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Question;[i]. Which;of the following statements is most correct?;a. Other;things held constant, the higher a firm?s days sales outstanding (DSO), the;better its credit department.;b. If;a firm that sells on terms of net 30 changes its policy and begins offering all;customers terms of 2/10, net 30 days, and if no change in sales volume occurs;then the firm?s DSO will probably increase.;c. If;a firm sells on terms of 2/10, net 30 days, and its DSO is 30 days, then its;aging schedule would probably show some past due accounts.;d. Statements;a and c are correct.;e. None;of the statements above is correct.;[ii]. Which;of the following statements is most correct?;a. Depreciation;is included in the estimate of cash flows (Cash flow = Net income +;Depreciation), so depreciation is set forth on a separate line in the cash;budget.;b. If;cash inflows and cash outflows occur on a regular basis, such as the situation;in which inflows from collections occur in equal amounts each day and most;payments are made regularly on the 10th of each month, then it is not necessary;to use a daily cash budget. A cash;budget prepared at the end of the month will suffice.;c. Sound;working capital policy is designed to maximize the time between cash;expenditures on materials and the collection of cash on sales.;d. Statements;b and c are correct.;e. None;of the statements above is correct.;[iii]. Ski;Lifts Inc. is a highly seasonal business.;The following summary balance sheet provides data for peak and off-peak;seasons (in thousands of dollars);Peak Off-peak;Cash $;50 $ 30;Marketable securities;0 20;Accounts receivable;40 20;Inventories;100 50;Net fixed assets 500 500;Total assets $690 $620;Spontaneous liabilities $;30 $ 10;Short-term debt 50 0;Long-term debt;300 300;Common equity 310 310;Total claims $690 $620;From this data we may conclude that;a. Ski;Lifts has a working capital financing policy of exactly matching asset and;liability maturities.;b. Ski;Lifts? working capital financing policy is relatively aggres?sive, that is, the;company finances some of its permanent assets with short-term discretionary;debt.;c. Ski;Lifts follows a relatively conservative approach to working capital financing;that is, some of its short-term needs are met by permanent capital.;d. Without;income statement data, we cannot determine the aggressiveness or conservatism;of the company?s working capital financing policy.;e. Statements;a and c are correct.;[iv]. Which;of the following statements is most correct?;a. Net;working capital may be defined as current assets minus current;liabilities. Any increase in the current;ratio will automatically lead to an increase in net working capital.;b. Although;short-term interest rates have historically averaged less than long-term rates;the heavy use of short-term debt is considered to be an aggressive strategy;because of the inherent risks of using short-term financing.;c. If;a company follows a policy of ?matching maturities,? this means that it matches;its use of common stock with its use of long-term debt as opposed to short-term;debt.;d. All;of the statements above are correct.;e. None;of the statements above is correct.;[v]. Which;of the following statements is most correct?;a. Accruals;are an expensive way to finance working capital.;b. A;conservative financing policy is one in which the firm finances all of its;fixed assets with long-term capital and part of its permanent net operating;working capital with short-term, nonspontaneous credit.;c. If;a company receives trade credit under the terms 2/10, net 30 days, this implies;the company has 10 days of free trade credit.;d. Statements;a and b are correct.;e. None;of the answers above is correct.;[vi]. Which;of the following statement completions is most correct? If the yield curve is;upward sloping, then a firm?s marketable securities portfolio, assumed to be;held for liquidity purposes, should be;a. Weighted;toward long-term securities because they pay higher rates.;b. Weighted;toward short-term securities because they pay higher rates.;c. Weighted;toward U.S. Treasury securities to avoid interest rate risk.;d. Weighted;toward short-term securities to avoid interest rate risk.;e. Balanced;between long- and short-term securities to minimize the effects of either an;upward or a downward trend in interest rates.;[vii]. Which;of the following statements is most correct?;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 the use of;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 likely to be higher than that of long-term debt.;d. If;a firm that can borrow from its bank buys on terms of 2/10, net 30 days, 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 does not represent a real financial cost to your firm as long as;the firm periodically pays off its entire balance.;[viii]. Which;of the following statements is most correct?;a. Under;normal conditions the shape of the yield curve implies that the interest cost;of short-term debt is greater than that of long-term debt, although short-term;debt has other advantages that make it desirable as a financing source.;b. Flexibility;is an advantage of short-term credit but this is somewhat offset by the