outstanding (DSO) are two ratios that are used to assess how effectively a firm is managing its current assets.
Question: Which of the following statements is CORRECT? 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 Options:
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
Question: The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.
Answer Options:
a. True
b. False
Answer:
b. False
Question: The calculated cost of trade credit for a firm that buys on terms of 2/10, net 30, is lower (other things held constant) if the firm plans to pay in 40 days than in 30 days.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Which of the following actions would be likely to shorten the cash conversion cycle? a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days. b. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50. c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30. d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days. e. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
Answer Options:
a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
b. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50.
c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30.
d. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
e. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
Answer:
a
Question: Which of the following statements is NOT CORRECT? a. A company may hold a relatively large amount of cash and marketable securities if the uncertainty about the volume of 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 Options:
a. A company may hold a relatively large amount of cash and marketable securities if the uncertainty about the volume of 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