Test Bank Chapter 14 Working Capital Management and Policies

Finance, 5e (Cornett)

Chapter 14 Working Capital Management and Policies

1) The area of management concerned with designing and overseeing the process of production is which of the following?

A) Production science

B) Production management

C) Operations management

D) Operations science

2) A production strategy that attempts to improve a firm's return on investment by reducing in-process inventory and associated carrying costs as much as possible is which of the following?

A) Production management

B) Operations management

C) Almost late

D) Just in time

3) The inventory order quantity that minimizes total holding and ordering costs is which of the following?

A) Barabas economic order quantity (EOQ)

B) Cornett economic order quantity (EOQ)

C) Operations management

D) Production management

4) Which of the following is defined as costs associated with not having sufficient cash, inventory, or accounts receivable?

A) Net working capital costs

B) Opportunity costs

C) Shortage costs

D) Cash cycle costs

5) Which of the following is defined as the cost or forgone opportunity of using an asset already in use by the firm, or a person already employed by the firm, in a new project?

A) Net working capital cost

B) Opportunity cost

C) Shortage cost

D) Cash cycle cost

6) To trace cash flows through the firm's operations, we must measure which of the following? (It is the time necessary to acquire raw materials, turn them into finished goods, sell them, and receive payment for them.)

A) Cash cycle

B) Operating cycle

C) Transaction cycle

D) Production cycle

7) Operating cycle is measured as

A) inventory turns minus average collection period.

B) inventory turns plus average collection period.

C) days' sales in inventory minus average collection period.

D) days' sales in inventory plus average collection period.

8) Which of the following is NOT one of the five basic elements of the kaizen approach of productivity improvement?

A) Teamwork

B) Improved morale

C) Quality circles

D) Suggestions for personal discipline

9) Choosing the optimal level of investment in each current asset type involves a trade-off between carrying costs and

A) opportunity costs.

B) financing costs.

C) safety costs.

D) shortage costs.

10) Which of the following current asset financing policies reflects the decision to finance the peaks of current assets with long-term debt and equity that provides the firm with a surplus of cash and marketable securities most of the time, except during peak asset demand?

A) Flexible financing policy

B) Restrictive financing policy

C) Compromise financing policy

D) Alternative financing policy

11) Which of the following current asset financing policies reflects the firm financing the seasonally-adjusted average level of asset demand with long-term debt and equity enabling it to use both short-term financing and short-term investing as needed?

A) Flexible financing policy

B) Restrictive financing policy

C) Compromise financing policy

D) Alternative financing policy

12) For most businesses, particularly smaller ones, the most common way to cover a short-term financing need is to apply at a bank for which of the following?

A) Commercial loan

B) Line of credit

C) Asset-based loan

D) Inventory loan

13) Which of these is the requirement of the firm to keep a certain percentage of the borrowed money deposited in the firm's bank accounts, whereby the bank agrees to lend money to the firm?

A) Commercial loan

B) Line of credit

C) Compensating balance

D) Inventory loan

14) Which of these is a short-term loan secured by a company's assets?

A) Commercial loan

B) Line of credit

C) Asset-based loan

D) Inventory loan

15) Which of these is an entity who will buy accounts receivable before they are due on a discounted basis, with the spread between the discounted price and the receivable's face value providing them with the expected compensation for both the time value of money and for the expected level of defaults amongst the accounts receivable?

A) Commercial bank

B) Factor

C) Receiver

D) Blanket loaner

16) Which of the following is NOT an example of an inventory loan?

A) Blanket inventory liens

B) Trust receipts

C) Field warehousing financing

D) Inventory factor

17) Which of the following is a money-market security, issued by large banks and medium-to-large corporations, that matures in nine months or less?

A) Banker's paper

B) Commercial paper

C) Banker's acceptance

D) Commercial acceptance

18) Which of the following is a short-term promissory note issued by a corporation, bearing the unconditional guarantee of a major bank?

A) Banker's paper

B) Commercial paper

C) Banker's acceptance

D) Commercial acceptance

19) Which of the following is NOT a reason for holding cash?

A) Transaction facilitation

B) Compensating balances

C) Investment opportunities

D) Transaction opportunities

20) Which of the following is NOT one of the Baumol model's unrealistic assumptions?

A) The firm has a constant, perfectly predictable distribution rate for cash.

B) No cash will come in during the period in question.

C) no allowance for any safety stock of extra cash to buffer the firm against unexpectedly high demand for cash

D) no assumption to start from a replenishment level of cash then decline smoothly to a value of zero

21) Which of the following approaches for determining the target cash balance assumes that the distribution of daily net cash flows is normally distributed, and allows for both cash inflows and outflows?

