Ch14 Working Capital Management Complete Test Bank

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 14 Working Capital Management

1) The appropriate mix of current assets is not a working capital management decision.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

2) Net working capital is important because it is a measure of a firm's liquidity and represents the net short-term investment the firm retains after paying its short-term debts.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

3) Working capital management involves making decisions regarding the uses and sources of current assets.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

4) Working capital efficiency refers to the length of time it takes for a firm to convert raw material to a finished product.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

5) Liquidity is the ability of a company to convert real or financial assets into cash quickly without suffering a financial loss.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

6) The operating cycle begins when the firm receives raw materials and ends when the firm collects cash payments on its credit sales.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

7) The cash conversion cycle is the length of time between the cash outflow for materials and the cash inflow from sales.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

8) Days' payables outstanding (DPO), which tells how long, on average, a firm takes to pay off its suppliers for the cost of inventory, is used to measure the operating cycle.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

9) Day's payables outstanding (DPO) is computed as number of days in a year divided by accounts payable turnover.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

10) An efficient firm with good working capital management should have a high average collection period relative to other firms in its industry.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

11) The flexible current asset management strategy calls for management to hold large amounts in cash, short-term investments, and inventory.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

12) The flexible current asset management strategy is perceived to be a high-risk, low-return course of action for management to follow.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

13) The restrictive current asset management strategy is a high-risk, high-return alternative to a flexible strategy.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

14) If shortage costs dominate carrying costs, the firm will need to move toward a more flexible policy.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

15) If carrying costs are less than shortage costs, then the firm will maximize value by adopting a more restrictive strategy.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

16) Trade credit, which is short-term financing, typically comes with an explicit interest charge.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

17) An offer of 3/10, net 40 means that the selling firm offers a 10 percent discount if the buyer pays the full amount of the purchase in cash within 3 days of the invoice date. Otherwise, the buyer has 40 days to pay the balance in full from the date of delivery.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

18) Trade credit is a cheap loan from the supplier.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

19) The aging schedule shows the breakdown of the firm's accounts receivable by their date of sale.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

20) The conflict between carrying costs and shortage costs is called the working capital trade-off.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

21) A firm that employs just-in-time management has to increase its investment in working capital.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

22) Float refers to how long it takes a credit customer to pay the firm.

Learning Objective: LO 6

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

23) A lockbox system allows geographically dispersed customers to send their payments to a post office box close to them.

Learning Objective: LO 6

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

24) Under the maturity matching strategy, a firm funds all seasonal working capital needs with short-term borrowing.

Learning Objective: LO 7

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

25) A short-term funding strategy calls for all seasonal working capital and a portion of the permanent working capital and fixed assets to be funded with short-term debt.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

26) An informal line of credit is short term debt promissory notes issued by large financial firms.

Learning Objective: LO 7

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

27) A factor is an individual or financial institution that buys accounts receivable without recourse.

Learning Objective: LO 7

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

28) Which of the following statements is NOT true?

A) Gross working capital refers to the funds invested in a company's current liabilities.

B) Net working capital (NWC) refers to the difference between current assets and current liabilities.

C) Working capital efficiency refers to the length of time between when a working capital asset is acquired and when it is converted into cash.

D) Working capital management involves making decisions regarding the use and sources of current assets.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

29) Which of the following statements is NOT true?

A) If cash balances become too small, it may lead the firm to bankruptcy.

B) The lower the cash balance, the better the ability of a firm to meet its short-term financial obligations.

C) The level of the cash balance has no bearing on a firm's ability to meet its short-term financial obligations.

D) The downside of holding too much cash is that the returns on cash are low.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

30) Which of the following is the definition of net working capital?

A) Total assets minus total liabilities

B) Current assets minus current liabilities

C) Current assets divided by current liabilities

D) Total assets divided by total liabilities

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

31) The cash conversion cycle:

A) shows how long a firm keeps its inventory before selling it.

B) begins when a firm invests cash to purchase the raw materials that would be used to produce goods.

C) begins when a firm receives raw materials using credit and ends when the firm collects cash payments on the sale of its finished goods.

D) estimates how long it takes on average for a firm to collect its outstanding accounts receivable balance.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

32) Which of the following statements is NOT true?

