Book Title
Fundamentals of Corporate Finance Standard Edition 9th Edition

978-0073382395 Chapter 18 Concepts Review and Critical Thinking Questions

April 3, 2019
Answers to Concepts Review and Critical Thinking Questions
1. These are firms with relatively long inventory periods and/or relatively long receivables periods. Thus,
2. These are firms that have a relatively long time between the time purchased inventory is paid for and the
3. a. Use: The cash balance declined by $200 to pay the dividend.
b. Source: The cash balance increased by $500, assuming the goods bought on payables credit were
c. Use: The cash balance declined by $900 to pay for the fixed assets.
d. Use: The cash balance declined by $625 to pay for the higher level of inventory.
e. Use: The cash balance declined by $1,200 to pay for the redemption of debt.
4. Carrying costs will decrease because they are not holding goods in inventory. Shortage costs will
5. Since the cash cycle equals the operating cycle minus the accounts payable period, it is not possible for
the cash cycle to be longer than the operating cycle if the accounts payable period is positive. Moreover,
6. It lengthened its payables period, thereby shortening its cash cycle. It will have no effect on the
7. The supplier’s receivables period will increase, thereby increasing their operating and cash cycles.
8. It is sometimes argued that large firms take advantage of smaller firms by threatening to take their
9. They would like to! The payables period is a subject of much negotiation, and it is one aspect of the
price a firm pays its suppliers. A firm will generally negotiate the best possible combination of payables
10. BlueSky will need less financing because it is essentially borrowing more from its suppliers. Among
Solutions to Questions and Problems
NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps.
Due to space and readability constraints, when these intermediate steps are included in this solutions
manual, rounding may appear to have occurred. However, the final answer for each problem is found
without rounding during any step in the problem.
1. a. No change. A dividend paid for by the sale of debt will not change cash since the cash raised from
the debt offer goes immediately to shareholders.
b. No change. The real estate is paid for by the cash raised from the debt, so this will not change the
cash balance.
c. No change. Inventory and accounts payable will increase, but neither will impact the cash account.
d. Decrease. The short-term bank loan is repaid with cash, which will reduce the cash balance.
e. Decrease. The payment of taxes is a cash transaction.
f. Decrease. The preferred stock will be repurchased with cash.
g. No change. Accounts receivable will increase, but cash will not increase until the sales are paid
h. Decrease. The interest is paid with cash, which will reduce the cash balance.
i. Increase. When payments for previous sales, or accounts receivable, are paid off, the cash balance
increases since the payment must be made in cash.
j. Decrease. The accounts payable are reduced through cash payments to suppliers.
k. Decrease. Here the dividend payments are made with cash, which is generally the case. This is
different from part a where debt was raised to make the dividend payment.
l. No change. The short-term note will not change the cash balance.
m. Decrease. The utility bills must be paid in cash.
n. Decrease. A cash payment will reduce cash.
o. Increase. If marketable securities are sold, the company will receive cash from the sale.