A) The Baumol model

B) The Miller-Orr model

C) The Merton model

D) The Interbank Financial model

22) Which of the following is NOT a fundamental factor ignored by the target cash balance models?

A) Firms have the option to borrow short-term to meet unexpected demands for cash.

B) The costs and delays of trading securities have fallen dramatically since the advent of the Internet.

C) Many large firms habitually use all or the majority of their available cash to purchase overnight securities.

D) Models take into account that many firms must keep compensating balances in their deposit accounts as part of borrowing agreements with their banks.

23) Which of these is defined as the excess amounts of a current asset kept on hand to meet unexpected shocks in demand?

A) Liquid current assets

B) Safety stock

C) Overnight securities

D) Float

24) Which of these is the period of time after a check has been written, but not yet cleared and deposited?

A) Liquid current assets

B) Safety stock

C) Overnight securities

D) Float

25) Which of the following is the technique for reducing collection float by having funds sent to several geographically situated regional banks and then transferring to a main concentration account in another bank?

A) Lockbox system

B) Concentration banking

C) Wire transfers

D) Collection float

26) Which of the following describes the place over which the bank-to-bank transfers are conducted within the United States?

A) Lockbox system

B) Concentration banking

C) Wire transfers

D) Fedwire

27) Which of the following is a checking account that the firm sets up so that the bank agrees to automatically transfer funds from an interest-bearing account to pay off any checks presented?

A) Lockbox system

B) Concentration banking

C) Wire transfers

D) Zero-balance account

28) Which of the following resemble checks, but differ in that they are payable by the firm issuing them rather than payable by a bank?

A) Drafts

B) Concentration banking

C) Wire transfers

D) Zero-balance account

29) Which of the following is NOT one of the "five C's" of credit analysis?

A) Capacity

B) Character

C) Collateral

D) Collectability

30) Elle Mae Industries has a cash balance of $50,000, accounts payable of $150,000; inventory of $190,000; accounts receivable of $250,000; notes payable of $210,000; and accrued wages and taxes of $40,000. How much net working capital does the firm need to fund?

A) $50,000

B) $90,000

C) $110,000

D) $130,000

31) Daisy D Industries has a cash balance of $75,000; accounts payable of $140,000; inventory of $300,000; accounts receivable of $350,000; notes payable of $145,000; and accrued wages and taxes of $80,000. How much net working capital does the firm need to fund?

A) $285,000

B) $60,000

C) $440,000

D) $360,000

32) Team Sports Industries has a cash balance of $60,000; accounts payable of $40,000; inventory of $100,000; accounts receivable of $110,000; notes payable of $80,000; and accrued wages and taxes of $10,000. How much net working capital does the firm need to fund?

A) $140,000

B) $130,000

C) $150,000

D) $210,000

33) Scribble, Inc. has sales of $80,000 and cost of goods sold of $64,000. The firm had a beginning inventory of $10,000 and an ending inventory of $12,000. What is the length of the days' sales in inventory?

A) 13.75 days

B) 45.63 days

C) 17.19 days

D) 68.44 days

34) Scribble, Inc. has sales of $100,000 and cost of goods sold of $75,000. The firm had a beginning inventory of $20,000 and an ending inventory of $22,000. What is the length of the days' sales in inventory?

A) 73.00 days

B) 83.30 days

C) 97.34 days

D) 107.07 days

35) Drawing, Inc. has sales of $860,000 and cost of goods sold of $450,000. The firm had a beginning inventory of $50,000 and an ending inventory of $59,000. What is the length of the days' sales in inventory?

A) 23.13 days

B) 44.21 days

C) 21.22 days

D) 47.86 days

36) Painting, Inc. has sales of $400,000 and cost of goods sold of $275,000. The firm had a beginning inventory of $42,000 and an ending inventory of $38,000. What is the length of the days' sales in inventory?

A) 53.09 days

B) 36.50 days

C) 38.33 days

D) 50.44 days

37) If a firm has a cash cycle of 25 days and an operating cycle of 80 days, what is its average payment period?

A) 25

B) 80

C) 55

D) 105

38) If a firm has a cash cycle of 10 days and an operating cycle of 43 days, what is its average payment period?

A) 10

B) 33

C) 43

D) 53

39) If a firm has a cash cycle of 47 days and an operating cycle of 92 days, what is its average payment period?

A) 45

B) 47

C) 92

D) 139

40) If a firm has a cash cycle of 25 days and an operating cycle of 80 days, what is its payables turnover?

