438743051 14 x11 Financial Management B Working Capital Management PDF

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(B. Working Capital Management)B. WORKING CAPITAL MANAGEMENTTHEORIES:Working capital management Working capital management involves investment and financing decisions related to: A. plant and equipment and current liabilities. B. current assets and capital structure. C. current assets and current li...

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Financial Management (B. Working Capital Management)

B. WORKING CAPITAL MANAGEMENT

A. B. C. D.

THEORIES: Working capital management 1. Working capital management involves investment and financing decisions related to: A. plant and equipment and current liabilities. B. current assets and capital structure. C. current assets and current liabilities. D. sales and credit.

Increase in the ratio of current liabilities to noncurrent liabilities. Increase in the operating cycle. Decrease in the operating cycle. Increase in the ratio of current assets to current liabilities.

Moderate 3. Short-term financing plans with high liquidity have: A. high return and high risk B. moderate return and moderate risk C. low profit and low risk D. none of the above

17. The goal of managing working capital, such as inventory, should be to minimize the: A. costs of carrying inventory B. opportunity cost of capital C. aggregate of carrying and shortage costs D. amount of spoilage or pilferage

Temporary & Permanent working capital 4. Temporary working capital supports A. the cash needs of the company. B. payment of long term debt.

C. acquisition of capital equipment. D. seasonal peaks.

Working capital financing policy Aggressive 5. Zap Company follows an aggressive financing policy in its working capital management while Zing Corporation follows a conservative financing policy. Which one of the following statements is correct? A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of shortterm debt to total debt. B. Zap has a low current ratio while Zing has a high current ratio. C. Zap has less liquidity risk while Zing has more liquidity risk. D. Zap finances short-term assets with long-term debt while Zing finances short-term assets with short-term debt.

Cash Management Motives for holding cash 7. The transaction motive for holding cash is for: A. a safety cushion C. compensating balance requirements B. daily operating requirements D. none of the above

6. Which of the following would increase risk? A. Raise the level of working capital. B. Decrease the amount of inventory by formulating an effective inventory policy. C. Increase the amount of short-term borrowing. D. Increase the amount of equity financing.

Cash conversion cyc le 9. The length of time between payment for inventory and the collection of cash is referred to as: A. payables deferral period C. operating cycle B. receivables conversion period D. cash conversion cycle

Float 8. The difference between the cash balance on the firm's books and the balance shown on the bank statement is called: A, the compensating balance C. a safety cushion B. float D. none of the above

10. As a firm's cash conversion cycle increases, the firm: A. becomes less profitable B. increases its investment in working capital C. reduces its accounts payable period

Conservative 2. As a company becomes more conservative with respect to working capital policy, it would tend to have a(n) 636

Financial Management (B. Working Capital Management)

D. Increases by the number of units of the safety stock.

D. incurs more shortage costs

19. Which of the following statements is correct for a firm that currently has total costs of carrying and ordering inventory that are 50% higher than total carrying costs? A. Current order size is greater than optimal B. Current order size is less than optimal C. Per unit carrying costs are too high D. The optimal order size is currently being used

11. The longer the firm's accounts payable period, the: A. longer the firm's cash conversion cycle is. B. shorter the firm's inventory period is. C. more the delay in the accounts receivable period. D. less the firm must invest in working capital. 12. The average length of time a peso is tied up in current asset is called the: A. net working capital. C. receivables conversion period. B. inventory conversion period. D. cash conversion period.

Trade credit 20. With credit terms of 3/8, n/30, what is the customer’s payment decision date? A. Three days after the invoice is received. B. The 8th day is the customer’s decision date. C. Anytime during the period, 8th to the 30th. D. The 30th day is the primary decision date.

