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ch 21 corporate finance

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b
Which of the following will cause an increase in net working capital, other things held constant?

a. A cash dividend is declared and paid.
b. Merchandise is sold at a profit, but the sale is on credit.
c. Long-term bonds are retired with the proceeds of a preferred stock issue.
d. Missing inventory is written off against retained earnings.
e. Cash is used to buy marketable securities
e
Firms generally choose to finance temporary current operating assets with short-term debt because

a. short-term interest rates have traditionally been more stable than long-term interest rates.
b. 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.
c. the yield curve is normally downward sloping.
d. short-term debt has a higher cost than equity capital.
e. 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.
a
Which of the following actions should Reece Windows take if it wants to reduce its cash conversion cycle?

a. Take steps to reduce the DSO.
b. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
c. Sell common stock to retire long-term bonds.
d. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
e. Increase average inventory without increasing sales
a
Which of the following statements is CORRECT?

a. 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.
b. 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.
c. Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.
d. 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.
e. Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.
c
Other things held constant, which of the following would tend to reduce the cash conversion cycle?

a. Place larger orders for raw materials to take advantage of price breaks.
b. Take all discounts that are offered.
c. Continue to take all discounts that are offered and pay on the net date.
d. Offer longer payment terms to customers.
e. Carry a constant amount of receivables as sales decline
e
Which of the following actions would be likely to shorten the cash conversion cycle?

a. Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
b. Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
c. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
d. Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
e. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
a
Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?

a. Depreciation.
b. Cumulative cash.
c. Repurchases of common stock.
d. Payment for plant construction.
e. Payments lags.
e
Which of the following statements concerning the cash budget is CORRECT?

a. Cash budgets do not include financial items such as interest and dividend payments.
b. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
c. Changes that affect the DSO do not affect the cash budget.
d. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.
e. Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax payments.
a
Which of the following items should a company report directly in its monthly cash budget?

a. Cash proceeds from selling one of its divisions.
b. Accrued interest on zero coupon bonds that it issued.
c. New shares issued in a stock split.
d. New shares issued in a stock dividend.
e. Its monthly depreciation expense.
d
Which of the following statements is CORRECT?

a. The cash budget and the capital budget are developed separately, and although they are both important to the firm, one does not affect the other.
b. Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.
c. The target cash balance should be set such that it need not be adjusted for seasonal patterns and unanticipated fluctuations in receipts, although it should be changed to reflect long-term changes in the firm's operations.
d. The typical cash budget reflects interest paid on loans as well as income from the investment of surplus cash. These numbers, as well as other items on the cash budget, are expected values; hence, actual results might vary from the budgeted amounts.
e. Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are used for actual
a
Which of the following statements is CORRECT?

a. Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
b. Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.
c. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
d. Commercial paper is typically offered at a long-term maturity of at least five years.
e. Trade credit is provided only to relatively large, strong firms
e
Which of the following statements is NOT CORRECT?

a. Accruals are "free" in the sense that no explicit interest is paid on these funds.
b. A conservative approach to working capital management will result in most, if not all, permanent current operating assets being financed with long-term capital.
c. The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.
d. Bank loans generally carry a higher interest rate than commercial paper.
e. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
e
Which of the following statements is CORRECT?

a. Conservative firms generally use no short-term debt and thus have zero current liabilities.
b. A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt.
c. If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
d. If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.
e. Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk.
c
.) Working capital policy C S Answer: c MEDIUM
. Which of the following statements is NOT CORRECT?

a. Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
b. The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
c. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60.
d. Managing working capital is important because it influences financing decisions and the firm's profitability.
e. A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.
a
Which of the following statements is CORRECT?

a. If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget.
b. Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales.
c. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60.
d. If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August.
e. Depreciation is included in the estimate of cash flows (Cash flow = Net income = Depreciation); hence depreciation is set forth on a separate line in the cash budget.
b
Which of the following statements is CORRECT?

a. A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.
b. If a company receives trade credit under terms of 2/10 net 30, this implies that the company has 10 days of free trade credit.
c. One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget.
d. If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high.
e. Accruals are an expensive but commonly used way to finance working capital.
e
Albrecht Inc. is a no-growth firm whose 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
d
Brothers Breads has the following data. What is the firm's cash conversion cycle?

Inventory conversion period = 50 days
Average collection period = 17 days
Payables deferral period = 25 days

a. 31 days
b. 34 days
c. 38 days
d. 42 days
e. 46 days
b
Fireside Inc. has the following data. What is the firm's cash conversion cycle?

Inventory conversion period = 38 days
Average collection period = 19 days
Payables deferral period = 20 days

a. 33 days
b. 37 days
c. 41 days
d. 45 days
e. 49 days
b
Whaley & Whaley has the following data. What is the firm's cash conversion cycle?