A) 14.6

B) 4.56

C) 6.64

D) 55

41) If a firm has a cash cycle of 10 days and an operating cycle of 43 days, what is its payables turnover?

A) 11.06

B) 36.5

C) 8.48

D) 33

42) If a firm has a cash cycle of 20 days and an operating cycle of 60 days, what is its payables turnover?

A) 8.06

B) 9.13

C) 20.00

D) 40.00

43) If a firm has a cash cycle of 32 days and an operating cycle of 67 days, what is its payables turnover?

A) 5.45

B) 10.43

C) 11.41

D) 35

44) If a firm has a cash cycle of 30 days and an operating cycle of 64 days, what is its average payment period?

A) 30 days

B) 34 days

C) 64 days

D) 94 days

45) If a firm has a cash cycle of 25 days and an operating cycle of 57 days, what is its average payment period?

A) 25 days

B) 32 days

C) 57 days

D) 82 days

46) If a firm has a cash cycle of 39 days and an operating cycle of 88 days, what is its average payment period?

A) 39 days

B) 49 days

C) 88 days

D) 127 days

47) If a firm has a cash cycle of 18 days and an operating cycle of 29 days, what is its payables turnover?

A) 11

B) 18

C) 29

D) 33.18

48) Would it be worth it to incur a compensating balance of $10,000 in order to get a 1-percent-lower interest rate on a 1-year, pure discount loan of $500,000?

A) Yes

B) No

C) Not enough information is given to know

49) Would it be worth it to incur a compensating balance of $2,000 in order to get a 1.5-percent-lower interest rate on a 1-year, pure discount loan of $100,000?

A) Yes

B) No

C) Not enough information is given to determine

50) Would it be worth it to incur a compensating balance of $4,000 in order to get a 1.5-percent-lower interest rate on a 1-year, pure discount loan of $300,000?

A) Yes, if the interest rate is less than 13.64 percent

B) No, if the interest rate is less than 13.64 percent

C) Yes, if the interest rate is more than 1.5 percent

D) Not enough information is given to determine

51) Would it be worth it to incur a compensating balance of $15,000 in order to get a 2-percent-lower interest rate on a 1-year, pure discount loan of $1,000,000?

A) Yes

B) No

C) Not enough information is given to determine

52) Would it be worth it to incur a compensating balance of $9,000 in order to get a 0.70 percent lower interest rate on a 1-year, pure discount loan of $250,000?

A) Yes

B) No

C) Not enough information is given to determine

53) KJ Enterprises estimates that it takes, on average, three days for their customers' payments to reach them, one day for the payments to be processed and deposited by their bookkeeping department, and two more days for the checks to clear once they're deposited. What is their collection float?

A) one day

B) two days

C) three days

D) six days

54) MC Enterprises estimates that it takes, on average, seven days for their customers' payments to reach them, two days for the payments to be processed and deposited by their bookkeeping department, and three more days for the checks to clear once they're deposited. What is their collection float?

A) 12 days

B) 10 days

C) 9 days

D) 7 days

55) CM Enterprises estimates that it takes, on average, seven days for their customers' payments to reach them, one day for the payments to be processed and deposited by their bookkeeping department, and three more days for the checks to clear once they're deposited. What is their collection float?

A) 7 days

B) 8 days

C) 10 days

D) 11 days

56) PBJ Enterprises estimates that it takes, on average, three days for their customers' payments to reach them, three days for the payments to be processed and deposited by their bookkeeping department, and three more days for the checks to clear once they're deposited. What is their collection float?

A) 5 days

B) 6 days

C) 9 days

D) 18 days

57) B&O Cos. has sales of $850,000 and cost of goods sold of $490,000. The firm had a beginning inventory of $69,000 and an ending inventory of $54,000. What is the length of the days' sales in inventory?

A) 40.22 days

B) 51.40 days

C) 23.19 days

D) 29.63 days

58) PNB Cos. has sales of $250,000 and cost of goods sold of $120,000. The firm had a beginning inventory of $19,000 and an ending inventory of $13,000. What is the length of the days' sales in inventory?

A) 27.74 days

B) 57.79 days

C) 18.98 days

D) 39.54 days

59) Suppose that Tucker Industries has annual sales of $5 million, cost of goods sold of $2.78 million, average inventories of $1,125,000, and average accounts receivable of $500,000. Assuming that all of Tucker's sales are on credit, what will be the firm's operating cycle?

A) 147.71

B) 111.21

C) 184.21

D) 36.5

60) Suppose that Mack Industries has annual sales of $10 million, cost of goods sold of $6.5 million, average inventories of $1 million, and average accounts receivable of $600,000. Assuming that all of Mack's sales are on credit, what will be the firm's operating cycle?

