Chapter 15: Working Capital M/C Problems Page 1
(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard)
Note that there is some overlap between the T/F and the multiple choice questions, as some T/F
statements are used in the MC questions. See the preface for information on the AACSB letter
indicators (F, M, etc.) on the subject lines.
Multiple Choice: True/False
1. Net operating working capital, defined as current assets minus the
difference between current liabilities and notes payable, is equal to
the current ratio minus the quick ratio.
a. True
b. False
2. Net working capital is defined as current assets divided by current
liabilities.
a. True
b. False
3. An increase in any current asset must be accompanied by an equal
increase in some current liability.
a. True
b. False
4. The three alternative current asset investment policies discussed in
the text differ regarding the size of current asset holdings.
a. True
b. False
5. The concept of permanent current assets reflects the fact that some
components of current assets do not shrink to zero even when a business
is at its seasonal or cyclical low. Thus, permanent current assets
represent a minimum level of current assets that must be financed.
a. True
b. False
CHAPTER 15
WORKING CAPITAL MANAGEMENT
Page 2 M/C Problems Chapter 15: Working Capital
6. A conservative financing approach to working capital will result in
permanent current assets and some seasonal current assets being
financed using long-term securities.
a. True
b. False
7. 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.
a. True
b. False
8. 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.
a. True
b. False
9. Other things held constant, if a firm “stretches” (i.e., delays paying)
its accounts payable, this will lengthen its cash conversion cycle
(CCC).
a. True
b. False
10. Shorter-term cash budgets–say a daily cash budget for the next month–
are generally used for actual cash control while longer-term cash
budgets–say monthly cash budgets for the next year–are generally used
for planning purposes.
a. True
b. False
11. Setting up a lockbox arrangement is one way for a firm to speed up the
collection of payments from its customers.
a. True
b. False
12. 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.
a. True
Chapter 15: Working Capital M/C Problems Page 3
b. False
13. The average accounts receivables balance is a function of both the
volume of credit sales and the days sales outstanding.
a. True
b. False
14. The four primary elements in a firm’s credit policy are (1) credit
standards, (2) discounts offered, (3) credit period, and (4) collection
policy.
a. True
b. False
15. Changes in a firm’s collection policy can affect sales, working
capital, and profits.
a. True
b. False
16. Not taking cash discounts is costly, and as a result, firms that do not
take them are usually those that are performing poorly and have
inadequate cash balances.
a. True
b. False
17. If a firm buys on terms of 2/10, net 30, it should pay as early as
possible during the discount period to lower its cost of trade credit.
a. True
b. False
18. Trade credit can be separated into two components: free trade credit,
which is credit received after the discount period ends, and costly
trade credit, which is the cost of discounts not taken.
a. True
b. False
19. As a rule, managers should try to always use the free component of
trade credit but should use the costly component only if the cost of
this credit is lower than the cost of credit from other sources.
a. True
b. False
Page 4 M/C Problems Chapter 15: Working Capital
20. If a firm’s suppliers stop offering discounts, then its use of trade
credit is more likely to increase than to decrease other things held
constant.
a. True
b. False
21. When deciding whether or not to take a trade discount, the cost of
borrowing from a bank or other source should be compared to the cost of
trade credit to determine if the cash discount should be taken.
a. True
b. False
22. The calculated cost of trade credit can be reduced by paying late.
a. True
b. False
23. The calculated cost of trade credit for a firm that buys on terms of
2/10, net 30, is lower (other things held constant) if the firm plans
to pay in 40 days than in 30 days.
a. True
b. False
24. One of the effects of ceasing to take trade credit discounts is that
the firm’s accounts payable will rise, other things held constant.
a. True
b. False
25. “Stretching” accounts payable is a widely accepted, entirely ethical,
and costless financing technique, which is particularly useful when
suppliers’ production plants are at full capacity.
a. True
b. False
26. An informal line of credit and a revolving credit agreement are similar
except that the line of credit creates a legal obligation for the bank
and thus is a more reliable source of funds for the borrower than the
revolving credit agreement.
a. True
b. False
Chapter 15: Working Capital M/C Problems Page 5
27. The maturity of most bank loans is short term. Bank loans to
businesses are frequently made as 90-day notes which are often rolled
over, or renewed, rather than repaid when they mature. However, if the
borrower’s financial situation deteriorates, then the bank may refuse
to roll over the loan.
