1.
The term "net working capital" means: a. the firm's gross working capital minus spontaneous financing b. the firm's cash, accounts receivable, and inventory minus short-term payables and accruals c. the firm's current assets minus its current liabilities d. all of the above
2.
Seasonal peaks in business are supported by: a. permanent working capital b. long-term financing c. temporary working capital d. discretionary financing
3.
Working capital policy involves a tradeoff between easier operation and ____. a. more working capital b. spontaneous liabilities c. temporary financing d. the cost of carrying short-term assets
4.
Working capital increases when ____ decreases. a. accounts receivable b. inventory c. accounts payable d. cash
5.
An aggressive working capital policy a. uses more short-term financing than longterm b. uses short-term financing to support only the peaks of temporary working capital c. supports a portion of permanent working capital with short-term financing d. Both a & b e. Both a & c
6.
Which of the following is not part of net working capital? a. accounts payable b. marketable securities c. retained earnings d. inventory e. accounts payable
7.
An effective program of working capital management requires that: a. the firm run with the absolute minimum in each current asset account. b. a series of cost/benefit tradeoffs be considered because running a business is easier with more working capital than with less, but holding working capital costs money c. large inventories be maintained to adequately service customers d. credit can be easily granted to customers to encourage higher sales
8.
Temporary working capital is a. the seasonal borrowing capacity of a firm b. incremental working capital necessary to finance slower than expected collections of customer receivables c. incremental working capital necessary to support peak activity in seasonal businesses d. additional payroll cost and expenses incurred during seasonal peaks
9.
Which of the following is accepted financing wisdom? a. The maturity of funds used to support a project should roughly match the project's duration. b. Because firms can use their own equity as they choose, equity can be used to finance projects of any duration. c. Any project can appropriately be supported by funding with a shorter maturity. d. Any project can appropriately be supported by funding with a longer maturity.
10.
Which of the following factors does not directly affect the firm's investment in working capital? a. the firm's inventory and credit policies b. the age of the firm's plant and equipment c. the firm's sales level d. the length of the firm's operating cycle
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11.
All other things equal, a policy of financing with a relatively ____ proportion of shortterm debt will tend to result in ____ earnings. a. large, lower b. constant, higher c. constant, lower d. large, higher
12.
Which of the following working capital financing policies subjects the firm to the greatest risk? a. financing temporary working capital with long-term debt b. financing permanent working capital with long-term debt c. financing permanent working capital with short-term debt d. financing temporary working capital with short-term debt
13.
Which of the following represents spontaneous financing? a. the origination of a 9-month bank loan b. the issuance of a note payable with a maturity of less than one year c. an increase accounts payable resulting from the purchase of inventories on 30-day credit d. a and c e. all of the above
14.
Why will banks extend short-term working capital financing to companies to which they would not extend long-term credit. a. Conditions are unlikely to deteriorate too badly in the short term. b. Working capital loans are "self liquidating." c. The working capital itself can be used to collateralize the loan. d. All of the above.
15.
In the context of working capital an accrual is not a. an estimate of an obligation of the firm b. effectively a short term loan from the unpaid supplier of services c. an adjustment to the accrued depreciation account d. a source of spontaneous financing
16.
All but one of the following are associated with short-term debt? a. Easily available to most companies. b. It is usually the lowest cost financing. c. It is a flexible form of financing. d. It is usually used to finance long-term assets.
17.
Which of the following is true regarding pledged receivables? a. They are collateral for a loan. b. Uncollected accounts are usually the responsibility of the lender. c. The process involves factoring. d. Both a & b
18.
Credit terms of 1/10, net 30 mean a. purchases made between the first and tenth day of the month must be paid by month end b. if the vendor is not paid within 30 days, 1% interest is charged for every 10 days thereafter c. the vendor will grant a discount of 10% for payment within 30 days d. the vendor will grant a 1% discount if paid within 10 days; otherwise the bill is due in full within 30 days
19.
Credit extended in connection with goods purchased for resale is called a. commercial paper. b. bank loans. c. trade credit or payables. d. commercial credit.
20.
A compensating balance arrangement between a firm and its bank a. increases the return on the loan to the bank. b. forces the firm to keep a minimum balance in its checking account. c. increases the cost of the loan to the firm. d. all of the above
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21.
When a firm factors its accounts receivable as opposed to pledging them, the firm will: a. offer the lender the accounts receivable as collateral to the loan b. sell the accounts receivable at a discount to the lender c. in all cases, remain liable for any uncollected accounts sold to the lender d. none of the above
22.
Which of the following is not a reason that firms typically hold cash? a. to make routine transactions b. to satisfy compensating balance requirements c. to earn interest d. to be able to respond to emergencies and opportunities
23.
Which of the following credit and collections decisions would typically not increase the accounts receivable balance? a. extending credit to less creditworthy customers b. increasing the discount offered for prompt payment c. extending the time allowed for payment of a customer's bill d. delaying dunning letters from the credit department e. all of the above would typically increase the accounts receivable balance
24.
More aggressive collection procedures should a. increase credit sales. b. decrease accounts receivable. c. increase ACP. d. all of the above e. none of the above
25.
Relaxation of credit policy results in a. an increase in credit sales. b. a decrease in credit expenses. c. a decrease in investment in receivables. d. b and c e. all of the above
26.
Which of the following is not a cost of carrying inventory? a. breakage and theft b. obsolescence c. financing and storage costs d. slower inventory turnover
27.
A firm has a $5 million revolving credit agreement with its bank at 1.5% over prime with a commitment fee of .5% unborrowed balance. What is the total cost of borrowing in a month when the prime rate is 8% if the firm borrowed $2 million prior to the beginning of the month and takes down an additional $1 million two thirds through the month on the 21st? (Correct answers may differ due to rounding.) a. $21,875 b. $20,833 c. $20,417 d. $19,583
28.
What is the effective rate on an 8% loan subject to a 20% minimum compensating balance? a. 9.6% b. 10% c. 8.13% d. none of the above
29.
CNN Corporation needs $750,000 and plans to borrow from its bank under the terms of its line-of-credit arrangement. These terms call for a minimum compensating balance of 12 percent. How much will CNN have to borrow to obtain the needed cash? a. $750,000 b. $798,307 c. $840,000 d. $852,273
30.
If the prompt payment discount is foregone, which of the following credit terms implies the customer is borrowing at a rate that is less than 20% (assume 365 days per year)? a. 2/10, net 30 b. 1.5/10, net 30 c. 1/10, net 20
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d. 3/20, net 75 e. all of the above imply borrowing at 20% or more.
31.
If a vendor's invoice states terms of sale of
2/10 net 60, the implied annual cost of interest from foregoing the discount would be: a. 13.2% b. 14.6% c. 2.0% d. 13.7%
32.
Hatter Enterprises has current assets of $15 million and a current ratio of 3. The bank has offered Hatter a $13 million revolving credit agreement at an interest rate of 10%.
Hatter will have to pay a commitment fee of
1% on the unused balance. Assuming that current assets and the current ratio remain constant, calculate the total annual financing charge associated with this agreement if Hatter borrows enough to support all of its net working capital. a. $1,030,000 b. $1,240,000 c. $1,310,000 d. $1,390,000
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