A) 34.25

B) 21.9

C) 56.15

D) 78.05

61) Suppose that Sam Industries has annual sales of $2 million, cost of goods sold of $950,000, average inventories of $45,000, and average accounts receivable of $90,000. Assuming that all of Sam's sales are on credit, what will be the firm's operating cycle?

A) 0.85

B) 16.43

C) 17.29

D) 33.72

62) Suppose that Freddy's Fries has annual sales of $500,000, cost of goods sold of $375,000, average inventories of $9,000, and average accounts receivable of $25,000. Assuming that all of Freddy's sales are on credit, what will be the firm's operating cycle?

A) 27.01

B) 18.25

C) 8.76

D) 9.49

63) Suppose that Farrah's Hair Care has annual sales of $100,000, cost of goods sold of $65,000, average inventories of $2,000, and average accounts receivable of $5,000. Assuming that all of Farrah's sales are on credit, what will be the firm's operating cycle?

A) 7.02

B) 11.23

C) 18.25

D) 29.48

64) Suppose that Freddie's Fries has annual sales of $500,000, cost of goods sold of $375,000, average inventories of $9,000, average accounts receivable of $25,000, and an average accounts payable balance of $20,000. Assuming that all of Freddie's sales are on credit, what will be the firm's cash cycle?

A) 46.48

B) 1.22

C) 7.54

D) 27.01

65) Suppose that Jamie's Jams has annual sales of $900,000; cost of goods sold of $600,000; average inventories of $11,000; average accounts receivable of $50,000; and an average accounts payable balance of $30,000. Assuming that all of Jamie's sales are on credit, what will be the firm's cash cycle?

A) 45.22

B) 8.72

C) 18.25

D) 26.97

66) Suppose that Darlene's Donuts has annual sales of $200,000; cost of goods sold of $90,000; average inventories of $4,000; average accounts receivable of $10,000; and an average accounts payable balance of $7,000. Assuming that all of Darlene's sales are on credit, what will be the firm's cash cycle?

A) 6.08

B) 28.39

C) 34.47

D) 62.86

67) Suppose your firm is seeking a 7-year, amortizing $100,000 loan with annual payments and your bank is offering you the choice between a $110,000 loan with a $10,000 compensating balance and a $100,000 loan without a compensating balance. If the interest rate on the $100,000 loan is 7 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

A) 7 percent

B) 10 percent

C) 4.34 percent

D) Not enough information is given to know

68) Suppose your firm is seeking a five-year, amortizing $900,000 loan with annual payments and your bank is offering you the choice between a $950,000 loan with a $50,000 compensating balance and a $900,000 loan without a compensating balance. If the interest rate on the $900,000 loan is 9.5 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

A) 9.5 percent

B) 5.56 percent

C) 7.43 percent

D) Not enough information is given to determine

69) Suppose your firm is seeking a 3-year, amortizing $300,000 loan with annual payments and your bank is offering you the choice between a $305,000 loan with a $5,000 compensating balance and a $300,000 loan without a compensating balance. If the interest rate on the $300,000 loan is 8 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

A) 8 percent

B) 7.09 percent

C) 1.67 percent

D) 7.98 percent

70) Rose Resources faces a smooth annual demand for cash of $10 million, incurs transaction costs of $325 every time they sell marketable securities, and can earn 3.9 percent on their marketable securities. What will be their optimal cash replenishment level?

A) $28,867.51

B) $288,675.13

C) $40,824.83

D) $408,248.29

71) Rose N More Resources faces a smooth annual demand for cash of $50 million, incurs transaction costs of $350 every time they sell marketable securities, and can earn 5.2 percent on their marketable securities. What will be their optimal cash replenishment level?

A) $18,708.29

B) $187,082.87

C) $82,041.27

D) $820,412.65

72) Reese's Resources faces a smooth annual demand for cash of $15 million, incurs transaction costs of $125 every time they sell marketable securities, and can earn 4.5 percent on their marketable securities. What will be their optimal cash replenishment level?

A) $28,867.51

B) $288,675.13

C) $61,237.24

D) $6,123.72

73) Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000, the effective annual rate on marketable securities to be 6 percent per year, and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal cash return point?

A) $59,094.77

B) $69,588.47

C) $181,131.66

D) $54,000.00

74) Happy Feet would like to maintain their cash account at a minimum level of $75,000, but expects the standard deviation in net daily cash flows to be $5,000, the effective annual rate on marketable securities to be 7 percent per year, and the trading cost per sale or purchase of marketable securities to be $150 per transaction. What will be their optimal cash return point?