Inventory conversion period = 41 days
Average collection period = 31 days
Payables deferral period = 38 days

a. 31 days
b. 34 days
c. 37 days
d. 41 days
e. 45 days
d
Mark's Manufacturing's average age of accounts receivable is 45 days, the average age of accounts payable is 40 days, and the average age of inventory is 69 days. Assuming a 365-day year, what is the length of its cash conversion cycle?

a. 63 days
b. 67 days
c. 70 days
d. 74 days
e. 78 days
d
Baltimore Baking is preparing its cash budget and 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
c
Buchholz Corporation follows a moderate current asset investment policy, but it is now considering a change, perhaps to a restricted or maybe to a relaxed policy. The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%. With a restricted policy, current assets will be 15% of sales, while under a relaxed policy they will be 25% of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?

a. 4.25%
b. 4.73%
c. 5.25%
d. 5.78%
e. 6.35%
c
Data on Nathan Enterprises for the most recent year are shown below, along with the days sales outstanding of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year.

Sales $110,000
Accounts receivable $16,000
Days sales outstanding (DSO) 53.09
Benchmark days sales outstanding (DSO) 20.00

a. $ 8,078
b. $ 8,975
c. $ 9,973
d. $10,970
e. $12,067
d
Thornton Universal Sales's cost of goods sold (COGS) average $2,000,000 per month, and it keeps inventory equal to 50% of its monthly COGS on hand at all times. Using a 365-day year, what is its inventory conversion period?

a. 11.7 days
b. 13.0 days
c. 14.4 days
d. 15.2 days
e. 16.7 days
e
Data on Liu Inc. for the most recent year are shown below, along with the inventory conversion period (ICP) of the firms against which it benchmarks. The firm's new CFO believes that the company could reduce its inventory enough to reduce its ICP to the benchmarks' average. If this were done, by how much would inventories decline? Use a 365-day year.

Cost of goods sold = $85,000
Inventory = $20,000
Inventory conversion period (ICP) = 85.88
Benchmark inventory conversion period (ICP) = 38.00

a. $ 7,316
b. $ 8,129
c. $ 9,032
d. $10,036
e. $11,151
e
Data on Mertz Co. for the most recent year are shown below, along with the payables deferral period (PDP) for the firms against which it benchmarks. The firm's new CFO believes that the company could delay payments enough to increase its PDP to the benchmarks' average. If this were done, by how much would payables increase? Use a 365-day year.

Cost of goods sold = $75,000
Payables = $5,000
Payables deferral period (PDP) = 24.33
Benchmark payables deferral period = 30.00

a. $ 764
b. $ 849
c. $ 943
d. $1,048
e. $1,164
e
Marshall Inc. recently hired your consulting firm to improve the company's performance. It has been 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 = $75,000
Annual sales = $600,000
Annual cost of goods sold = $360,000
Average accounts receivable = $160,000
Average accounts payable = $25,000

a. 120.6 days
b. 126.9 days
c. 133.6 days
d. 140.6 days
e. 148.0 days
d
Frosty Corporation has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

Annual sales = $45,000
Annual cost of goods sold = $31,500
Inventory = $4,000
Accounts receivable = $2,000
Accounts payable = $2,400

a. 25 days
b. 28 days
c. 31 days
d. 35 days
e. 38 days
d
Shulman Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

Annual sales = $45,000
Annual cost of goods sold = $30,000
Inventory = $4,500
Accounts receivable = $1,800
Accounts payable = $2,500

a. 28 days
b. 32 days
c. 35 days
d. 39 days
e. 43 days
b
Whitson Co. is looking for ways to shorten its cash conversion cycle. It has annual sales of $36,500,000, or $100,000 a day on a 365-day basis. The firm's cost of goods sold is 75% of sales. On average, the company has $9,000,000 in inventory and $8,000,000 in accounts receivable. Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable. She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days. What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

a. -26 days
b. -22 days
c. -18 days
d. -14 days
e. -11 days
e
Pascarella Inc. is revising its payables policy. It has annual sales of $50,735,000, an average inventory level of $15,012,000, and average accounts receivable of $10,008,000. The firm's cost of goods sold is 85% of sales. The company makes all purchases on credit and has always paid on the 30th day. However, it now plans to take full advantage of trade credit and to pay its suppliers on the 40th day. The CFO also believes that sales can be maintained at the existing level but inventory can be lowered by $1,946,000 and accounts receivable by $1,946,000. What will be the net change in the cash conversion cycle, assuming a 365-day year?

a. -26.6 days
b. -29.5 days
c. -32.8 days
d. -36.4 days
e. -40.5 days
c
Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year). The company carries average inventory of $750,000. Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion period. The firm buys on terms of net 30 days, and it pays on time. The CFO believes he can reduce the average inventory to $647,260 with no effect on sales. By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

a. $123,630
b. $130,137
c. $136,986
d. $143,836
e. $151,027
c
Famous Farm's DSO is 50 days (on a 365-day basis), accounts receivable are $100 million, and its balance sheet shows inventory of $125 million. What is the inventory turnover ratio?

a. 4.73
b. 5.26
c. 5.84
d. 6.42
e. 7.07
b
During the coming year, Gold & Gold wants to increase its free cash flow by $180 million, which should result in a higher EVA and stock price. The CFO has made these projections for the upcoming year:

• EBIT is projected to equal $850 million.
• Gross capital expenditures are expected to total to $360 million versus depreciation of $120 million, so its net capital expenditures should total $240 million.
• The tax rate is 40%.
• There will be no changes in cash or marketable securities, nor will there be any changes in notes payable or accruals.

What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

a. $ 72
b. $ 90
c. $108
d. $130
e. $156