52) Certain financing plans are termed conservative when ________.
A) short-term financing is used frequently
B) working capital is relatively high
C) current assets are relatively low
D) risk is increased
53) Which of the following is true of an aggressive funding strategy of a firm?
A) Under an aggressive funding strategy, a firm funds it seasonal requirements with bonds and long–
term loans.
B) Under an aggressive funding strategy, a firm funds its seasonal requirements with short-term debt.
C) Under an aggressive funding strategy, a firm funds both its seasonal and its permanent requirements
with long-term debt.
D) Under an aggressive funding strategy, a firm funds it permanent requirements with commercial paper
and notes payable.
54) An increase in the current asset to total asset ratio will result in ________.
A) an increase in profit
B) an increase in risk
C) a decrease in risk
D) a decrease in profit
55) A decrease in the current asset to total asset ratio will result in ________.
A) an increase in risk
B) a decrease in risk
C) an increase in profit
D) a decrease in profit
56) An increase in the current liabilities to total assets ratio will result in ________.
A) an increase in risk
B) a decrease in risk
C) an increase in profit
D) a decrease in profit
57) An decrease in the current liabilities to total assets ratio will result in ________.
A) an increase in risk
B) an increase in profit
C) a decrease in risk
D) a decrease in profit
Table 15.1
Irish Air Services has determined several factors relative to its asset and financing mix.
(a) The firm earns 10 percent annually on its current assets.
(b) The firm earns 20 percent annually on its fixed assets.
(c) The firm pays 13 percent annually on current liabilities.
(d) The firm pays 17 percent annually on long-term funds.
(e) The firm’s monthly current, fixed, and total asset requirements for the previous year are summarized
in the table below:
58) The firm’s monthly permanent funds requirement is ________. (See Table 15.1)
A) $100,000
B) $57,500
C) $140,000
D) $157,500
59) The firm’s monthly average seasonal funds requirement is ________. (See Table 15.1)
A) $17,500
B) $57,500
C) $40,000
D) $157,500
60) The firm’s annual financing costs of the aggressive financing strategy are ________. (See Table 15.1)
A) $21,175
B) $26,075
C) $24,475
D) $22,775
61) The firm’s annual financing costs of conservative financing strategy are ________. (See Table 15.1)
A) $22,775
B) $26,075
C) $26,775
D) $21,175
62) If the firm’s current liabilities in June were $37,000, the net working capital was ________. (See Table
15.1)
A) $20,000
B) $21,500
C) $23,000
D) $38,000
63) If the firm’s current liabilities in December were $40,000, the net working capital was ________. (See
Table 15.1)
A) $140,000
B) $60,000
C) $10,000
D) -$10,000
64) The firm’s initial ratio of current to total assets is ________. (See Table 15.1)
A) 1:3.2
B) 3:1
C) 2:3
D) 3:2.3
Table 15.2
The company earns 5 percent on current assets and 15 percent on fixed assets. The firm’s current liabilities
cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
65) The firm’s initial net working capital is ________. (See Table 15.2)
A) $15,000
B) $13,000
C) $5,000
D) $10,000
66) The firm’s initial ratio of current assets to total assets is ________. (See Table 15.2)
A) 3:1
B) 1:3
C) 2:1
D) 2:3
67) If the firm was to shift $3,000 of current assets to fixed assets, the firm’s net working capital would
________, and the risk of insolvency would ________, respectively. (See Table 15.2)
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
68) If the firm was to shift $7,000 of fixed assets to current assets, the firm’s net working capital would
________, and the risk of not being able to meet current obligations would ________, respectively. (See
Table 15.2)
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase
69) If the firm was to shift $2,000 of current liabilities to long-term funds, the firm’s net working capital
would ________, the annual cost of financing would ________, and the risk of insolvency would ________,
respectively. (See Table 15.2)
A) decrease; decrease; increase
B) increase; increase; decrease
C) decrease; increase; decrease
D) increase; decrease; decrease
70) The firm would like to increase its current ratio. This goal would be accomplished most profitably by
________. (See Table 15.2)
A) increasing accounts payable
B) decreasing inventory
C) increasing accounts receivable
D) decreasing cash and cash equivalents
71) An increase in the average payment period will ________ the operating cycle and ________ the cash
conversion cycle.
A) increase; decrease
B) decrease; decrease
C) decrease; not affect
D) not affect; decrease
72) The difference between the number of days resources are tied up in the operating cycle and the
number of days a firm can use spontaneous financing before payment is made is the ________.