Receivables management 13. All of these factors are used in credit policy administration except: A. credit standards C. peso amount of receivables B. terms of trade D. collection policy

PROBLEMS Working capital financing i. Casie Company turns out 200 calculators a day at a cost of P250 per calculator for materials and variable conversion cost. It takes the firm 18 days to convert raw materials into calculator. Casie’s usual credit terms extended to its customers is 30 days, and the firm generally pays its suppliers in 20 days. If the foregoing cycles are constant, what amount of working capital must Casie Company finance? A. P1,400,000 C. P 900,000 B. P2,400,000 D. P1,800,000

14. Which of the following statements is most correct? If a company lowers its DSO, but no changes occur in sales or operating costs, then: A. the company might well end up with a higher debt ratio. B. the company might well end up with a lower debt ratio. C. the company would probably end up with a higher ROE. D. the company's total asset turnover ratio would probably decline. 15. All but which of the following is considered in determining credit policy? C. Accounts payable deferral period A. Credit standards B. Credit limits D. Collection efforts Inventory management 16. The use of safety stock by a firm will: A. reduce inventory costs B. increase inventory costs

Cash conversion cycle ii. Luke Company has an inventory conversion period of 60 days, a receivables conversion period of 45 days, and a payments cycle of 30 days. What is the length of the firm’s cash conversion cycle? A. 90 days C. 54 days B. 75 days D. 105 days

C. have no effect on inventory costs D. none of the above

18. When a specified level of safety stock is carried for an item in inventory, the average inventory level for that item A. decreases by the amount of the safety stock. B. is one-half the level of the safety stock. C. Increases by one-half the amount of the safety stock.

iii. The Spades Company has an inventory conversion period of 75 days, a receivables conversion period of 38 days, and a payable payment period of 30 days. What is the length of the firm’s cash conversion cycle? A. 83 days C. 67 days 637

Financial Management (B. Working Capital Management)

B. 113 days

B. P1,912.50

D. 45 days

D. P 188.55

iv. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its average daily sales are P100,000. The company has P1.5 million in accounts payable. Its average daily purchases are P50,000. What is the length of the company’s cash conversion period? A. 50 days C. 30 days D. 40 days B. 20 days

Annual savings ix. What are the expected annual savings from a lock-box system that collects 150 checks per day averaging P500 each, and reduces mailing and processing times by 2.5 and 1.5 days respectively, if the annual interest rate is 7%? A. P 5,250 C. P 21,000 B. P 13,125 D. P300,000

Days inventory v. What is the inventory period for a firm with an annual cost of goods sold of P8 million, P1.5 million in average inventory, and a cash conversion cycle of 75 days? A. 6.56 days C. 52.60 days D. 67.50 days B. 18.75 days

Receivables management Carrying cost x. The Camp Company has an inventory conversion period of 60 days, a receivable conversion period of 30 days, and a payable payment period of 45 days. The Camp’s variable cost ratio is 60 percent and annual fixed costs of P600,000. The current cost of capital for Camp is 12%. If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s carrying cost on accounts receivable, using 360 days year? C. P 20,250 A. P281,250 B. P168,750 D. P 56,250

vi. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its average daily sales are P100,000. The company has P1.5 million in accounts payable. Its average daily purchases are P50,000. What is the length of the company’s inventory conversion period? A. 50 days C. 120 days B. 90 days D. 40 days

Average receivables xi. Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000. Forty percent of the customers pay on the tenth day and take discounts; the other 60 percent pay, on average, 45 days after their purchases. What is the average amount of receivables? A. P70,000 C. P77,200 B. P77,500 D. P67,500

Cash management Economic conversion quantity (ECQ) vii. Simile Inc. has a total annual cash requirement of P9,075,000 which are to be paid uniformly. Simile has the opportunity to invest the money at 24% per annum. The company spends, on the average, P40 for every cash conversion to marketable securities. What is the optimal cash conversion size? A. P60,000 C. P45,000 B. P55,000 D. P72,500

xii. Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% are expected to be credit sales at terms of n/30. Palm estimates that a proposed relaxation of credit standards will increase credit sales by 20% and increase the average collection period from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit to standards will result in an expected increase in the average accounts receivable balance of A. P 540,000 C. P2,700,000 D. P1,620,000 B. P 900,000

Opportunity cost viii. Hyperbole Corporation estimates its total annual cash disbursements of P3,251,250 which are to be paid uniformly. Hyperbole has the opportunity to invest the money at 9% per annum. The company spends, on the average, P25 for every cash conversion to marketable securities and vice versa. What is the opportunity cost of keeping cash in the bank account? A. P3,825.00 C. P4,190.00

Investment in receivables xiii. Currently, La Carlota Company has annual sales of P2,500,000. Its average collection 638

