Chapter 16: Working Capital Management
52. Great Skot expects to have cash receipts in June of $532,160. Skot’s cash disbursements in June are $581,720,
including an interest payment on a bond issue of $32,000. If Skot wishes to maintain a cash balance of
$40,000, how much will Skot have to borrow if it started the month with a cash balance of $52,000?
a. Surplus of $2,440. Will not have to borrow
b. Surplus of $34,440. Will not have to borrow
c. $5,560
d. $37,560
53. Gates Industries balance sheet and income statement for the year ending December 31, 1978 are as follows:
Balance Sheet ($ million)
Cash $10.0 Accounts payable
$15.0
Accounts receivable 15.0 Salaries, benefits, & payroll taxes payable
3.0
Inventories* 12.0 Long-term debt
15.0
Fixed assets (net) 30.0 Stockholders’ equity
34.0
Total assets $67.0 Total liab. & stock. equity
$67.0
Income Statement ($ million)
Net sales (all credit)
$125.0
Cost of sales
75.0
Selling, general, & admin. expenses
30.0
Other expenses
13.0
Earnings after tax
$ 7.0
*Note: Average inventories also equal $12.0 (million).
Determine the length of the firm’s cash conversion cycle.
a. 102.2 days
b. 29.2 days
c. 39.6 days
d. none of the above/cannot be computed
Chapter 16: Working Capital Management
54. Barnes Company has highly seasonal sales and financing requirements. Barnes has made the following
projections of its asset needs and net additions to retained earnings over the next year (in $ million).
Fixed
Current
Net Additions
Quarter
Assets
Assets
to Retained Earnings
1
$60
$30
$1
2
$60
$35
$2
3
$65
$40
$4
4
$65
$35
$2
Net worth (equity) at the beginning of the year is $50 million. The company does not plan to sell any new
equity during the coming year. Assume that Barnes follows a matching approach to finance its assets, i.e.,
long-term debt and equity are used to finance fixed and permanent current assets and short-term debt is used to
finance fluctuating current assets. Determine the amount of long-term and short-term debt respectively
outstanding at the end of the third quarter ($ million).
a. $39; $2
b. $48; $0
c. $41; $7
d. none of these/cannot be determined
2
4
2
Chapter 16: Working Capital Management
55. Simmons Industries is considering two alternative working capital investment and financing policies. Policy A
requires the firm to keep its current assets at 60% of forecasted sales and to finance 75% of its debt
requirements with long-term debt (and 25% with short-term debt). Policy B, on the other hand, requires the
firm to keep current assets at 40% of forecasted sales and to finance 50% of its debt requirements with long–
term debt (and 50% with short-term debt). Forecasted sales for next year are $20 million. Earnings before
interest and taxes are projected to be 20% of sales. The firm’s corporate income tax rate is 40%. Its fixed assets
total $10 million. The firm desires to maintain its existing capital structure that consists of 50% debt (both
long-term and short-term) and 50% equity. Interest rates on short- and long-term debt are 8% and 10%
respectively.
Determine the expected rate of return on equity next year for Simmons Industries under each of the working
capital policies.
a. 26.9%, 30.4%
b. 21%, 26.7%
c. 8.1%, 9.1%
d. 16.1%, 21.3%
Chapter 16: Working Capital Management
56. Laserscope Inc. is trying to determine the best combination of short-term and long-term debt to employ in
financing its assets. Laserscope will have $16 million in current assets and $20 million in fixed assets next year
and expects operating income (EBIT) to be $4.1 million. The company’s tax rate is 40% and its debt ratio is
50%. The firm’s debt will be financed by one of the following policies:
Amount of
Interest rate
Financing policy
Short-term debt
LTD (%)
STD(%)
Aggressive
$12
11.0
7.5
Conservative
6
10.3
7.0
What is the return on shareholder’s equity under each policy?
a. aggressive = 12.70% & conservative = 12.22%
b. aggressive = 8.47% & conservative = 8.14%
c. aggressive = 4.23% & conservative = 4.07%
d. aggressive = 7.67% & conservative = 8.81%
Chapter 16: Working Capital Management
57. Cisco Systems wishes to analyze the joint impact of its working capital investment and financing policies on
shareholder return. The company has $24 million in fixed assets. Cisco wishes to maintain a debt ratio of 40%.
