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Exam 16: Working Capital Management

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Question 1

True/False

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An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower than the revolving credit agreement.

A) True
B) False

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Question 2

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Other things held constant,if a firm "stretches" (i.e. ,delays paying)its accounts payable,this will lengthen its cash conversion cycle (CCC).

A) True
B) False

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Question 3

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Affleck Inc.'s business is booming,and it needs to raise more capital.The company purchases supplies on terms of 1/10,net 20,and it currently takes the discount.One way of acquiring the needed funds would be to forgo the discount,and the firm's owner believes she could delay payment to 60 days without adverse effects.What would be the effective annual percentage cost of funds raised by this action? (Assume a 365-day year. )

A firm buys on terms of 3/15,net 45.It does not take the discount,and it generally pays after 85 days.What is the nominal annual percentage cost of its non-free trade credit,based on a 365-day year?

Which of the following statements is CORRECT?

Which of the following statements concerning the cash budget is CORRECT?

Desai Inc.has the following data,in thousands.Assuming a 365-day year,what is the firm's cash conversion cycle? Do not round intermediate calculations.Round to the nearest whole day. $\begin{array}{lr}\text { Annual sales = } & \$ 45,000 \\\text { Annual cost of goods sold = } & \$ 22,500 \\\text { Inventory }= & \$ 4,500 \\\text { Accounts receivable }= & \$ 1,800 \\\text { Accounts payable = } & \$ 2,500\end{array}$ ?

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.

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.

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.

If a firm switched from taking trade credit discounts to paying on the net due date,this might cost the firm some money,but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.

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.

Changes in a firm's collection policy can affect sales,working capital,and profits.

Accruals are "spontaneous" funds arising automatically from a firm's operations,but unfortunately,due to law and economic forces,firms have little control over the level of these accounts.

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

Which of the following statements is CORRECT?

The maturity matching,or "self-liquidating",approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates.When short-term rates are relatively high,short-term assets will be financed with long-term debt to reduce costs.

Data on Wentz Inc.for last year 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.Do not round your intermediate calculations. $\begin{array}{lr}\text { Cost of goods sold = } & \$ 77,000 \\\text { Payables }= & \$ 5,000 \\\text { Payables Deferral Period (PDP) }= & 23.70 \\\text { Benchmark Payables Deferral Period = } & 30.000\end{array}$ ?

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

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise,other things held constant.