a. True
b. False
28. A line of credit can be either a formal or an informal agreement
between a borrower and a bank regarding the maximum amount of credit
the bank will extend to the borrower during some future period,
assuming the borrower maintains its financial strength.
a. True
b. False
29. If a firm has set up a revolving credit agreement with a bank, the risk
to the firm of being unable to obtain funds when needed is lower than
if it had an informal line of credit.
a. True
b. False
30. Accruals arise automatically from a firm’s operations and are “free”
capital in the sense that no explicit interest must normally be paid on
accrued liabilities.
a. True
b. False
31. Accruals are “spontaneous” funds arising automatically from a firm’s
operations, but unfortunately, due to law and economic forces, firms
have little control over the level of these accounts.
a. True
b. False
32. The facts that (1) no explicit interest is paid on accruals and (2) the
firm can vary the level of these accounts at will makes them an
attractive source of funding to meet the firm’s working capital needs.
a. True
b. False
33. Uncertainty about the exact lives of assets prevents precise maturity
matching in an ex post (i.e., after the fact) sense even though it is
possible to match maturities on an ex ante (expected) basis.
Page 6 M/C Problems Chapter 15: Working Capital
a. True
b. False
34. The maturity matching, or “self-liquidating,” approach to financing
involves obtaining the funds for permanent current assets with a
combination of long-term capital and short-term capital that varies
depending on the level of interest rates. When short-term rates are
relatively high, short-term assets will be financed with long-term debt
to reduce costs.
a. True
b. False
35. A firm that follows an aggressive working capital financing approach
uses primarily short-term credit and thus is more exposed to an
unexpected increase in interest rates than is a firm that uses long–
term capital and thus follows a conservative financing policy.
a. True
b. False
36. The relative profitability of a firm that employs an aggressive working
capital financing policy will improve if the yield curve changes from
upward sloping to downward sloping.
a. True
b. False
37. If the yield curve is upward sloping, then short-term debt will be
cheaper than long-term debt. Thus, if a firm’s CFO expects the yield
curve to continue to have an upward slope, this would tend to cause the
current ratio to be relatively low, other things held constant.
a. True
b. False
38. The risk to the firm of borrowing using short-term credit is usually
greater than if it used long-term debt. Added risk stems from (1) the
greater variability of interest costs on short-term than long-term debt
and (2) the fact that even if its long-term prospects are good, the
firm’s lenders may not be willing to renew short-term loans if the firm
is temporarily unable to repay those loans.
a. True
b. False
Chapter 15: Working Capital M/C Problems Page 7
39. Long-term loan agreements always contain provisions, or covenants, that
constrain the firm’s future actions. Short-term credit agreements are
just as restrictive in order to protect the interest of the lender.
a. True
b. False
40. A firm constructing a new manufacturing plant and financing it with
short-term loans, which are scheduled to be converted to first mortgage
bonds when the plant is completed, would want to separate the
construction loan from its current liabilities associated with working
capital when calculating net working capital.
a. True
b. False
41. The longer its customers normally hold inventory, the longer the credit
period supplier firms normally offer. Still, suppliers have some
flexibility in the credit terms they offer. If a supplier lengthens
the credit period offered, this will shorten the customer’s cash
conversion cycle but lengthen the supplier firm’s own CCC.
a. True
b. False
42. The cash conversion cycle (CCC) combines three factors: The inventory
conversion period, the receivables collection period, and the payables
deferral period, and its purpose is to show how long a firm must
finance its working capital. Other things held constant, the shorter
the CCC, the more effective the firm’s working capital management.
a. True
b. False
43. The target cash balance is typically (and logically) set so that it
does not need to be adjusted for either seasonal patterns or
unanticipated random fluctuations.
a. True
b. False
44. A firm’s peak borrowing needs will probably be overstated if it bases
its monthly cash budget on the assumption that both cash receipts and
cash payments occur uniformly over the month but in reality payments
are concentrated at the beginning of each month.
a. True
b. False
Page 8 M/C Problems Chapter 15: Working Capital
45. A firm’s peak borrowing needs will probably be overstated if it bases
its monthly cash budget on the assumption that both cash receipts and
cash payments occur uniformly over the month but in reality receipts
are concentrated at the beginning of each month.
a. True
b. False
46. The cash budget and the capital budget are handled separately, and
although they are both important, they are developed completely
independently of one another.
a. True
b. False
47. Since depreciation is a non-cash charge, it neither appears on nor has
any effect on the cash budget. Thus, if the depreciation charge for
the coming year doubled or halved, this would have no effect on the
cash budget.