A) The cash conversion cycle begins when a firm invests cash to purchase the raw materials that would be used to produce goods.

B) The cash conversion cycle begins when the firm uses its cash to purchase raw materials and ends when the firm collects its credit sales.

C) To measure the cash conversion cycle, we need another measure called the days' payables outstanding.

D) The cash conversion cycle ends not with the finished goods being sold to customers and the cash collected on the sales; but when a firm pays for its purchases of raw materials.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

33) The operating cycle:

A) begins when a firm receives the raw materials that would be used to produce goods.

B) begins when a firm uses its cash to purchase raw materials and ends when the firm collects cash payments on its credit sales.

C) cannot be measured without knowing the days' payables outstanding.

D) does not end with the finished goods being sold to customers and the cash collected on the sales; but when you take into account the time taken by the firm to pay for its purchases.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

34) Which of the following statements is true when managing working capital accounts?

A) Maintain extra raw material inventories to prevent causing manufacturing delays.

B) Delay collecting accounts receivables from customers.

C) Pay accounts payable immediately even if suppliers do not offer high discounts for early payment.

D) Use as little labor as possible to manufacture the product while producing a quality product.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

35) Which of the following statements is true?

A) Cash conversion cycle = DSO + DSI + DPO

B) Cash conversion cycle = DSO + DSI - DPO

C) Cash conversion cycle = DSO - DPO

D) Cash conversion cycle = DSO + DPO - DSI

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

36) Which of the following statements is correct?

A) Cash conversion cycle = DSO - DSI + DPO

B) Operating cycle = DSO + DPO

C) Operating cycle = Cash conversion cycle + DPO

D) Cash conversion cycle = Operating cycle - DSO

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

37) Trend Foods distributes its products to more than 100 restaurants and delis. The company's collection period is 32 days, and it keeps its inventory for 10 days. What is Trend's operating cycle?

A) 22 days

B) 32 days

C) 42 days

D) 52 days

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

38) Stamp, Inc. has an operating cycle of 81 days and takes 47 days to collect on its receivables. What is its level of inventory if the firm's cost of goods sold is $312,455? Round your final answer to the nearest dollar.

A) $9,190

B) $14,685

C) $29,105

D) $69,339

Learning Objective: LO 2

Bloomcode: Application

AACSB: Evaluation

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

39) Le Baron Company has an operating cycle of 123 days. The firm's days' sales in inventory is 73 days. How much does the firm have in receivables if it has credit sales of $433,450? Round your final answer to the nearest dollar.

A) $59,377

B) $71,252

C) $47,501

D) $64,233

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

40) All Stars, Inc. has inventory of $44,233 and cost of goods sold of $512,902. The company has an operating cycle of 74 days. What is the firm's days' sales outstanding (DSO)? Round your answers to the nearest whole number.

A) 43 days

B) 32 days

C) 49 days

D) 26 days

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

Reference 14-1 Use the following information to answer the questions below:

You are provided the following working capital information for the Ridge Company:

Ridge Company

Account

Inventory $12,890

Accounts receivable 12,800

Accounts payable 12,670

Credit sales $124,589

Cost of goods sold 99,630

41) Refer to Reference 14-1. What is the operating cycle for Ridge Company? Round your final answer to the nearest whole number.

A) 47 days

B) 85 days

C) 36 days

D) 51 days

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

42) Refer to Reference 14-1. What is the cash conversion cycle for Ridge Company? Round your final answers to one decimal place.

A) 83.5 days

B) 38.3 days

C) 129.9 days

D) 46.4 days

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

43) Wolfgang Electricals estimates the company takes 31 days on average to pay off its suppliers. It also knows that it has days' sales in inventory of 54 days and days' sales outstanding of 34 days. What is its cash conversion cycle?

A) 119 days

B) 34 days

C) 57 days

D) 46 days

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

44) Renald Corp. estimates that the company takes 27 days on average to pay off its suppliers. It also knows that it has days' sales in inventory of 43 days and days' sales outstanding of 45 days. What is its cash conversion cycle?

A) 61 days

B) 115 days

C) 57 days

D) 46 days

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

45) Your boss asks you to compute the company's cash conversion cycle. Looking at the financial statements, you see that the average inventory for the year was $126,300, accounts receivable were $97,900, and accounts payable were at $115,100. You also see that the company had credit sales of $324,000 and that cost of goods sold was $282,000. What is your firm's cash conversion cycle? Round to the nearest day.

