Question;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-?-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.
Paper#49855 | Written in 18-Jul-2015Price : $18