A) cash conversion cycle
B) average payment period
C) operating cycle
D) average age of inventory
73) A decrease in the production time to manufacture a finished good will result in ________.
A) an increase in the average age of inventory
B) a decrease in the cash conversion cycle
C) an increase in the cash conversion cycle
D) a decrease in the average age of inventory
74) A firm has annual operating outlays of $1,800,000 and a cash conversion cycle of 60 days. If the firm
currently pays 12 percent for financing and reduces its cash conversion cycle to 50 days, the annual
savings is ________. (Assume a 365-day year.)
A) $4,652.19
B) $3,065.86
C) $5,917.81
D) $2,160.23
75) A negative cash conversion cycle ________.
A) means that the operating cycle exceeds the average inventory period
B) means that the average payment period exceeds the operating cycle
C) indicates that a firm is shortening its average payment period and lengthening its average collection
period
D) indicates that a firm is shortening its average age of inventory and average payment period
76) A firm may have a negative cash conversion cycle if it carries ________.
A) very little inventory and sells its products on credit
B) high inventory and sells its products on credit
C) very little inventory and sells its products for cash
D) high inventory and sells its products for cash
77) Improvements to cash management include ________.
A) a reduction in the cash turnover
B) a reduction in the cash conversion cycle
C) an increase in the average age of inventory
D) an increase in the credit period allowed to customers
78) A firm with a cash conversion cycle of 175 days wants to stretch its average payment period from 30
days to 45 days. This will result in a(n) ________ in the cash conversion cycle of ________ days.
A) increase; 15
B) decrease; 15
C) increase; 45
D) decrease; 45
79) In an aggressive financing strategy, a firm anticipating a large increase in sales for the coming period
should finance the increase in working capital with ________.
A) the sale of common stock
B) the sale of a bond issue
C) a line of credit
D) a long-term note from the bank
80) The aggressive financing strategy is risky in two aspects: a firm operates with a possibility of
________, and an inability to engage in ________ when needed.
A) insolvency; short-term borrowing
B) interest rate swings; short-term borrowing
C) low earnings; long-term borrowing
D) fixed interest rate; long-term borrowing
81) In theory, the conservative financing strategy ignores ________.
A) all current liabilities
B) the spontaneous forms of short-term financing
C) all current assets
D) the high risk associated with external financing
82) In economic conditions characterized by a scarcity of short-term funds, a firm would best choose the
________ financing strategy.
A) aggressive
B) conservative
C) permanent
D) seasonal
83) A risk of the ________ financing strategy is unpredictable interest expense.
A) aggressive
B) conservative
C) permanent
D) seasonal
84) The ________ financing strategy requires a firm to pay interest on excess funds borrowed but not
needed throughout the entire year.
A) aggressive
B) conservative
C) permanent
D) seasonal
85) The aggressive financing strategy is a ________ method while the conservative financing strategy is a
________ method.
A) high-profit, high-risk; low-profit, low-risk
B) high-profit, low-risk; low-profit, high-risk
C) low-profit, high-risk; high-profit, low-risk
D) low-profit, low-risk; high-profit, high-risk
86) In economic conditions characterized by short–term interest rates which exceed long-term interest
rates, the financing strategy that would maximize profits is ________ strategy.
A) the aggressive
B) the conservative
C) the trade-off
D) a seasonal
87) A firm with a very low current ratio in comparison to the industry standard could lower the risk of
unavailable short-term funds by moving toward ________ financing strategy.
A) the aggressive
B) the conservative
C) a permanent
D) a seasonal
88) A firm which uses the aggressive financing strategy plans to purchase a major fixed asset financed
with a loan. The most likely consequence of this action is ________.
A) a decrease in the current ratio
B) an increase in net working capital
C) a decrease in the risk of insolvency
D) an increase in long-term debt
89) A firm which uses the aggressive financing strategy plans to purchase raw materials in large
quantities to take price discounts. The firm will finance the purchase with a long-term loan. The most
likely consequence of this action is ________.
A) a decrease in the current ratio
B) an increase in net working capital
C) an increase in risk of insolvency
D) a decrease in net working capital
90) Only a firm’s permanent financing requirement (and not the seasonal requirement) is financed with
________ in the aggressive funding strategy.
A) long-term debt
B) T-bills
C) retained earnings
D) accounts payable
91) A firm’s financing requirements can be separated into ________.
