Question 1

Which one of the following statements is NOT true?

Accepted Answer

A)   Companies using matching maturity 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 working capital and a portion of fixed assets are funded with short-term debt when companies use the aggressive funding strategy.
D)   Companies using a matching maturity strategy fund all working capital needs with short-term borrowing.E) None of the above
F) B) and C)

Question 2

Under the maturity matching strategy, a company funds all seasonal demands with short-term borrowing.

Accepted Answer

A) True 
 B)False

Question 3

Cost of trade credit: Senter Company sells its goods with terms of 2/10 EOM, net 30. What is the implicit cost of the trade credit?

Accepted Answer

A)   18.50%
B)   30.00%
C)   44.59%
D)   21.89%E) All of the above
F) None of the above

Question 4

Cash conversion cycle: Renald Company estimates that it takes the company 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?

Accepted Answer

A)   61 days
B)   115 days
C)   57 days
D)   46 daysE) B) and C)
F) A) and B)

Question 5

Effective interest rate: Maggie's Bistro is borrowing $375,000. The loan requires an 8 per cent compensating balance, and the effective interest rate on the loan is 10.326 per cent. What is the stated APR on this loan? Round to one decimal place.

Accepted Answer

A)   10.0%
B)   9.5%
C)   7.4%
D)   8.5%E) B) and C)
F) All of the above

Question 6

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. How many orders will the dealer need to place this year?

Accepted Answer

A)   4 orders
B)   5 orders
C)   6 orders
D)   7 ordersE) A) and B)
F) B) and D)

Question 7

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

Accepted Answer

A) True 
 B)False  False

Question 8

Which one of the following statements is NOT true?

Accepted Answer

A)   Gross working capital is the funds invested in a company's current liabilities.
B)   Net working capital (NW
C)   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.E) C) and D)
F) All of the above

Question 9

Operating cycle: 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?

Accepted Answer

A)   22 days
B)   32 days
C)   42 days
D)   None of the above.E) All of the above
F) None of the above

Question 10

The conflict between carrying costs versus shortage costs is called the working capital trade-off.

Accepted Answer

A) True 
 B)False  True

Question 11

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

Accepted Answer

A) True 
 B)False  False

Question 12

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

Accepted Answer

A)   Financial managers need to balance shortage costs against carrying costs to find an optimal strategy.
B)   If carrying costs are smaller than shortage costs, then the company will maximise value by adopting a more restrictive strategy.
C)   If shortage costs dominate carrying costs, the company will need to move toward a more flexible policy.
D)   Management will try to find the level of current assets that minimises the sum of the carrying costs and shortage costs.E) A) and B)
F) None of the above

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

The cash conversion cycle

Accepted Answer

A)   shows how long the company keeps its inventory before selling it.
B)   begins when the company invests cash to purchase the raw materials that would be used to produce the goods that the company manufactures.
C)   begins when the company uses its cash to purchase raw materials and ends when the company collects cash payments on its credit sales.
D)   estimates how long it takes on average for the company to collect its outstanding accounts receivable balance.E) B) and D)
F) A) and B)

Question 16

The ageing schedule shows the breakdown of the company's accounts receivable by their date of sale.

Accepted Answer

A) True 
 B)False

Question 17

Effective interest rate: Serengeti Travels has borrowed $50,000 at a stated APR of 8.5 per cent. The loan calls for a compensating balance of 8 per cent. What is the effective interest rate for this company? (Please refer to section 14.7 'Short term bank loan')

Accepted Answer

A)   9.24%
B)   8.50%
C)   8.00%
D)   16.50%E) B) and C)
F) A) and C)

Question 18

Net working capital is important because it is a measure of liquidity and represents the net short-term investment the company keeps in the business.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A)   The strategy promotes a liberal trade credit policy for customers.
B)   The flexible strategy calls for management to invest large amounts in cash, marketable securities, and inventory.
C)   The flexible strategy is perceived to 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.E) A) and C)
F) None of the above

Exam 14: Working Capital Management

Which one of the following statements is NOT true?

Correct Answer
verified

Under the maturity matching strategy, a company funds all seasonal demands with short-term borrowing.

Correct Answer
verified

Cost of trade credit: Senter Company sells its goods with terms of 2/10 EOM, net 30. What is the implicit cost of the trade credit?

Correct Answer
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Cash conversion cycle: Renald Company estimates that it takes the company 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?

Correct Answer
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Effective interest rate: Maggie's Bistro is borrowing $375,000. The loan requires an 8 per cent compensating balance, and the effective interest rate on the loan is 10.326 per cent. What is the stated APR on this loan? Round to one decimal place.

Correct Answer
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Correct Answer
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The appropriate mix of current assets is not a working capital management decision.

Correct Answer
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False

Which one of the following statements is NOT true?

Correct Answer
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Operating cycle: 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?

Correct Answer
verified

The conflict between carrying costs versus shortage costs is called the working capital trade-off.

Correct Answer
verified
True

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

Correct Answer
verified
False

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

Correct Answer
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A company that employs just-in-time management has to increase its investment in working capital.

Correct Answer
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The flexible strategy is perceived be a high-risk and low-return course of action for management to follow.

Correct Answer
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The cash conversion cycle

Correct Answer
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The ageing schedule shows the breakdown of the company's accounts receivable by their date of sale.

Correct Answer
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Effective interest rate: Serengeti Travels has borrowed $50,000 at a stated APR of 8.5 per cent. The loan calls for a compensating balance of 8 per cent. What is the effective interest rate for this company? (Please refer to section 14.7 'Short term bank loan')

Correct Answer
verified

Net working capital is important because it is a measure of liquidity and represents the net short-term investment the company keeps in the business.

Correct Answer
verified

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

Correct Answer
verified

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

Correct Answer
verified

Exam 14: Working Capital Management

Which one of the following statements is NOT true?

Correct AnswerverifiedShow Answer

Under the maturity matching strategy, a company funds all seasonal demands with short-term borrowing.

Correct AnswerverifiedShow Answer

Cost of trade credit: Senter Company sells its goods with terms of 2/10 EOM, net 30. What is the implicit cost of the trade credit?

Correct AnswerverifiedShow Answer

Cash conversion cycle: Renald Company estimates that it takes the company 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?

Correct AnswerverifiedShow Answer

Effective interest rate: Maggie's Bistro is borrowing $375,000. The loan requires an 8 per cent compensating balance, and the effective interest rate on the loan is 10.326 per cent. What is the stated APR on this loan? Round to one decimal place.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedFalse

Which one of the following statements is NOT true?

Correct AnswerverifiedShow Answer

Operating cycle: 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?

Correct AnswerverifiedShow Answer

The conflict between carrying costs versus shortage costs is called the working capital trade-off.

Correct AnswerverifiedTrue

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

Correct AnswerverifiedFalse

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The cash conversion cycle

Correct AnswerverifiedShow Answer

The ageing schedule shows the breakdown of the company's accounts receivable by their date of sale.

Correct AnswerverifiedShow Answer

Effective interest rate: Serengeti Travels has borrowed $50,000 at a stated APR of 8.5 per cent. The loan calls for a compensating balance of 8 per cent. What is the effective interest rate for this company? (Please refer to section 14.7 'Short term bank loan')

Correct AnswerverifiedShow Answer

Net working capital is important because it is a measure of liquidity and represents the net short-term investment the company keeps in the business.

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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False

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True

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False

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