higher;flotation costs associated with the need to repeatedly renew short-term credit.;c. A;short-term loan can usually be obtained more quickly than a long-term loan but;the penalty for early repayment of a short-term loan is significantly higher;than for a long-term loan.;d. Statements;about the flexibility, cost, and riskiness of short-term versus long-term;credit are dependent on the type of credit that is actually used.;e. Short-term;debt is often less costly than long-term debt and the major reason for this is;that short-term debt exposes the borrowing firm to much less risk than;long-term debt.;Multiple;Choice: Problems;Easy;[ix]. Spartan Sporting;Goods has $5 million in inventory and $2 million in accounts receivable.Its average daily sales are $100,000.The company?s payables deferral period (accounts payable;divided by daily purchases) is 30 days.What;is the length of the company?s cash conversion cycle?;a. 100;days;b. 60;days;c. 50;days;d. 40;days;e. 33;days;[x]. For;the Cook County Company, the average age of accounts receivable is 60 days, the;average age of accounts payable is 45 days, and the average age of inventory is;72 days. Assuming a 365-day year, what;is the length of the firm?s cash conversion cycle?;a. 87;days;b. 90;days;c. 65;days;d. 48;days;e. 66;days;[xi]. The;Danser Company expects to have sales of $30,000 in January, $33,000 in;February, and $38,000 in March. If 20 percent of sales are for cash, 40 percent;are credit sales paid in the month following the sale, and 40 percent are;credit sales paid 2 months following the sale, what are the cash receipts from;sales in March?;a. $55,000;b. $47,400;c. $38,000;d. $32,800;e. $30,000;[xii]. Jumpdisk;Company writes checks averaging $15,000 a day, and it takes 5 days for these;checks to clear. The firm also receives;checks in the amount of $17,000 per day, but the firm loses three days while;its receipts are being deposited and cleared.;What is the firm's net float in dollars?;a. $126,000;b. $;75,000;c. $;32,000;d. $;24,000;e. $;16,000;[xiii]. Rojas;Computing is developing a new software system for one of its clients. The system has an up-front cost of $75;million (at t = 0). The client has;forecasted its inventory levels for the next five years as shown below;Year Inventory;1 $1.0 billion;2 1.2 billion;3 1.6 billion;4 2.0 billion;5 2.2 billion;Rojas forecasts that its new software will enable its client to;reduce inventory to the following levels;Year Inventory;1 $0.8 billion;2 1.0 billion;3 1.4 billion;4 1.7 billion;5 1.9 billion;After Year 5, the software will become obsolete, so it;will have no further impact on the client?s inventory levels. Rojas? client is evaluating this software;project as it would any other capital budgeting project. The client estimates that the weighted;average cost of capital for the software system is 10 percent. What is the estimated NPV (in millions of;dollars) of the new software system?;a. $233.56;b. $489.98;c. $625.12;d. $813.55;e. $956.43;[xiv]. Bowa Construction?s days;sales outstanding is 50 days (on a 365-day basis). The company?s accounts receivable equal $100;million and its balance sheet shows inventory equal to $125 million. What is the company?s inventory turnover;ratio?;a. 5.84;b. 4.25;c. 3.33;d. 2.75;e. 7.25;[xv]. If;Hot Tubs Inc. had sales of $2,027,773 per year (all credit) and its days sales;outstanding was equal to 35 days, what was its average amount of accounts;receivable outstanding? (Assume a 365-day year.);a. $194,444;b. $;57,143;c. $ 5,556;d. $;97,222;e. $212,541;[xvi]. A;firm is offered trade credit terms of 3/15, net 45 days. The firm does not take the discount, and it;pays after 67 days. What is the nominal annual cost of not taking the;discount? (Assume a 365-day year.);a. 21.71%;b. 22.07%;c. 22.95%;d. 23.48%;e. 24.52%;[xvii]. Dixie;Tours Inc. buys on terms of 2/15, net 30 days.;It does not take discounts, and it typically pays 35 days after the;invoice date. Net purchases amount to;$720,000 per year. What is the nominal annual cost of its non-free trade credit?;(Assume a 365-day year.);a. 17.2%;b. 23.6%;c. 26.1%;d. 37.2%;e. 50.6%;[xviii]. Your company has been offered credit terms on;its purchases of 4/30, net 90 days. What;will be the nominal annual cost of trade credit if your company;pays on the 35th day after receiving the invoice? (Assume a 365-day year.);a.;30%;b. 304%;c. 3%;d.;87%;e. 156%;[xix]. Phillips Glass Company buys on terms of 2/15;net 30 days. It does not take discounts;and it typically pays 30 days after the invoice date. Net purchases amount to $730,000 per;year. On average, how much ?free? trade;credit does Phillips receive during the year?;(Assume a 365-day year.);a. $30,000;b. $40,000;c. $50,000;d. $60,000;e. $70,000;[xx]. Wildthing;Amusement Company?s total assets fluctuate between $320,000 and $410,000, while;its fixed assets remain constant at $260,000.;If the firm follows a maturity matching or moderate working capital;financing policy, what is the likely level of its long-term financing?;a. $;90,000;b. $260,000;c. $350,000;d. $410,000;e. $320,000;[xxi]. Inland;Oil arranged a $10,000,000 revolving credit agreement with a group of small;banks. The firm paid an annual;commitment fee of one-half of one