Financial Management (B. Working Capital Management)

xvii. What is the economic order quantity for the following inventory policy: A firm sells 32,000 bags of premium sugar per year. The cost per order is P200 and the firm experiences a carrying cost of P0.80 per bag. A. 2,000 bags C. 8,000 bags B. 4,000 bags D. 16,000 bags

period is 45 days, and bad debts are 3 percent of sales. The credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to 1.5 percent of total sales, and the average collection period would fall to 30 days. However, sales would also fall by an estimated P300,000 annually. Variable costs are 75 percent of sales and the cost of carrying receivables is 10 percent. Assume a tax rate of 40 percent and 360 days per year. What would be the decrease in investment in receivables if the change were made? C. P 96,875 A. P 9,688 B. P 12,988 D. P129,975

Annual demand xviii.Marsman Co. has determined the following for a given year: Economic order quantity (standard order size) Total cost to place purchase orders for the year Cost to place one purchase order Cost to carry one unit for one year What is Marsman’s estimated annual usage in units? A. 1,000,000 C. 500,000 B. 2,000,000 D. 1,500,000

Comprehensive Question Nos. 14 through 16 are based on the following data: Sonata Company is considering changing its credit terms from 2/15, net 30 to 3/10, net 30 in order to speed collections. At present, 40 percent of Sonata Company‘s customers take the 2 percent discount. Under the new term, discount customers are expected to rise to 50 percent. Regardless of the credit terms, half of the customers who do not take the discount are expected to pay on time, whereas the remainder will pay 10 days late. The change does not involve a relaxation of credit standards; therefore bad debt losses are not expected to rise above their present 2 percent level. However, the more generous cash discount terms are expected to increase sales from P2 million to P2.6 million per year. Sonata Company’s variable cost ratio is 75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firm’s income tax rate is 40 percent.

5,000 units P40,000 P 100 P 4

Required annual return on investment xix. BIBO Company is a distributor of videotapes. Pirate Mart is a local retail outlet which sells blank and recorded videos. Pirate Mart purchases tapes from BIBO Company at P300.00 per tape; tapes are shipped in packages of 20. BIBO Company pays all incoming freight, and Pirate Mart does not inspect the tapes due to BIBO Company's reputation for high quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes per week. Pirate Mart earns 20% on its cash investments. The purchase-order lead time is two weeks. The following cost data are available: Relevant ordering costs per purchase order P80 P90.50 Carrying costs per package per year 3 Relevant insurance, materials handling, breakage, etc., per year 2 P 4.50 What is the required annual return on investment per package? C. P1,200 A. P6,000 B. P 250 D. P 600

xiv. What are the days sales outstanding (DSO) before and after the change of credit policy? A. 27.0 days and 22.5 days, respectively C. 22.5 days and 21.5 days, respectively B. 22.5 days and 27.0 days, respectively D. 21.5 days and 22.5 days respectively

xv. The incremental carrying cost on receivable is A. P 843.75 C. P 643.75 B. P8,889.00 D. P6,667.00

Order quantity xx. For Raw Material L12, a company maintains a safety stock of 5,000 pounds. Its average inventory (taking into account the safety stock) is 12,000 pounds. What is the apparent order quantity? A. 18,000 lbs. C. 14,000 lbs. B. 6,000 lbs. D. 24,000 lbs

xvi. The incremental after tax profit from the change in credit terms is A. P68,493 C. P60,615 B. P65,640 D. P57,615 Inventory management EOQ 639

Financial Management (B. Working Capital Management)

A. P19,550 B. P18,750

Optimal safety stock level xxi. Each stockout of a product sold by Arnis Co. costs P1,750 per occurrence. The company’s carrying cost per unit of inventory is P5 per year, and the company orders 1,500 units of product 20 times a year at a cost of P100 per order. The probabilities of a stockout at various levels of safety stock are: Units of Safety Stock Probability of Stockout 0. 0.50 100. 0.30 200. 0.14 300. 0.05 400. 0.01 The optimal safety stock level for the company based on the units of safety stock level above is A. 200 units C. 100 units B. 300 units D. 400 units