a. True
b. False
48. Synchronization of cash flows is an important cash management
technique, as proper synchronization can reduce the required cash
balance and increase a firm’s profitability.
a. True
b. False
49. On average, a firm collects checks totaling $250,000 per day. It takes
the firm approximately 4 days from the day the checks were mailed until
they result in usable cash for the firm. Assume that (1) a lockbox
system could be employed which would reduce the cash conversion
procedure to 2 1/2 days and (2) the firm could invest any additional
cash generated at 6% after taxes. The lockbox system would be a good
buy if it costs $25,000 annually.
a. True
b. False
50. Since receivables and payables both result from sales transactions, a
firm with a high receivables-to-sales ratio must also have a high
payables-to-sales ratio.
a. True
b. False
Chapter 15: Working Capital M/C Problems Page 9
51. Dimon Products’ sales are expected to be $5 million this year, with 90%
on credit and 10% for cash. Sales are expected to grow at a stable,
steady rate of 10% annually in the future. Dimon’s accounts receivable
balance will remain constant at the current level, because the 10% cash
sales can be used to support the 10% growth rate, other things held
constant.
a. True
b. False
52. For a zero-growth firm, it is possible to increase the percentage of
sales that are made on credit and still keep accounts receivable at
their current level, provided the firm can shorten the length of its
collection period sufficiently.
a. True
b. False
53. A firm’s collection policy, i.e., the procedures it follows to collect
accounts receivable, plays an important role in keeping its average
collection period short, although too strict a collection policy can
reduce profits due to lost sales.
a. True
b. False
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
Page 10 M/C Problems Chapter 15: Working Capital
57. If a profitable firm finds that it simply must “stretch” its accounts
payable, then this suggests that it is undercapitalized, i.e., that it
needs more working capital to support its operations.
a. True
b. False
58. If one of your firm’s customers is “stretching” its accounts payable,
this may be a nuisance but it does not represent a real financial cost
to your firm as long as the customer periodically pays off its entire
balance.
a. True
b. False
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
Multiple Choice: Conceptual
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.
Chapter 15: Working Capital M/C Problems Page 11
62. 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.
63. 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.
64. 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.
65. A lockbox plan is most beneficial to firms that
a. have suppliers who operate in many different parts of the country.
b. have widely dispersed manufacturing facilities.
c. have a large marketable securities portfolio, and cash, to protect.
d. receive payments in the form of currency, such as fast food
restaurants, rather than in the form of checks.
e. have customers who operate in many different parts of the country.
66. Which of the following is NOT commonly regarded as being a credit
policy variable?
a. Credit period.
b. Collection policy.
c. Credit standards.
Page 12 M/C Problems Chapter 15: Working Capital
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.
68. 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.
Chapter 15: Working Capital M/C Problems Page 13
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.
69. 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.
70. Which of the following actions would be likely to shorten the cash
conversion cycle?
a. Adopt a new manufacturing process that speeds up the conversion of
raw materials to finished goods from 20 days to 10 days.
b. Change the credit terms offered to customers from 3/10, net 30 to
1/10, net 50.
c. Begin to take discounts on inventory purchases; we buy on terms of
2/10, net 30.
d. 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.
e. Change the credit terms offered to customers from 2/10, net 30 to
1/10, net 60.
71. Which of the following is NOT directly reflected in the cash budget of
a firm that is in the zero tax bracket?
a. Payment lags.
b. Payment for plant construction.
c. Cumulative cash.
d. Repurchases of common stock.
e. Writing off bad debts.
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.
Page 14 M/C Problems Chapter 15: Working Capital
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.
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.
Chapter 15: Working Capital M/C Problems Page 15
d. The firm has just sold long-term securities and has not yet invested
the proceeds in operating assets.
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.
79. Which of the following statements is CORRECT?
a. A firm that makes 90% of its sales on credit and 10% for cash is
growing at a constant rate of 10% annually. Such a firm will be
able to keep its accounts receivable at the current level, since the
10% cash sales can be used to finance the 10% growth rate.
b. In managing a firm’s accounts receivable, it is possible to increase
credit sales per day yet still keep accounts receivable fairly
steady, provided the firm can shorten the length of its collection
period (its DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for
credit sales to be more profitable than cash sales.
d. Since receivables and payables both result from sales transactions,
a firm with a high receivables-to-sales ratio must also have a high
payables-to–sales ratio.
e. Other things held constant, if a firm can shorten its DSO, this will
lead to a higher current ratio.