A) 119 days

B) 34 days

C) 57 days

D) 125 days

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

46) West Handicrafts, Inc. has net sales of $423,000 with 30 percent of it being credit sales. Its cost of goods sold is $324,000. The firm's cash conversion cycle is 47.9 days. The firm's operating cycle is 86.3 days. What is the firm's accounts payable? Round to the nearest dollar. Do not round your intermediate calculations.

A) $34,087

B) $126,900

C) $71,203

D) $56,322

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

47) The flexible current asset investment strategy:

A) has a high percent of current assets to total assets, and is generally perceived to be a low-risk and high-return course of action.

B) calls for management to hold small amounts in cash, short-term investments, and inventory.

C) leads to high levels of accounts payables.

D) has a high percent of current assets to sales, and is generally perceived to be a low-risk and low-return course of action.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

48) Which of the following is NOT true about the flexible current asset investment strategy?

A) The strategy promotes a liberal trade credit policy for customers.

B) The strategy calls for management to hold large balances in cash, short-term investments, and inventory.

C) The strategy is perceived be a high-risk and high-return course of action for management to follow.

D) The strategy's downside is the high inventory carrying cost.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

49) A restrictive current asset investment strategy calls for:

A) levels of current assets kept to a minimum.

B) a firm barely investing in cash, marketable securities, and inventory.

C) tight terms of sale intended to curb credit sales and accounts receivable.

D) All of the above.

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

50) A restrictive current asset management strategy is a high-risk, high-return alternative to a flexible strategy because of:

A) financial shortage costs.

B) production shortage costs.

C) human resources shortage costs.

D) equipment shortage costs.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

51) Which of the following statements is true?

A) Financial shortage costs arise mainly from converting accounts receivables into cash.

B) Operating shortage costs result from added expenses for increased production and sales.

C) Operating shortage costs are generally inconsequential, especially if the product markets are competitive.

D) Financial shortage costs arise mainly from illiquidity–shortage of cash or a lack of marketable securities to sell for cash.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

52) Operating shortage costs that result from lost production and sales are caused by:

A) having too much inventory being purchased with supplier credit.

B) an excess amount of finished goods.

C) liberal, non-restrictive credit policies.

D) not holding enough raw materials in inventory.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

53) Which of the following statements about working capital trade-off is true?

A) Financial managers need to balance operating shortage costs against financial shortage costs to find an optimal management strategy.

B) If carrying costs are greater than shortage costs, then the firm will maximize value by adopting a more flexible strategy.

C) If shortage costs dominate carrying costs, the firm will need to move toward a more restrictive policy.

D) Financial managers need to balance shortage costs against carrying costs to find an optimal management strategy.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

54) Which of the following statements about working capital trade-off is NOT true?

A) Financial managers need to balance shortage costs against carrying costs to find an optimal management strategy.

B) If carrying costs are smaller than shortage costs, then the firm will maximize value by adopting a more restrictive strategy.

C) If shortage costs dominate carrying costs, the firm will need to move toward a more flexible policy.

D) Management will try to find the level of current assets that minimizes the sum of the carrying costs and shortage costs.

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

55) The aging schedule:

A) shows the breakdown of a firm's accounts receivable by their date of payment.

B) cannot identify delinquent accounts until they are paid.

C) is an important financial tool for analyzing the quality of a company's payables.

D) is an important financial tool for analyzing the quality of a company's receivables.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

56) Which of the following statements is NOT true?

A) Accounts payable (trade credit), bank loans, and commercial paper are common sources of short-term financing.

B) An informal line of credit is a verbal agreement between the firm and the bank, allowing the firm to borrow up to an agreed-upon limit.

C) An informal line of credit is a special type of collateralized loan.

D) A formal line of credit is also known as "revolving credit."

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

57) Senter Corp. sells its goods with terms of 2/10 EOM, net 30. What is the implicit cost of the trade credit? Round your final percentage answer to two decimal places. Do not round your intermediate calculations.