C. P38,300 D. P62,500

Maximum interest rate xxiv. Narra Company is considering a switch to level production. Cost efficiencies will occur under level production and after tax cost would decline by P70,000 but inventory would increase from P1,000,000 to P1,800,000. Narra would have to finance the extra inventory at a cost of 10.5 percent. What is the maximum interest rate that makes level production feasible? A. 7.00 percent C. 8.75 percent B. 5.83 percent D. 10.00 percent Opportunity cost xxv. Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of high selling products for the coming year. Its supplier quoted a price of P25 per zipper. Diesel planned to purchase 7,500 units per month but its supplier could not guarantee this delivery schedule. In order to ensure availability of these zippers, Diesel is considering the purchase of all these 90,000 units on January 1. Assuming Diesel can invest cash at 12%, the company’s opportunity cost of purchasing the 90,000 units at the beginning of the year is A. P127,500 C. P123,750 B. P135,000 D. P264,000

xxii. Paeng Company uses the EOQ model for inventory control. The company has an annual demand of 50,000 units for part number 6702 and has computed an optimal lot size of 6,250 units. Per-unit carrying costs and stockout costs are P9 and P4, respectively. The following data have been gathered in an attempt to determine an appropriate safety stock level: Units Short Because of Excess Number of Times Short Demand during the Lead Time Period in the last 40 Reorder Cycles 100 8 200 10 300 14 400 8 What is the optimal safety stock level? A. 100 units C. 200 units B. 300 units D. 400 units

Trade credit xxvi. If a firm is given a trade credit terms of 2/10, net 30, then the cost to the firm failing to take the discount is: C. 36.7% A. 2.0%. B. 30.0%. D. 10.0%. xxvii. The cost of discounts missed on credit terms of 2/10, n/60 is A. 2.0 percent C. 12.4 percent B. 14.9 percent D. 21.2 percent

Annual inventory costs xxiii.Durable Furniture Company uses about 200,000 yards of a particular fabric each year. The fabric costs P25 per yard. The current policy is to order the fabric four times a year. Incremental ordering costs are about P200 per order, and incremental carrying costs are about P0.75 per yard, much of which represents the opportunity cost of the funds tied up in inventory. How much total annual costs are associated with the current inventory policy?

Bank loans Discount loan xxviii. You plan to borrow P10,000 from your bank, which offers to lend you the money at a 10 percent nominal, or stated, rate on a one-year loan. What is the effective interest rate if the loan is a discount loan? A. 10.00% C. 12.45% 640

Financial Management (B. Working Capital Management)

B. 11.11%

D. 14.56%

A. P3,624 B. P1,176

Discount loan with compensating balance xxix. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10% compensating balance? Assume 360 days per year. C. 17.4% A. 20.0% B. 15.0% D. 22.2%

C. P4,800 D. P1,224

xxxiv. An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank loan for 8 percent can be arranged at any time. When should the customer pay the invoice? A. Pay on the 1st. C. Pay on the 40th B. Pay on the 10th D. Pay on the 60th

Compensating balance with interest xxx. The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual interest rate 12%. As a condition of the loan, Premiere is required to maintain a compensating balance of P300,000 in its checking account. The checking account earns interest at an annual rate of 3%. Premiere would otherwise maintain only P100,000 in its checking account for transactional purposes. Premiere’s effective interest costs of the loan is A. 12.00% C. 16.30% B. 14.25% D. 15.86%

xxxv. The Peninsula Commercial Bank and Island Corporation agreed to the following loan proposal:  Stated interest rate of 10% on a one-year discounted loan; and  15% of the loan as compensating balance on zero-interest current account to be maintained by Island Corporation with Peninsula Commercial Bank. The loan requires a net proceeds of P1.5 million. What is the principal amount of loan applied for as part of the loan agreement? A. P1,666,667 C. P1,764,706 B. P2,000,000 D. P1,125,000

Add-on xxxi. Perlas Company borrowed from a bank an amount of P1,000,000. The bank charged a 12% stated rate in an add-on arrangement, payable in 12 equal monthly installments. A. 22.15% C. 25.05% B. 24.00% D. 12.70%

i.

Financing alternative xxxii. A company has accounts payable of P5 million with terms of 2% discount within 15 days, net 30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or it can wait until the 30th day when it will receive revenues to cover the payment. If it borrows funds on the last day of the discount period in order to obtain the discount, its total cost will be C. P 75,500 less A. P 51,000 less B. P100,000 less D. P 24,500 more

Answ...