The company’s tax rate is also 40%. The following information was developed for the two policies under
consideration (dollars in millions):
Aggressive
Conservative
Investment in current assets
$28
$34
Amount of short term debt
$16
$10
EBIT
$5.4
$5.8
Interest rate–LTD (%)
12.0
11.0
Interest rate–STD(%)
7.5
7.0
For the aggressive approach, Cisco’s ROE is and for the conservative approach the ROE is .
a. 4.18%, 3.77%
b. 11.62%, 10.48%
c. 6.97%, 6.29%
d. none of these are correct
58. Cryo-vac expects sales to increase 20% next year from the current level of $5,000,000. The firm has current
assets of $1,000,000 and fixed assets of $1,500,000. Cryo-vac has current liabilities of $750,000 of which
$300,000 are in notes payable. What additional financing will Cryo-vac need to support the expected sales
increase if its profit margin is 8% and the firm expects to pay out $200,000 in dividends? An increase in net
fixed assets of $300,000 will be required.
a. $130,000
b. $70,000
c. Surplus of $70,000
d. $270,000
Chapter 16: Working Capital Management
59. Commercial paper is:
a. long-term with maturities greater than one year.
b. short-term with maturities under six months.
c. short-term with maturities that do not exceed nine months.
d. long-term with maturities of greater than five years.
60. When pledging accounts receivables, which of the following statements is/are correct?
I. Pledging requires permission of the SEC.
II. In pledging accounts receivables, the firm loses title to the receivables and they are no longer listed on
the balance sheet.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
61. Factoring accounts receivable is done:
a. on a default basis
b. on a consignment basis
c. on an interest only basis
d. on a non-recourse basis
62. When factoring accounts receivables, the factor is the:
a. negotiated accounts receivable account.
b. the percent deduction in payment to the firm.
c. the financial institution that buys the accounts receivable.
d. the method of determining how much money is lent to the firm.
63. In considering factoring accounts receivable, which of the following statements is/are correct?
I. Maturity factoring occurs when the firm receives payment at the normal collection or due date of the
factored accounts.
II. Advance factoring occurs when the firm receives payment in prior to the normal collection or due date of
the factored accounts.
a. Only statement I is correct
b. Only statement II is correct
c. Both statements I and II are correct
d. Neither statement I nor II is correct
Chapter 16: Working Capital Management
64. Working capital policy involves day-to-day decisions that determine all of the following EXCEPT:
a. firm’s level of longterm assets.
b. proportions of short-term and long-term debt used to finance assets.
c. level of each type of current asset.
d. specific sourcers and mix of short-term liabilities the firm should employ.
65. A firm’s working capital position is important since::
a. it is a measure of risk.
b. it is a measure of efficiency.
c. it is much more in demand due to its scarcity.
d. it reflects the amount of short-term liabilities that the firm must consider.
66. A firm’s working capital position is important from an internal and external standpoint. Which of the following
apply:
a. It measures a firm’s risk.
b. Provisions for a minimum working capital position are often included in restrictive covenants.
c. A firm’s policy often affects its ability to obtain debt.
d. A working capital position determines its level of common stock sales.
67. Efficient current assets management refers to the firm’s ability to economize on which of the following?
I. Inventory
II. Marketable securities
a. Only inventory
b. Only marketable securities
c. Both inventory and marketable securities
d. Neither inventory nor marketable securities
68. Sources of debt financing are classified according to their:
a. Maturities
b. Interest paid
c. Par
d. Yield
Chapter 16: Working Capital Management
69. In examining the term structure of interest rates, the interest rates of have exceeded short-term rates.
a. Commercial paper
b. Notes payable
c. Corporate bonds
d. Marketable securities
70. Fluctuating current assets are those assets that are affected by:
a. the consumer’s demand for the product
b. the seasonal nature of the company
c. management preferences
d. IRS regulations
71. Negotiated short-term credit sources are all of the following EXCEPT:
a. commerical paper
b. inventory loans
c. trade credit
d. bank credit
72. What is financial forecasting?
73. Name some factors that affect the firm’s investment decision to invest in current assets.
Chapter 16: Working Capital Management
74. Why is working capital so important to a firm’s continued profitability?
75. Explain trade credit.
76. What are accrued expenses and how are they handled as unsecured short-term credit?
Chapter 16: Working Capital Management
77. Explain how a firm uses commercial paper as a short-term financing source and explain the disadvantage of
using this form of financing.
78. Firms can meet its financing needs by using a matching approach for financing. What is the matching
approach?
79. What are the classifications for short-term lenders and how do they differ?
80. What is “stretching accounts payable” and what are the advantages and disadvantages of doing it?
Chapter 16: Working Capital Management
81. Net working capital is:
a. the difference between the company’s current assets and current liabilities.
b. the difference between the company’s current assets and fixed assets.
c. the sum of the firm’s current assets plus the firm’s current liabilities
d. the firm’s fixed assets plus the firm’s long-term liabilities.