Brig FM C17 stud REV SEND PDF

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FM Brigham Ch17...

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CHAPTER 17 F

1.

Net working capital is defined as current assets divided by current liabilities

T

2.

The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.

T

3.

A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.

T

4.

F

5.

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive current asset financing strategy because of the inherent risks of using short-term financing. If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC) and cause a deterioration in its cash position.

F

6.

T

7.

F

8.

c

9.

a

10.

b

11.

d

12.

Other things held constant, if a firm "stretches" (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC). Shorter-term cash budgets (such as a daily cash budget for the next month) are generally used for actual cash control while longer-term cash budgets (such as a monthly cash budgets for the next year) are generally used for planning purposes. Inventory management is largely self-contained in the sense that very little coordination among the sales, purchasing, and production personnel is required for successful inventory management. . Other things held constant, which of the following will cause an increase in net working capital? a. Cash is used to buy marketable securities. b. A cash dividend is declared and paid. c. Merchandise is sold at a profit, but the sale is on credit. d. Long-term bonds are retired with the proceeds of a preferred stock issue. e. Missing inventory is written off against retained earnings. Firms generally choose to finance temporary current assets with short-term debt because a. matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital. b. short-term interest rates have traditionally been more stable than long-term interest rates. c. a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term. d. the yield curve is normally downward sloping. e. short-term debt has a higher cost than equity capital. . Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take? a. Increases average inventory without increasing sales. b. Take steps to reduce the DSO. c. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales. d. Sell common stock to retire long-term bonds. e. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock. A lockbox plan is a. used to protect cash, i.e., to keep it from being stolen. b. used to identify inventory safety stocks. c. used to slow down the collection of checks our firm writes. d. used to speed up the collection of checks received. e. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.

b

13.

d

14.

e

15.

Which of the following statements is CORRECT? a. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased. b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. c. If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. d. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased. e. If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt. Other things held constant, which of the following would tend to reduce the cash conversion cycle? a. Carry a constant amount of receivables as sales decline. b. Place larger orders for raw materials to take advantage of price breaks. c. Take all discounts that are offered. d. Continue to take all discounts that are offered and pay on the net date. e. Offer longer payment terms to customers. Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital? a. $260,642 b. $274,360 c. $288,800 d. $304,000 e. $320,000 Lower total asset range Upper total asset range

$320,000 $410,000

Minimum total assets = FA + Min. CA = $320,000 = LT Debt + Equity A maturity matching policy implies that fixed assets and permanent current assets are financed with longterm sources. This is its most likely level of long-term financing. d

16.

Cass & Company has the following data. What is the firm's cash conversion cycle? Inventory conversion period = Receivables collection period = Payables deferral period =

50 days 17 days 25 days

a. 31 days b. 34 days c. 38 days d. 42 days e. 46 days Inventory conversion period = Receivables collection period =

50 days 17 days

Payables deferral period =

25 days

CCC = Inv. conv. period + Rec. coll. period − Pay. def. period = 42 days b

17.

Romano Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = Receivables collection period = Payables deferral period =

38 days 19 days 20 days

a. 33 days b. 37 days c. 41 days d. 45 days e. 49 days : Inventory conversion period = Receivables collection period = Payables deferral period =

38 days 19 days 20 days

CCC = Inv. conv. period + Rec. coll. period − Pay. def. period = 37 days b

18.

Whittington Inc. has the following data. What is the firm's cash conversion cycle? Inventory conversion period = Receivables collection period = Payables deferral period =

41 days 31 days 38 days

a. 31 days b. 34 days c. 37 days d. 41 days e. 45 days Inventory conversion period = Receivables collection period = Payables deferral period =

41 days 31 days 38 days

CCC = Inv. conv. period + Rec. coll. period − Pay. def. period = 34 days d

19.

Singal Inc. is preparing its cash budget. It expects to have sales of $30,000 in January, $35,000 in February, and $35,000 in March. If 20% of sales are for cash, 40% are credit sales paid in the month after the sale, and another 40% are credit sales paid 2 months after the sale, what are the expected cash receipts for March? a. $24,057 b. $26,730 c. $29,700 d. $33,000 e. $36,300

Cash Pay 2nd month Pay 3rd month

Payments: 20% 40% 40%

Collections

January February March Total collections for month:

e

20.

Sales for Mos. $30,000 35,000 35,000

January $6,000

February $12,000 7,000

$6,000

$19,000

March $12,000 14,000 7,000 $33,000

Your consulting firm was recently hired to improve the performance of Shin-Soenen Inc, which is highly profitable but has been experiencing cash shortages due to its high growth rate. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 365-day year, what is the firm's present cash conversion cycle? Average inventory = Annual sales = Annual cost of goods sold = Average accounts receivable = Average accounts payable =

$75,000 $600,000 $360,000 $160,000 $25,000

a. 120.6 days b. 126.9 days c. 133.6 days d. 140.6 days e. 148.0 days Avg. inventory = Avg. receivables = Avg. payables =

$75,000 Annual sales = $160,000 Annual COGS = $25,000 Days in year =

Inv Conv. period = Inv/(COGS/365) + DSO = Receivables/(Sales/365) − Payables deferral = Payables/(COGS/365) Cash conversion cycle (CCC)

$600,000 $360,000 365 76.0 days 97.3 days −25.3 days 148.0 days...