A) current liabilities and short-term funds
B) current assets and fixed assets
C) current liabilities and long-term debt
D) seasonal and permanent
92) The basic strategies for determining the appropriate financing mix are ________.
A) seasonal and permanent funding
B) short-term and long-term financing
C) aggressive and conservative funding
D) current and non-current liabilities
93) If a firm uses an aggressive financing strategy, ________.
A) it increases return and increases risk
B) it increases return and decreases risk
C) it decreases return and increases risk
D) it decreases return and decreases risk
94) One major risk a firm assumes in an aggressive financing strategy is ________.
A) the possibility that collections will be slower than expected
B) the possibility that long-term funds may not be available when needed
C) the possibility that short-term funds may not be available when needed
D) the possibility that it will run out of cash
95) The basic strategies that should be employed by a business firm in managing cash includes ________.
A) paying accounts payable as early as possible
B) turning over inventory as quickly as possible, avoiding stockouts
C) operating in a fashion that requires maximum cash
D) extending the credit period allowed to customers
96) For minimizing the cash conversion cycle, a firm should ________.
A) grant longer credit terms to customers to maintain healthy business relations
B) pay off accounts payables as fast as possible to gain credibility
C) turn over inventory as quickly as possible without stockouts
D) increase mail managing, processing, and clearing time when collecting from customers
97) Adong’s Fishing Products is analyzing the performance of its cash management. On average, the firm
holds inventory for 65 days, pays its suppliers in 35 days, and collects its receivables in 15 days. The firm
has a current annual outlay of $1,960,000 on operating cycle investments. Adong currently pays 10
percent for its financing. (Assume a 360–day year.)
(a) Calculate the firm’s cash conversion cycle.
(b) Calculate the firm’s operating cycle.
(c) Calculate the daily expenditure and the firm’s annual savings if the operating cycle is reduced by 15
days.
98) A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently
the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an
average payment period of 10 days. The lockbox system will reduce the average collection period by 3
days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and
currently pays 9 percent for its financing. (Assume a 360-day year.)
(a) Calculate the cash conversion cycle before and after the lockbox system.
(b) Calculate the savings in financing costs from the lockbox system.
99) Jia’s Jewelers has seasonal financing needs that vary from $250,000 to $2,725,000. The permanent
financing requirement is $4,100,000. Check the appropriate box indicating the better strategy for each of
the following events.
36
Table 15.3
100) Ace’s Business Forms has compiled several factors relative to its financing mix. The firm pays 8
percent on short-term funds and 10 percent on long-term funds. The firm’s monthly current, fixed, and
total asset requirements for the previous year are summarized in Table 15.3.
Determine:
(a) the monthly permanent funds requirement
(b) the monthly average seasonal funds requirement
(c) the annual financing costs (aggressive strategy)
(d) the annual financing costs (conservative strategy)
101) Ace’s Business Forms pays 8 percent on short-term funds and 10 percent on long-term funds.
Determine its annual financing costs using the trade-off strategy described: Ace’s Business Forms has
seasonal financing requirements ranging from zero to $50,000 per month. Based on this range, the firm
has decided to finance $25,000 per month of the seasonal funds with long-term debt and the rest of the
seasonal funds with short-term debt. The permanent funds requirement will be financed with long-term
funds. (See Table 15.3)
102) Studio San, a dealer in contemporary art, has forecasted its seasonal financing needs for the next six
months as follows:
(a) The firm projects that short-term funds will cost 11 percent and long-term funds will cost 13 percent
annually.
(b) The firm’s permanent funds requirement is $500,000.
Calculate financing costs for the first six months using the aggressive and conservative strategies.
39
103) Adam’s Aeronautics is interested in making sure it has enough money to finance its assets. The
company’s current assets and fixed assets for the months of January through December are given in the
following table.
(a) Find the average monthly seasonal and permanent funds requirement.
(b) What is the total cost of financing under the aggressive and conservative strategies. Assume short–
term funds costs 4.5 percent and the interest rate for long-term funds is 12 percent.
(c) Find the net working capital under the aggressive and conservative strategies.
15.3 Inventory management
1) Because managing inventory is just like managing any other investment, decisions about the level of
inventory should be guided by the effect of inventory levels on sales.
2) The ABC system is an inventory management technique for determining the optimal order quantity for
an item of inventory.