A) $80,000.00

B) $99,755.64

C) $76,593.42

D) $82,548.18

75) BOGO Shoes would like to maintain their cash account at a minimum level of $100,000, but expects the standard deviation in net daily cash flows to be $7,000; the effective annual rate on marketable securities to be 6.5 percent per year; and the trading cost per sale or purchase of marketable securities to be $175 per transaction. What will be their optimal cash return point?

A) $107,000

B) $133,374.63

C) $144,266.52

D) $101,859.65

76) Hollywood Shoes would like to maintain their cash account at a minimum level of $50,000, but expects the standard deviation in net daily cash flows to be $4,000; the effective annual rate on marketable securities to be 6 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal upper cash limit?

A) $59,094.77

B) $69,588.47

C) $108,765.41

D) $54,000.00

77) Happy Feet would like to maintain their cash account at a minimum level of $75,000, but expects the standard deviation in net daily cash flows to be $5,000; the effective annual rate on marketable securities to be 7 percent per year; and the trading cost per sale or purchase of marketable securities to be $150 per transaction. What will be their optimal upper cash limit?

A) $80,000.00

B) $99,755.64

C) $76,593.42

D) $149,266.92

78) Stellar Shoes would like to maintain their cash account at a minimum level of $25,000, but expects the standard deviation in net daily cash flows to be $2,000; the effective annual rate on marketable securities to be 5 percent per year; and the trading cost per sale or purchase of marketable securities to be $100 per transaction. What will be their optimal upper cash limit?

A) $27,000

B) $38,092.34

C) $114,277.02

D) $64,277.02

79) Joe's Burgers would like to maintain their cash account at a minimum level of $300,000, but expects the standard deviation in net daily cash flows to be $20,000; the effective annual rate on marketable securities to be 5.2 percent per year; and the trading cost per sale or purchase of marketable securities to be $22.50 per transaction. What will be their optimal upper cash limit?

A) $320,000.00

B) $336,492.68

C) $409,478.04

D) $1,009,478.04

80) John Boy Industries has a cash balance of $59,000, accounts payable of $139,000, inventory of $115,000, accounts receivable of $220,000, notes payable of $175,000, and accrued wages and taxes of $23,000. How much net working capital does the firm need to fund?

A) $140,000

B) $34,000

C) −$25,000

D) $57,000

81) Dandee Lions, Inc. has a cash balance of $105,000, accounts payable of $290,000, inventory of $213,000, accounts receivable of $310,000, notes payable of $95,000, and accrued wages and taxes of $65,000. How much net working capital does the firm need to fund?

A) $8,000

B) $83,000

C) $178,000

D) $18,000

82) If a firm has a cash cycle of 71 days and an operating cycle of 139 days, what is its average payment period?

A) 210 days

B) 68 days

C) 53 days

D) 41 days

83) If a firm has a cash cycle of 75 days and an operating cycle of 120 days, what is its payables turnover?

A) 8.11

B) 7.19

C) 5.97

D) 6.73

84) If a firm has a cash cycle of 41 days and an operating cycle of 76 days, what is its average payment period?

A) 52 days

B) 29 days

C) 117 days

D) 35 days

85) If a firm has a cash cycle of 38 days and an operating cycle of 82 days, what is its payables turnover?

A) 8.79

B) 8.30

C) 9.53

D) 10.89

86) What must the rate be less than to be worth it to incur a compensating balance of $20,000 in order to get a 2 percent lower interest rate on a one-year, pure discount loan of $200,000?

A) The rate must be less than 78 percent.

B) The rate must be greater than 78 percent.

C) The rate must be greater than −78 percent.

D) The rate must be less than −78 percent.

87) CM Enterprises estimates that it takes, on average, seven days for their customers' payments to reach them, one day for the payments to be processed and deposited by their bookkeeping department, and three more days for the check to clear once they're deposited. What is their collection float?

A) 11 days

B) 10 days

C) 8 days

D) 7 days

88) B&B Cos. has sales of $732,000 and cost of goods sold of $323,000. The firm had a beginning inventory of $48,000 and an ending inventory of $39,000. What is the length of the days' sales in inventory?

A) 37.79 days

B) 31.84 days

C) 44.07 days

D) 49.02 days

89) Suppose that Dunn Industries has annual sales of $2.5 million, cost of goods sold of $1,850,000, average inventories of $1,900,000, and average accounts receivable of $660,000. Assuming that all of Dunn's sales are on credit, what will be the firm's operating cycle?

