Chapter 15: Working Capital Management
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54. Because money has time value, a cash sale is always more profitable than a credit sale.
a. True
b. False
55. If a firm sells on terms of 2/10, net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the
30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts.
a. True
b. False
56. If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some
money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on
the balance sheet.
a. True
b. False
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59. The prime rate charged by big money center banks at any one time is likely to vary greatly (for example, as much as 2
to 4 percentage points) across banks due to banks’ ability to differentiate themselves and because different banks operate
in different parts of the country.
a. True
b. False
60. A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the
committed funds to compensate the bank for the commitment to extend those funds.
a. True
b. False
61. 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.
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c. Credit standards.
d. Cash discounts.
e. Payments deferral period.
67. Swim Suits Unlimited is in a highly seasonal business, and the following summary balance sheet data show its assets
and liabilities at peak and off-peak seasons (in thousands of dollars):
Peak Off-Peak
Cash $50 $30
Marketable securities 0 20
Accounts receivable 40 20
Inventories 100 50
Net fixed assets 500 500
Total assets $690 $620
Payables and accruals $30 $10
Short-term bank debt 50 0
Long-term debt 300 300
Common equity 310 310
Total claims $690 $620
From this data we may conclude that
a. Swim Suits’ current asset financing policy calls for exactly matching asset and liability maturities.
b. Swim Suits’ current asset financing policy is relatively aggressive; that is, the company finances some of its
permanent assets with short-term discretionary debt.
c. Swim Suits follows a relatively conservative approach to current asset financing; that is, some of its short-term
needs are met by permanent capital.
d. Without income statement data, we cannot determine the aggressiveness or conservatism of the company’s current
asset financing policy.
e. Without cash flow data, we cannot determine the aggressiveness or conservatism of the company’s current asset
financing policy.
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72. Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
a. Payments lags.
b. Depreciation.
c. Cumulative cash.
d. Repurchases of common stock.
e. Payment for plant construction.
73. Which of the following statements concerning the cash budget is CORRECT?
a. Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax
payments.
b. Cash budgets do not include financial items such as interest and dividend payments.
c. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
d. Changes that affect the DSO do not affect the cash budget.
e. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing
revenues.
74. Which of the following items should a company report directly in its monthly cash budget?
a. Its monthly depreciation expense.
b. Cash proceeds from selling one of its divisions.
c. Accrued interest on zero coupon bonds that it issued.
d. New shares issued in a stock split.
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e. New shares issued in a stock dividend.
75. Which of the following statements is CORRECT?
a. Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are
used for actual cash control.
b. 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.
c. Since depreciation is a non–cash charge, it neither appears on nor has any effect on the cash budget.
d. 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.
e. 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.
76. Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable
securities?
a. The firm must make a known future payment, such as paying for a new plant that is under construction.
b. The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience
a seasonal decline.
c. The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience
seasonal increases.
d. The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
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e. The firm just won a product liability suit one of its customers had brought against it.
77. Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the
marketable securities held in a firm’s portfolio, assumed to be held for emergencies, should
a. consist mainly of long-term securities because they pay higher rates.
b. consist mainly of short-term securities because they pay higher rates.
c. consist mainly of U.S. Treasury securities to minimize interest rate risk.
d. consist mainly of short-term securities to minimize interest rate risk.
e. be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a
downward trend in interest rates.
78. Which of the following statements is most consistent with efficient inventory management? The firm has a
a. below-average inventory turnover ratio.
b. low incidence of production schedule disruptions.
c. below-average total assets turnover ratio.
d. relatively high current ratio.
e. relatively low DSO.
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d. 32 days
e. 33 days
89. Romano Inc. has the following data. What is the firm’s cash conversion cycle?
Inventory Conversion Period = 38 days
Receivables Collection Period = 19 days
Payables Deferral Period = 35 days
a. 26 days
b. 24 days
c. 22 days
d. 19 days
e. 20 days
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93. Dyl Pickle Inc. had credit sales of $5,000,000 last year and its days sales outstanding was DSO = 35 days. What was
its average receivables balance, based on a 365-day year.
a. $436,301
b. $426,712
c. $551,370
d. $570,548
e. $479,452
94. Edwards Enterprises 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 $38,000; 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? Do not round intermediate
calculations.
a. 4.85%
b. 5.59%
c. 5.70%
d. 6.27%
e. 4.79%