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Working Capital Management (Reading 40)
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Exercise Problems:
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2. A 30-day $10,000 U.S. Treasury bill sells for $9,932.40. The discount-basis yield (%) is closest to:
A. 8.11. B. 8.17. C. 8.28.
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Ans: A;
A is correct. Note: The face value is greater than the purchase price because the T-bill sells at a discount. |
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3. Selected information from a company’s recent income
statement and balance sheets is presented below.
The company operates in an industry in which suppliers offer terms of 2/10, net 30. The payables turnover for the average company in the industry is 8.5 times. Which of the following statements is most accurate? In 2011, the company on average:
A. took advantage of early payment discounts. B. paid its accounts within the payment terms provided. C. paid its accounts more promptly than the average firm in the industry.
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Ans: C;
The firm’s days in payables is 39.9 days; therefore, it appears the firm does not normally take supplier-provided discounts (paying in 10 days) nor pay its accounts within the 30-day terms provided. However, on average, the firm is paying faster than the average firm in the industry (42.9 days). |
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4. Based on a need to borrow $2 million for one month,
which of the following alternatives has the least expensive effective
annual cost?
A. A banker’s acceptance with an all-inclusive annual rate of 6.1% B. A credit line at 6.0% annually with a $4,000 annual commitment fee C. Commercial paper at 5.9% annually with a dealer’s annual commission of $1,500 and a backup line annual cost of $3,500
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Ans: A;
Banker’s acceptance has the lowest annual effective cost of 0.0613.
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5. For a 90-day U.S. Treasury bill selling at a discount,
which of the following methods most likely results in the highest
yield?
A. Money market yield B. Discount-basis yield C. Bond equivalent yield
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Ans: C;
Note that the face value is greater than the purchase price because the T-bill sells at a discount:
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6. Which is most likely considered a secondary
source of liquidity?
A. Trade credit. B. Liquidating long-term assets. C. Centralized cash management system.
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Ans: B;
Liquidating long-term assets is a secondary source of liquidity.
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7. Other factors held constant, the reduction of a
company’s average accounts payables due to suppliers offering less trade
credit will most likely:
A. reduce the operating cycle. B. increase the operating cycle. C. not affect the operating cycle.
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Ans: C;
Payables are not part of the operating cycle calculation. Operating cash cycle includes inventory and accounts receivable.
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8. An inventory system that reduces average inventory
without affecting sales will most likely reduce the:
A. quick ratio. B. inventory turnover. C. cash conversion cycle.
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Ans: C;
The inventory turnover will increase which means the days in inventory will reduce which will reduce the cash conversion cycle (also called net operating cycle). |
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9. The annual cost of trade credit assuming a 365-day
year for terms 3/10 net 40 is closest to:
A. 32.0%. B. 43.3%. C. 44.9%. |
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Ans: C;
Cost of trade credit
= [ 1 + Discount/(1 – Discount)] ^(365/Days beyond discount period) -1
=[ 1+ 3%/(1-3%)]^(365/30)-1
=44.9%
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10. The
following information is available for a company and the industry in
which it competes:
Relative to the industry, the company’s operating cycle:
A. and cash conversion cycle are both longer. B. is longer, but its cash conversion cycle is shorter. C. is shorter, but its cash conversion cycle is longer.
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Ans: A;
The operating cycle = number of days of inventory + number of days of receivables. The cash conversion cycle = operating cycle – number of days of payables.
Therefore, the operating cycle and cash conversion cycle are both longer for the company.
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11. Which
of the following is the most appropriate technique for forecasting
cash flow for the short term?
A. Statistical models B. Simple projections C. Projection models and averages
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Ans: B;
Simple projections are used to forecast short-term needs. Projection models and averages are normally used to forecast medium term cash flow needs. Statistical models are normally used to forecast long term needs, not short term cash flow needs. |
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12. Which
of the following methods would be least likely to improve the
cash collections of a retail organization?
A. Lockbox B. Debit cards C. Electronic checks
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Ans: A;
A lockbox is a deposit system coordinated with a bank and is useful when the customer is not paying at the time of sale. In retail organizations, the customer normally pays at the time of sale and the best ways to improve cash collections are to ensure the payments made at that time have no credit risk for the seller. Debit cards, credit cards and electronic checks eliminate the credit risk for the seller. |
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13. A
company extends its trade credit terms by four days to all its credit
customers. The most likely effect of this change to the company’s
credit customers is a four day:
A. increase in their operating cycle. B. decrease in their operating cycle. C. decrease in their net operating cycle.
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Ans: C;
A four day increase in payables will reduce the cash conversion cycle (net operating cycle) by four days. |
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14. An
analyst gathers the following information for a company:
Liquidity measure
The company’s operating cycle is closest to:
A. 20.9 days. B. 33.2 days. C. 46.8 days.
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Ans: C;
Operating cycle = days inventory outstanding + days receivables outstanding
Days inventory outstanding = 365 / inventory turnover = 17.63 days
Days receivables outstanding = 365 / accounts receivable turnover = 29.2 days
Operating cycle = 17.63 days + 29.2 days = 46.8 days |
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