percent of the unused balance of the loan;commitment. On the used portion of the;loan, Inland paid 1.5 percent above prime for the funds actually borrowed on an;annual, simple interest basis. The prime;rate was at 9 percent for the year. If;Inland borrowed $6,000,000 immediately after the agreement was signed and;repaid the loan at the end of one year, what was the total dollar cost of the;loan agreement for one year?;a. $560,000;b. $650,000;c. $540,000;d. $900,000;e. $675,000;Medium;[xxii]. On;average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to one-half of its;monthly sales on hand at all times. If the firm analyzes its accounts using a;365-day year, what is the firm?s inventory conversion period?;a. 365.0;days;b. 182.5;days;c.;30.3 days;d.;15.2 days;e.;10.5 days;[xxiii]. Porta Stadium Inc. has annual sales of;$80,000,000 and keeps average inventory of $20,000,000. On average, the firm has accounts receivable;of $16,000,000. The firm buys all raw;materials on credit, its trade credit terms are net 35 days, and it pays on;time. The firm?s managers are searching;for ways to shorten the cash conversion cycle.;If sales can be maintained at existing levels but inventory can be;lowered by $4,000,000 and accounts receivable lowered by $2,000,000, what will;be the net change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day.;a. +105;days;b. -105;days;c.;+27 days;d.;-27 days;e. -3 days;[xxiv]. You;have recently been hired to improve the performance of Multiplex Corporation;which has been experiencing a severe cash shortage. As one part of your analysis, you want to;determine the firm?s cash conversion cycle.;Using the following information and a 365-day year, what is your;estimate of the firm?s current cash conversion cycle?;?;Current;inventory = $120,000.;?;Annual;sales = $600,000.;?;Accounts;receivable = $157,808.;?;Accounts;payable = $25,000.;?;Total;annual purchases = $365,000.;?;Purchases;credit terms: net 30 days.;?;Receivables;credit terms: net 50 days.;a. 49;days;b. 193;days;c. 100;days;d. 168;days;e. 144;days;[xxv]. Kolan Inc. has annual sales of $36,500,000;($100,000 a day on a 365-day basis). On;average, the company has $12,000,000 in inventory and $8,000,000 in accounts;receivable. The company is looking for;ways to shorten its cash conversion cycle, which is calculated on a 365-day;basis. Its CFO has proposed new policies;that would result in a 20 percent reduction in both average inventories and;accounts receivables. The company anticipates that these policies will also;reduce sales by 10 percent. Accounts;payable will remain unchanged. What;effect would these policies have on the company?s cash conversion cycle? Round to the nearest whole day.;a. -40;days;b. -22;days;c. -13;days;d. +22;days;e. +40;days;[xxvi]. Gaston;Piston Corp. has annual sales of $50,735,000 and maintains an average inventory;level of $15,012,000. The average;accounts receivable balance outstanding is $10,008,000. The company makes all purchases on credit and;has always paid on the 30th day. The;company is now going to take full advantage of trade credit and pay its;suppliers on the 40th day. If sales can;be maintained at existing levels but inventory can be lowered by $1,946,000 and;accounts receivable lowered by $1,946,000, what will be the net change in the;cash conversion cycle? (Assume there are;365 days in the year.);a. -14.0;days;b. -18.8;days;c. -28.0;days;d. -25.6;days;e. -38.0;days;[xxvii]. Jarrett;Enterprises is considering whether to pursue a restricted or relaxed current;asset investment policy. The firm?s;annual sales are $400,000, its fixed assets are $100,000, debt and equity are;each 50 percent of total assets. EBIT is;$36,000, the interest rate on the firm?s debt is 10 percent, and the firm?s tax;rate is 40 percent. With a restricted;policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will;be 25 percent of sales. What is the difference in the projected ROEs between;the restricted and relaxed policies?;a. 0.0%;b. 6.2%;c. 5.4%;d. 1.6%;e. 3.8%;[xxviii]. Chadmark;Corporation?s budgeted monthly sales are $3,000. Forty percent of its customers pay in the;first month and take the 2 percent discount. The remaining 60 percent pay in;the month following the sale and don?t receive a discount. Chadmark?s bad debts are very small and are;excluded from this analysis. Purchases;for next month?s sales are constant each month at $1,500. Other payments for wages, rent, and taxes are;constant at $700 per month. Construct a;single month?s cash budget with the information given. What is the average cash gain or (loss);during a typical month for Chadmark Corporation?;a. $2,600;b. $ 800;c. $ 776;d. $ 740;e. $ 728;[xxix]. Cross;Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R);is $2.5 million and is financed by a bank loan with 11 percent annual;interest. Cross is considering a;regional lockbox system to speed up collections which it believes will reduce;A/R by 20 percent. The annual cost of;the system is $15,000. What is the;estimated net annual savings to the firm from implementing the lockbox system?;a. $500,000;b. $;30,000;c. $;60,000;d. $;55,000;e. $;40,000


Paper#48802 | Written in 18-Jul-2015

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