A) 471.22 days

B) 374.86 days

C) 418.61 days

D) 515.39 days

90) Suppose that LilyMac Photography has annual sales of $218,000, cost of goods sold of $123,000, average inventories of $1,250, and average accounts receivable of $22,000. Assuming that all of LilyMac's sales are on credit, what will be the firm's operating cycle?

A) 40.54 days

B) 45.13 days

C) 41.16 days

D) 37.82 days

91) Suppose that LilyMac Photography has annual sales of $290,000, cost of goods sold of $155,000, average inventories of $3,500, average accounts receivable of $21,000, and an average accounts payable balance of $10,000. Assuming that all of LilyMac's sales are on credit, what will be the firm's cash cycle?

A) 11.12 days

B) 13.01 days

C) 14.99 days

D) 16.97 days

92) Suppose your firm is seeking a seven-year, amortizing $400,000 loan with annual payments and your bank is offering you the choice between a $410,000 loan with a $10,000 compensating balance and a $400,000 loan without a compensating balance. If the interest rate on the $400,000 loan is 9.5 percent, how low would the interest rate on the loan with the compensating balance have to be in order for you to choose it?

A) The rate would have to be lower than 8.76 percent.

B) The rate would have to be lower than 8.29 percent.

C) The rate would have to be lower than 8.14 percent.

D) The rate would have to be lower than 7.99 percent.

93) Rose Axels faces a smooth annual demand for cash of $8 million; incurs transaction costs of $200 every time they sell marketable securities; and can earn 3.8 percent on their marketable securities. What will be their optimal cash replenishment level?

A) $264,583.03

B) $278,997.38

C) $290,190.50

D) $313,809.26

94) HotFoot Shoes would like to maintain their cash account at a minimum level of $35,000, but expect the standard deviation in net daily cash flows to be $2,000, the effective annual rate on marketable securities to be 5 percent per year, and the trading cost per sale or purchase of marketable securities to be $210 per transaction. What will be their optimal cash return point?

A) $41,899.45

B) $45,901.75

C) $51,752.46

D) $56,780.25

95) Betty Boop has saved enough money to go back to grad school. She is planning to put the money in a money market account where it will earn 2.5 percent. If she anticipates slowly drawing the money out over the course of her time in grad school at a constant rate of $29,000 per year, but is charged a commission of $7.95 every time she sells shares, how much should she take out of the mutual fund at a time?

A) $4,589.52

B) $4,437.04

C) $4,294.65

D) $4,101.83

96) What effect does increasing the standard deviation in daily cash flows have on the cash return point in the Miller-Orr model?

A) It will cause the cash return point to increase.

B) It will cause the cash return point to decrease.

C) It has no impact on the cash return point.

D) It will cause the cash return point to first increase, then decrease.

97) What effect does decreasing the standard deviation in daily cash flows have on the cash return point in the Miller-Orr model?

A) It will cause the cash return point to increase.

B) It will cause the cash return point to decrease.

C) It has no impact on the cash return point.

D) It will cause the cash return point to first decrease, then increase.

98) Which of the following actions will cause a firm's net working capital to increase?

A) The firm uses more trade credit.

B) The firm increases its inventory in anticipation of seasonal sales.

C) The firm pays off a short-term bank loan with cash.

D) All of these choices are correct.

99) Which of the following actions will cause a firm's net working capital to decrease?

A) The firm relaxes its credit policy.

B) The firm increases its usage of accruals.

C) The firm pays off a short-term bank loan with cash.

D) None of the options will cause a firm's net working capital to decrease.

100) Imagine a firm has a temporary surplus of cash meant to fund an expansion project in the next nine months. Which of the following statements is correct?

A) The firm will probably want to invest this in preferred stock.

B) The firm will probably want to invest this surplus in U.S. Treasury bonds.

C) The firm will probably want to invest this surplus in U.S. Treasury bills.

D) The firm will probably want to invest this surplus in whichever security yields the highest return.

101) Why do firms offer customers discounts for paying early?

A) If customers pay early, the firm increases the likelihood of being paid.

B) If customers pay early, the firm's cash cycle is shortened.

C) If customers pay early, the firm improves its credit policy.

D) All of these choices are correct.

102) What is the difference between a lockbox system and concentration banking?

A) In concentration banking, both physical collection and processing take place close to the customer but in a lockbox system, neither the collections nor processing take place close to the customer.

B) In a lockbox system, customers' payments are physically collected close to them and much of the processing takes place close to the bank, but in concentration banking both physical collection and processing take place close to the bank.

C) Concentration banking involves using several banks to fund a large loan and lockbox systems deal with the ability to speed up collections.

D) None of the options.

103) All of the following are different techniques that can be used to help firms reduce collection float EXCEPT

A) using drafts.

