FIN 534 Week 10 Quiz 9 Chapter 16
download Question 1 Which of the following statements is NOT CORRECT? Answer Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. Accruals are "free" in the sense that no explicit interest is paid on these funds. A conservative approach to working capital management will result in most if not all permanent current operating assets being financed with long-term capital. 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. Bank loans generally carry a higher interest rate than commercial paper. 2 points Question 2 Which of the following statements is CORRECT? Answer Accruals are an expensive but commonly used way to finance working capital. A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds. If a company receives trade credit under terms of 2/10 net 30, this implies that the company has 10 days of free trade credit. One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget. If a firm has a relatively aggressive current asset financing policy vis-Ă -vis other firms in its industry, then its current ratio will probably be relatively high. 2 points Question 3 Which of the following statements is CORRECT? Answer Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual cash control. The cash budget and the capital budget are developed separately, and although they are both important to the firm, one does not affect the other. Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget. The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm's operations. The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts. 2 points Question 4 Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take? Answer Increase average inventory without increasing sales. Take steps to reduce the DSO. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales. Sell common stock to retire long-term bonds. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock. 2 points Question 5 Which of the following actions would be likely to shorten the cash conversion cycle? Answer
Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days. Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50. Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30. 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. Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60. 2 points Question 6 Which of the following statements is CORRECT? Answer Trade credit is provided only to relatively large, strong firms. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies. 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. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. Commercial paper is typically offered at a long-term maturity of at least five years. 2 points Question 7 Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities? Answer The firm must make a known future payment, such as paying for a new plant that is under construction. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases. The firm has just sold long-term securities and has not yet invested the proceeds in operating assets. The firm just won a product liability suit one of its customers had brought against it. 2 points Question 8 Which of the following statements is CORRECT? Answer Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), hence depreciation is set forth on a separate line in the cash budget. 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. Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales. 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. If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August. 2 points Question 9 Which of the following items should a company report directly in its monthly cash budget? Answer Its monthly depreciation expense. Cash proceeds from selling one of its divisions. Accrued interest on zero coupon bonds that it issued. New shares issued in a stock split. New shares issued in a stock dividend.
2 points Question 10 Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket? Answer Payments lags. Depreciation. Cumulative cash. Repurchases of common stock. Payment for plant construction. 2 points Question 11 Which of the following statements is CORRECT? Answer 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. Conservative firms generally use no short-term debt and thus have zero current liabilities. 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. 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. 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. 2 points Question 12 Other things held constant, which of the following would tend to reduce the cash conversion cycle? Answer Carry a constant amount of receivables as sales decline. Place larger orders for raw materials to take advantage of price breaks. Take all discounts that are offered. Continue to take all discounts that are offered and pay on the net date. Offer longer payment terms to customers. 2 points Question 13 Other things held constant, which of the following will cause an increase in net working capital? Answer Cash is used to buy marketable securities. A cash dividend is declared and paid. Merchandise is sold at a profit, but the sale is on credit. Long-term bonds are retired with the proceeds of a preferred stock issue. Missing inventory is written off against retained earnings. 2 points Question 14 Which of the following statements is CORRECT? Answer Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. 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. 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. 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. 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. 2 points Question 15
A lockbox plan is Answer used to protect cash, i.e., to keep it from being stolen. used to identify inventory safety stocks. used to slow down the collection of checks our firm writes. used to speed up the collection of checks received. 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.