A) 18.50%

B) 30.00%

C) 44.59%

D) 21.89%

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

58) Kearns, Inc. sells its goods with terms of 3/15 EOM, net 60. What is the implicit cost of the trade credit? Do not round your intermediate calculations, and round your final answer to the nearest whole percent.

A) 15%

B) 45%

C) 34%

D) 28%

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

59) Which of the following statements is true of economic order quantity (EOQ)?

A) The EOQ mathematically determines the maximum total inventory cost.

B) The EOQ takes into account inventory reorder costs, but not the inventory carrying costs.

C) The EOQ takes into account inventory carrying costs, but not the inventory reorder costs.

D) The optimal order size is determined by the EOQ model.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

60) Which of the following statements is NOT true of economic order quantity (EOQ)?

A) The economic order quantity (EOQ) mathematically determines the minimum total inventory cost.

B) The EOQ ignores inventory reorder costs and inventory carrying costs.

C) The optimal order size is determined by the EOQ model.

D) The EOQ is directly proportional to the sales per period.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

61) Which of the following statements about just-in-time inventory management policy is NOT true?

A) It calls for the exact day-by-day, or even hour-by-hour raw material needs to be delivered by the suppliers.

B) If the supplier fails to make the needed deliveries, then production shuts down.

C) A big disadvantage in this system is that there are high raw inventory costs.

D) It mitigates obsolescence or loss to theft.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

Reference 14-2 Use the following to answer the questions below:

Jensen Autos, one of the largest car dealers in Eau Claire, sells about 700 vehicles a year. The cost of placing an order with their supplier is $1,100, and the inventory carrying costs are $120 for each car. Most of their sales are in late fall of each year.

62) Refer to Reference 14-2. What is the number of cars per order? Round your final answer to the nearest whole number.

A) 80 cars

B) 101 cars

C) 58 cars

D) 113 cars

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

63) Refer to Reference 14-2. How many orders will the dealer need to place this year? Round your answer to the nearest whole number.

A) 4 orders

B) 5 orders

C) 6 orders

D) 7 orders

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

64) Ticktock Clocks sells 10,000 alarm clocks each year. If the total cost of placing an order is $65 and it costs $85 per year to carry the alarm clock in inventory, calculate the optimal order size using the EOQ formula. Round your final answer to the nearest whole number.

A) 124 clocks

B) 161 clocks

C) 15,294 clocks

D) 26,154 clocks

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

65) Which of the following statements about collection time is NOT true?

A) Collection time, or float, is the time between when a customer makes a payment and when the cash becomes available to the firm.

B) Collection time can be broken down into three components.

C) Delivery time or mailing time is not part of the collection time.

D) Processing delay is one of the components of the collection time.

Learning Objective: LO 6

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

66) Porter Corp. has just signed up for a lockbox. Management expects the lockbox to reduce the mail float by 2.3 days. The firm's sales on average are $41,250 a day, with the average check being $165. The bank charges $0.39 per processed check. Assume that there are 270 business days in a year and the opportunity cost of funds is 5 percent. What will the firm's savings be from using the lockbox?

A) $3,427.50

B) $975.50

C) $2,632.50

D) $94,875.00

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

67) Rocky Corp. has daily sales of $18,100. The financial manager determined that a lockbox would reduce the collection time by 2.2 days. Assuming the company can earn 6 percent interest per year, what are the savings from the lockbox? Round your final answer to the nearest dollar.

A) $3,621

B) $2,389

C) $39,820

D) $1,100

Learning Objective: LO 6

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

68) Which of the following statements about maturity matching strategy is true?

A) All working capital needs are funded with long-term borrowing.

B) Even if the level of sales varies seasonally, short-term borrowing is set to the maximum level possible to prevent any possible lack of working capital throughout the year.

C) All assets are funded with long-term financing.

D) All seasonal working capital needs are funded with short-term borrowing.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

69) Which of the following statements about short-term funding strategy is true?

A) Only permanent working capital and fixed assets are funded with short-term debt.

B) The upside to this strategy is that a portion of a firm's long-term assets are periodically refinanced over their working lives.

C) It can take advantage of a downward-sloping yield curve and lower a firm's overall cost of funding.

D) All seasonal working capital needs and a portion of permanent working capital and fixed assets are funded with short-term debt.