B) using wire transfers.

C) using concentration banking.

D) using a lockbox system.

104) All of the following are the different types of float the firm may experience in its collections EXCEPT

A) mail float.

B) availability float.

C) check kiting float.

D) processing float.

105) If a firm starts selling its accounts receivable to a factor, how will the firm's cash cycle change?

A) The firm will increase its cash cycle since it will now have to wait longer for payment.

B) The firm will decrease its cash cycle since accounts receivable is reduced.

C) Depending on conditions, the cash cycle could either increase or decrease.

D) There will be no change.

106) If demand for a firm's products suddenly slows down so that inventory increases while sales decrease, how will the firm's needs for net working capital react?

A) Net working capital would increase.

B) Net working capital would decrease.

C) There would be no change in net working capital.

D) Net working capital would first decrease, then increase slowly over time.

107) If demand for a firm's products suddenly increases so that inventory decreases while sales increase, how will the firm's needs for net working capital react?

A) Net working capital would increase.

B) Net working capital would decrease.

C) There would be no change in net working capital.

D) Net working capital would first decrease, then increase slowly over time.

108) Which of the following is the best description of the operating cycle?

A) The length of time that it takes to convert raw materials into inventory

B) The length of time that it takes to convert raw materials into accounts receivable

C) The length of time to acquire raw materials and receive payment for them when sold

D) None of the options

109) When the firm finances the seasonally adjusted average level of asset demand with long-term debt and equity, the firm is said to follow a

A) seasonal-dependent financing policy.

B) relaxed financing policy.

C) restricted financing policy.

D) compromise financing policy.

110) Why would a firm ever use short-term debt to finance permanent current assets?

A) This would be illogical and is rarely observed.

B) This would occur if short-term rates were much lower than long-term rates.

C) This would only occur if the managers were very conservative.

D) None of the options.

111) Everything else held constant, will an increase in the amount of inventory on hand increase or decrease the firm's profitability?

A) Decrease the profitability.

B) Increase the profitability.

C) It could either increase or decrease the profitability depending on net profit margins.

D) It could either increase or decrease the profitability depending on the debt ratio.

112) If a firm's inventory ratio increases, what will happen to the firm's cash cycle?

A) It will increase.

B) It will decrease.

C) It will increase and then slowly decrease back to the initial level.

D) It will decrease and then slowly increase back to the initial level.

113) All of the following will result in an increase in net working capital EXCEPT

A) an increase in inventory.

B) a decrease in accounts payable.

C) an increase in cash.

D) an increase in accruals.

114) If a firm's inventory ratio increases, what will happen to the firm's operating cycle?

A) It will increase.

B) It will decrease.

C) It will increase and then slowly decrease back to the initial level.

D) It will decrease and then slowly increase back to the initial level.

115) A firm wants to reduce its cash cycle. Which of the following actions will reduce its cash cycle?

A) The firm reduces its Days' sales outstanding.

B) The firm increases its inventory.

C) The firm reduces its accounts payable.

D) All of these choices are correct.

116) If the firm wants to identify the percentage of accounts receivable that are over 90 days old, the firm should prepare

A) a detailed analysis of accounts receivable.

B) an aging schedule.

C) a credit analysis.

D) an analysis of the cash cycle.

117) The financing policy that will result in investing in marketable securities when asset requirements are low is referred to as

A) compromise financing.

B) restrictive financing.

C) flexible financing.

D) none of the options.

118) The optimal cash replenishment level will increase with all of the following changes EXCEPT

A) the transaction cost decreases.

B) the annual demand for cash increases.

C) the interest rate decreases.

D) All of these choices are correct.

119) The optimal cash replenishment level will decrease with all of the following changes EXCEPT

A) the transaction cost decreases.

B) the annual demand for cash decreases.

C) the interest rate decreases.

D) All of these choices are correct.

120) The operating cycle will increase with all of the following changes EXCEPT

A) the cost of goods sold increases.

B) the level of accounts receivable increases.

C) the level of inventory increases.

D) All of these choices are correct.

121) The operating cycle will decrease with all of the following changes EXCEPT

A) the cost of goods sold increases.

B) the level of credit sales increases.

C) the level of inventory decreases.

D) All of these choices are correct.

122) Safety stock is referred to as the

A) excess amounts of fixed assets kept on hand to meet unexpected shocks in demand.

B) excess amounts of accruals used to fund short-term demands for cash.

C) excess amounts of a current asset kept on hand to meet unexpected shocks in demand.

D) none of the options.

123) All of the following are examples of carrying costs EXCEPT

A) rental payments on storage facilities where inventory is maintained.

