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-á-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.
98. 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
Lower total asset range
Upper total asset range
99. 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
Inventory conversion period =
50 days
100. 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
Inventory conversion period =
38 days
Average collection period =
19 days
Payables deferral period =
20 days
101. 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
Inventory conversion period =
41 days
Average collection period =
31 days
Payables deferral period =
38 days
102. 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
103. 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
104. Krackle Korn 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
105. 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%
106. 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
Sales
Receivables and DSO
New receivables = DSO (Sales/365) =
Reduction in receivables = Original receivables − New receivables =
Alternative solution:
(Change in DSO/Original DSO) Orig. receivables =
107. Thornton Universal Sales’ 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
Monthly COGS =
108. 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
Cost of goods sold
Inventory and ICP
New inventory = ICP (COGS/365) =
Reduction in inventories = Original Inv. − New Inv. =
Alternative solution:
(Change in ICP/Original ICP) Orig. Inv. =
109. 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
Inventory/COGS =
Annual COGS =
Avg. inventory =
a.
$764
b.
$849
c.
$943
d.
$1,048
e.
$1,164
110. 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
Avg. inventory =
$75,000
Annual sales =
$600,000
Avg. receivables =
$160,000
Annual COGS =
$360,000
Avg. payables =
$25,000
Days in year =
Inv. conv. period = Inv./(COGS/365)
+ DSO = Receivables/(Sales/365)
Cash conversion cycle (CCC)
Cost of goods sold
Inventory and PDP
New payables = PDP (COGS/365) =
Increase in payables = New Payables − Original Payables =
Alternative solution:
(Change in PDP/Original PDP) Orig. Payables =
111. 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
Annual sales
$45,000
Annual cost of goods sold (COGS)
$31,500
Inventory
$4,000
Accounts receivable
$2,000
Accounts payable
$2,400
Days in year
Sales per day =
$123.29
COGS per day =
$86.30
Inv. conv. period = Inv./COGS per day =
Avg. coll. period = Receivables/Sales per day =
Pay. def. period = Accounts payable/COGS per day =
112. 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
113. Kiley Corporation had the following data for the most recent year (in millions). The new CFO believes
(1) that an improved inventory management system could lower the average inventory by $4,000, (2)
that improvements in the credit department could reduce receivables by $2,000, and (3) that the
purchasing department could negotiate better credit terms and thereby increase accounts payable by
$2,000. Furthermore, she thinks that these changes would not affect either sales or the costs of goods
sold. If these changes were made, by how many days would the cash conversion cycle be lowered?
Original
Revised
Annual sales: unchanged
$110,000
$110,000
Cost of goods sold: unchanged
$80,000
$80,000
Average inventory: lowered by $4,000
$20,000
$16,000
Average receivables: lowered by $2,000
$16,000
$14,000
Average payables: increased by $2,000
$10,000
$12,000
Days in year
365
365
a.
34.0
b.
37.4
c.
41.2
d.
45.3
e.
49.8
Original
Revised
Annual sales: unchanged
$110,000
$110,000
Cost of goods sold: unchanged
$80,000
$80,000
Average inventory: lowered by $4,000
$20,000
$16,000
Average receivables: lowered by $2,000
$16,000
$14,000
Average payables: increased by $2,000
$10,000
$12,000
Days in year
365
365
DSO = Receivables/(Sales/365) =
Annual sales
$45,000
Annual cost of goods sold (COGS)
$30,000
Inventory
Accounts receivable
Accounts payable
Days in year
Sales per day =
$123.29
COGS per day =
Inv. conv. period = Inv./COGS per day =
Avg. coll. period = Receivables/Sales per day =
Pay. def. period = Accounts payable/COGS per day =
114. 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
115. 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
116. Tierney Enterprises is constructing its cash budget. Its budgeted monthly sales are $5,000, and they are
constant from month to month. 40% of its customers pay in the first month and take the 2% discount,
while the remaining 60% pay in the month following the sale and do not receive a discount. The firm
has no bad debts. Purchases for next month’s sales are constant at 50% of projected sales for the next
month. “Other payments,” which include wages, rent, and taxes, are 25% of sales for the current
month. Construct a cash budget for a typical month and calculate the average net cash flow during the
month.
a.
$1,092
b.
$1,150
c.
$1,210
d.
$1,271
e.
$1,334
117. Carter & Carter is considering setting up a regional lockbox system to speed up collections. The
company sells to customers all over the U.S., and all receipts come in to its headquarters in San
Francisco. The firm’s average accounts receivable balance is $2.5 million, and they are financed by a
bank loan at an 11% annual interest rate. The firm believes this new lockbox system would reduce
receivables by 20%. If the annual cost of the system is $15,000, what pre-tax net annual savings would
be realized?
a.
$29,160
b.
$32,400
c.
$36,000
d.
$40,000
e.
$44,000
118. Newsome Inc. buys on terms of 3/15, net 45. It does not take the discount, and it generally pays after
60 days. What is the nominal annual percentage cost of its non-free trade credit, based on a 365-day
year?
a.
25.09%
b.
27.59%
c.
30.35%
d.
33.39%
e.
36.73%
119. Freeman Builders, Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays
60 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual
percentage cost of its non-free trade credit, based on a 365-day year?
a.
10.86%
b.
12.07%
c.
13.41%
d.
14.90%
e.
16.55%