Learning Objective: LO 7

Bloomcode: Analysis

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

70) Which of the following statements is NOT true?

A) Firms using maturity matching strategy fund all working capital needs with long-term borrowing.

B) Long-term financing strategy relies on long-term debt to finance both capital assets and working capital.

C) All permanent working capital and fixed assets are funded with long-term debt when firms use a maturity matching strategy.

D) Firms using a maturity matching strategy fund all seasonal working capital needs with short-term borrowing.

Learning Objective: LO 7

Bloomcode: Comprehension

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

71) Serengeti Travels has borrowed $50,000 at a stated APR of 8.5 percent. The loan calls for a compensating balance of 8 percent. What is the effective interest rate for this company? Round your final percentage answer to two decimal places.

A) 9.24%

B) 8.50%

C) 8.00%

D) 16.50%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

72) Sun Prairie Traders borrowed $63,000 at an APR of 10 percent. The loan called for a compensating balance of 10 percent. What is the effective interest rate on the loan? Round your final percentage answer to two decimal places.

A) 10.00%

B) 11.11%

C) 8.00%

D) 12.50%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

73) Good Homes Furnishings is borrowing $225,000. The loan requires a 10 percent compensating balance, and the effective interest rate on loan is 8.25 percent. What is the stated APR on this loan? Do not round your intermediate calculations, and round your final percentage answer to two decimal places.

A) 10.00%

B) 11.11%

C) 7.43%

D) 8.25%

Learning Objective: LO 7

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

74) Maggie's Bistro is borrowing $375,000. The loan requires an 8 percent compensating balance, and the effective interest rate on the loan is 10.326 percent. What is the stated APR on this loan? Do not round your intermediate calculations, and round your final percentage answer to two decimal places.

A) 10.0%

B) 9.5%

C) 7.4%

D) 8.5%

Learning Objective: LO 7

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

75) Gibbs, Inc. has just set up a formal line of credit of $1 million with First National Bank. The line of credit is good for up to five years. The bank will be charging them an interest rate of 6.25 percent on the loan, and in addition the firm will pay an annual fee of 50 basis points on the unused balance. The firm borrowed $600,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? Round your final percentage answer to two decimal places.

A) 8.00%

B) 7.25%

C) 6.58%

D) 8.25%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

76) Trend, Inc. has just set up a formal line of credit of $5 million with First National Bank. The line of credit is good for up to three years. The bank will be charging them an interest rate of 7.5 percent on the loan, and in addition, the firm will pay an annual fee of 50 basis points on the unused balance. The firm borrowed $2,300,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? Round your final percentage answer to one decimal place.

A) 8.5%

B) 7.2%

C) 9.0%

D) 8.1%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

77) Storm Electronics has set up a formal line of credit of $2 million with First Kentucky Bank. The line of credit is good for up to three years. The bank will be charging them an interest rate of 6.25 percent on the loan, and in addition the firm will pay an annual fee of 60 basis points on the unused balance. The firm borrowed $1,500,000 on the first day the credit line became available. What is the firm's effective interest rate on this line of credit? Round your final percentage answer to two decimal places.

A) 7.50%

B) 6.45%

C) 6.25%

D) 7.15%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

78) Pride, Inc. sells $150,000 of its accounts receivable to factors at 2.875 percent discount. The firm's average collection period is 75 days. What is the simple annual interest cost of the factors loan? Round your percentage answer to one decimal place.

A) 35.5%

B) 32.9%

C) 27.8%

D) 31.1%

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

79) A firm sells $125,000 of its accounts receivable to factors at 3 percent discount. The firm's average collection period is one month. What is the dollar cost of the factoring service?

A) $3,000

B) $4,500

C) $3,750

D) $4,250

Learning Objective: LO 7

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

80) Which of the following is a short-term financing instrument?

A) Accounts receivable

B) Bank loans with a maturity of more than 1 year

C) Medium term bonds

D) Accounts payable

Learning Objective: LO 7

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Global and Industry Perspectives

81) What are some strategies that financial managers can follow in managing their working capital accounts?

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

82) Explain working capital trade-off.

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Industry/Sector Perspective

83) How does a just-in-time inventory management work?

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Strategic Planning

AICPA: Global and Industry Perspectives

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