Page 16 M/C Problems Chapter 15: Working Capital
80. Which of the following statements is CORRECT?
a. Other things held constant, the higher a firm’s days sales
outstanding (DSO), the better its credit department.
b. If a firm that sells on terms of net 30 changes its policy to 2/10,
net 30, and if no change in sales volume occurs, then the firm’s DSO
will probably increase.
c. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days,
then the firm probably has some past due accounts.
d. If a firm sells on terms of net 60, and if its sales are highly
seasonal, with a sharp peak in December, then its DSO as it is
typically calculated (with sales per day = Sales for past 12
months/365) would probably be lower in January than in July.
e. If a firm changed the credit terms offered to its customers from
2/10, net 30 to 2/10, net 60, then its sales should increase, and
this should lead to an increase in sales per day, and that should
lead to a decrease in the DSO.
81. Which of the following statements is CORRECT?
a. Trade credit is provided only to relatively large, strong firms.
b. Commercial paper is a form of short-term financing that is primarily
used by large, strong, financially stable companies.
c. 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.
d. Commercial paper can be issued by virtually any firm so long as it
is willing to pay the going interest rate.
e. Commercial paper is typically offered at a long-term maturity of at
least five years.
82. Which of the following statements is NOT CORRECT?
a. Commercial paper can be issued by virtually any firm so long as it
is willing to pay the going interest rate.
b. Accruals are “free” in the sense that no explicit interest is paid
on these funds.
c. A conservative approach to working capital management will result in
most if not all permanent assets being financed with long-term
capital.
d. 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.
e. Bank loans generally carry a higher interest rate than commercial
paper.
Chapter 15: Working Capital M/C Problems Page 17
83. Which of the following statements is CORRECT?
a. 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.
b. Conservative firms generally use no short-term debt and thus have
zero current liabilities.
c. 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.
d. 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.
e. 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.
84. Which of the following statements is NOT CORRECT?
a. 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.
b. Credit policy has an impact on working capital because it influences
both sales and the time before receivables are collected.
c. The cash budget is useful to help estimate future financing needs,
especially the need for short-term working capital loans.
d. 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.
e. Managing working capital is important because it influences
financing decisions and the firm’s profitability.
85. Which of the following statements is CORRECT?
a. Depreciation is included in the estimate of free cash flows (FCF =
EBIT(1 – T) + Depreciation – [Capital expenditures + NOWC]), hence
depreciation is set forth on a separate line in the cash budget.
b. 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.
c. Sound working capital policy is designed to maximize the time
between cash expenditures on materials and the collection of cash on
sales.
d. 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.
e. 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
Page 18 M/C Problems Chapter 15: Working Capital
typically calculated (with sales per day = Sales for past 12
months/365) would probably be lower in October than in August.
86. Which of the following statements is CORRECT?
a. Accruals are an expensive but commonly used way to finance working
capital.
b. 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.
c. 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.
d. One cannot tell if a firm has a conservative, aggressive, or
moderate current asset financing policy without an examination of
its cash budget.
e. 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.
Multiple Choice: Problems
87. 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
88. Cass & Company has the following data. What is the firm’s cash
conversion cycle?
Inventory conversion period = 50 days
Receivables collection period = 17 days
Payables deferral period = 25 days
a. 31 days
b. 34 days
c. 38 days
d. 42 days
e. 46 days
Chapter 15: Working Capital M/C Problems Page 19
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 = 20 days
a. 33 days
b. 37 days
c. 41 days
d. 45 days
e. 49 days
90. Whittington Inc. has the following data. What is the firm’s cash
conversion cycle?
Inventory conversion period = 41 days
Receivables collection period = 31 days
Payables deferral period = 38 days
a. 31 days
b. 34 days
c. 37 days
d. 41 days
e. 45 days
91. Inmoo Company’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
92. 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
Page 20 M/C Problems Chapter 15: Working Capital
93. Dyl Pickle Inc. had credit sales of $3,500,000 last year and its days
sales outstanding was DSO = 35 days. What was its average receivables
balance, based on a 365-day year?
a. $335,616
b. $352,397
c. $370,017
d. $388,518
e. $407,944
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 $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%
95. Data on Shick Inc. for 2011 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
Benchmarks’ days sales outstanding (DSO) 20.00
a. $ 8,078
b. $ 8,975
c. $ 9,973
d. $10,970
e. $12,067
96. Your firm’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