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Ch 16 Supply Chains and Working Capital Management
93. Hinkle Corporation buys on terms of 2/15, net 60 days. It does not take discounts, and it typically pays on time, 60
days after the invoice date. Net purchases amount to $550,000 per year. On average, what is the dollar amount of total
trade credit (costly + free) the firm receives during the year, i.e., what are its average accounts payable? (Assume a 365-
day year, and note that purchases are net of discounts.)
a.
$90,411
b.
$94,932
c.
$99,678
d.
$104,662
e.
$109,895
94. Noddings Inc. needs to raise more capital because its business is booming. The company purchases supplies on terms
of 1/10 net 20, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount,
and the firm's owner believes she could delay payment to 40 days without adverse effects. What would be the effective
annual percentage cost of funds raised by this action? (Assume a 365-day year.)
a.
10.59%
Ch 16 Supply Chains and Working Capital Management
b.
11.15%
c.
11.74%
d.
12.36%
e.
13.01%
95. Suppose the suppliers of your firm offered you credit terms of 2/10 net 30 days. Your firm is not taking discounts, but
is paying after 25 days instead of waiting until Day 30. You point out that the nominal cost of not taking the discount and
paying on Day 30 is approximately 37%. But since your firm is neither taking discounts nor paying on the due date, what
is the effective annual percentage cost (not the nominal cost) of its costly trade credit, using a 365-day year?
a.
60.3%
b.
63.5%
c.
66.7%
d.
70.0%
e.
73.5%
Ch 16 Supply Chains and Working Capital Management
96. Arnold Inc. purchases merchandise on terms of 2/10 net 30, and it always pays on the 30th day. The CFO calculates
that the average amount of costly trade credit carried is $375,000. What is the firm's average accounts payable balance?
(Assume a 365-day year.)
a.
$458,160
b.
$482,273
c.
$507,656
d.
$534,375
e.
$562,500
Ch 16 Supply Chains and Working Capital Management
97. Blueroot Inc. is considering a change in its financing policy. Currently, it uses maximum trade credit by not taking
discounts on its purchases. The standard industry credit terms offered by all its suppliers are 2/10 net 30 days, and the firm
pays on time. The new CFO is considering borrowing from its bank, using short-term notes payable, and then taking
discounts. The firm wants to determine the effect of this policy change on its net income. Its net purchases are $11,760 per
day, using a 365-day year. The interest rate on the notes payable is 10%, and the tax rate is 40%. If the firm implements
the plan, what is the expected change in net income?
a.
$32,964
b.
$34,699
c.
$36,526
d.
$38,448
e.
$40,370
Ch 16 Supply Chains and Working Capital Management
98. During the coming year, Gold & Gold wants to increase its free cash flow by $180 million, which should result in a
higher stock price. The CFO has made these projections for the upcoming year:
∙
EBIT is projected to equal $850 million.
∙
Gross capital expenditures are expected to total to $360 million versus depreciation of $120
million, so its net capital expenditures should total $240 million.
∙
The tax rate is 40%.
∙
There will be no changes in cash or marketable securities, nor will there be any changes in
notes payable or accruals.
What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?
a.
$72
b.
$90
c.
$108
d.
$130
e.
$156
Ch 16 Supply Chains and Working Capital Management
99. 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
100. 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
Ch 16 Supply Chains and Working Capital Management
101. 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
102. 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
Ch 16 Supply Chains and Working Capital Management
103. 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
104. Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket?
a.
Depreciation.
b.
Cumulative cash.
c.
Repurchases of common stock.
d.
Payment for plant construction.
e.
Payments lags.
Ch 16 Supply Chains and Working Capital Management
105. Which of the following statements concerning the cash budget is CORRECT?
a.
Cash budgets do not include financial items such as interest and dividend payments.
b.
Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
c.
Changes that affect the DSO do not affect the cash budget.
d.
Capital budgeting decisions have no effect on the cash budget until projects go into operation and start
producing revenues.
e.
Depreciation expense is not explicitly included, but depreciation's effects are reflected in the estimated tax
payments.
106. Which of the following items should a company report directly in its monthly cash budget?
a.
Cash proceeds from selling one of its divisions.
Ch 16 Supply Chains and Working Capital Management
b.
Accrued interest on zero coupon bonds that it issued.
c.
New shares issued in a stock split.
d.
New shares issued in a stock dividend.
e.
Its monthly depreciation expense.
107. Which of the following statements is CORRECT?
a.
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.
b.
Since depreciation is a non-cash charge, it neither appears on nor has any effect on the cash budget.
c.
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.
d.
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.
e.
Shorter-term cash budgets, in general, are used primarily for planning purposes, while longer-term budgets are
used for actual cash control.
Ch 16 Supply Chains and Working Capital Management
108. 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
Ch 16 Supply Chains and Working Capital Management
109. 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
Ch 16 Supply Chains and Working Capital Management
110. Cash is often referred to as a "non-earning" asset. Thus, one goal of cash management is to minimize the amount of
cash necessary for conducting a firm's normal business activities.
a.
True
b.
False
111. Firms hold cash balances in order to complete transactions (both routine and precautionary) that are necessary in
business operations and as compensation to banks for providing loans and services.
a.
True
b.
False
Ch 16 Supply Chains and Working Capital Management
112. For a firm that makes heavy use of net float, being able to forecast collections and disbursement check clearings is
essential.
a.
True
b.
False
113. 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
Ch 16 Supply Chains and Working Capital Management
114. 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
115. 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