B) the lost sale if the company runs out of a particular model.

C) the opportunity costs associated with having capital tied up in current assets instead of more productive fixed assets.

D) All of these choices are correct.

124) All of the following are examples of carrying costs EXCEPT

A) rental payments on buildings where the business is located.

B) maintenance costs on the inventory.

C) the opportunity costs associated with having capital tied up in current assets instead of more productive fixed assets.

D) All of these choices are correct.

125) Which of the following will decrease the operating cycle?

A) The cash cycle increases.

B) The days' sales in inventory decreases by three days but the average collection period increases by two days.

C) The average payment period increases.

D) All of these choices are correct.

126) Which of the following statements regarding operating cycles are true?

A) The firm's cash cycle is the portion of the operating cycle that the firm must finance.

B) Is the time required to acquire raw materials and to produce, sell, and receive payment for the finished goods.

C) The firm's cash cycle is the operating cycle minus the average payment period.

D) all of the above

127) Which of the following is not a basic element of Kaizen?

A) teamwork

B) personal discipline

C) improved moral

D) flexible work schedules

128) Carrying costs are associated with having current assets and fall into which general category?

A) The opportunity costs associated with having capital tied up in current assets instead of more productive fixed assets.

B) Explicit costs necessary to maintain the value of current assets.

C) both a and b

D) neither a or b

129) Which of the following will increase the operating cycle?

A) The cash cycle decreases by one day but the average payment period increases by two and a half days.

B) The days' sales in inventory decreases by one day but the average collection period increases by two days.

C) COGS stays the same but inventory increases.

D) All of these choices are correct.

130) Inventory loans that firms use to purchase inventory can include:

A) blanket inventory liens

B) trust receipts

C) field warehousing financing

D) all of the above

131) ________ is a cheap source of funds for the lender and represent opportunity costs for borrowing firms.

A) compensating balances

B) transaction facilitation

C) investment opportunities

D) cash account

132) Which is not one of the five C's in credit analysis?

A) collection

B) character

C) capital

D) collateral

133) "The net amount of current assets that the firm has to fund, above and beyond those that someone else funds for them" is referred to as

A) net working capital.

B) excess capacity.

C) safety stock.

D) unfunded assets.

134) If a firm has a cash cycle of 8 days and an operating cycle of 39 days, what is its average payment period?

A) 47 days

B) 39 days

C) 31 days

D) 8 days

135) If a firm has a cash cycle of 55 days and an operating cycle of 150 days, what is its payables turnover?

A) 9.50

B) 6.64

C) 3.84

D) 2.60

136) If a firm has a cash cycle of 30 days and an operating cycle of 92 days, what is its average payment period?

A) 92 days

B) 62 days

C) 34 days

D) 30 days

137) If a firm has a cash cycle of 18 days and an operating cycle of 34 days, what is its payables turnover?

A) 16.00

B) 20.28

C) 22.81

D) 34.00

138) If a firm has a cash cycle of 32 days and an operating cycle of 52 days, what is its payables turnover?

A) 7.02

B) 11.41

C) 18.25

D) 20.00

139) Suppose that Professional Photography has annual sales of $900,000, cost of goods sold of $450,000, average inventories of $5,000, average accounts receivable of $40,000, and an average accounts payable balance of $20,000. Assuming that all of Professional's sales are on credit, what will be the firm's cash cycle?

A) 4.06 days

B) 12.17 days

C) 18.25 days

D) 36.50 days

140) What must the rate be less than to be worth it to incur a compensating balance of $2,000 in order to get a 2 percent lower interest rate on a one-year, pure discount loan of $50,000?

A) The rate must be less than 48 percent.

B) The rate must be greater than 48 percent.

C) The rate must be greater than −48 percent.

D) The rate must be less than −48 percent.

141) CJ Enterprises estimates that it takes, on average, three days for their customers' payments to reach them, one day for the payments to be processed and deposited by their bookkeeping department, and two more days for the check to clear once they're deposited. What is their collection float?

A) 6 days

B) 5 days

C) 4 days

D) 3 days

142) PB&J Company has sales of $900,000 and cost of goods sold of $450,000. The firm had a beginning inventory of $70,000 and an ending inventory of $65,000. What is the length of the days' sales in inventory?

A) 56.78 days

B) 54.75 days

C) 52.72 days

D) 26.36 days

143) BK Industries has sales of $500,000 and cost of goods sold of $230,000. The firm had a beginning inventory of $10,000 and an ending inventory of $15,000. What is the length of the days' sales in inventory?

A) 10.95 days

B) 15.87 days

C) 19.84 days

D) 23.80 days