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Exam 21: Supply Chains and Working Capital Management

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Question 61

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Long-term loan agreements always contain provisions,or covenants,that constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interest of the lender.

A) True
B) False

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Question 62

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For a zero-growth firm,it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level,provided the firm can shorten the length of its collection period sufficiently.

A) True
B) False

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Question 63

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The maturity of most bank loans is short term.Bank loans to businesses are frequently made as 90-day notes which are often rolled over,or renewed,rather than repaid when they mature.However,if the borrower's financial situation deteriorates,then the bank may refuse to roll over the loan.

The four primary elements in a firm's credit policy are (1)credit standards, (2)discounts offered, (3)credit period,and (4)collection policy.

Net working capital is defined as current assets divided by current liabilities.

Net working capital,defined as current assets minus the sum of payables and accruals,is equal to the current ratio minus the quick ratio.

Brothers Breads has the following data.What is the firm's cash conversion cycle? $\begin{array}{llcc} \text { Inventory conversion period = } & \text {50 days} \\ \text {Average collection period = } & \text {17 days}\\ \text { Payables deferral period = } & \text {25 days}\\\end{array}$

Data on Nathan Enterprises for the most recent year are shown below,along with the days sales outstanding of the firms against which it benchmarks.The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average.If this were done,by how much would receivables decline? Use a 365-day year. $\begin{array} { l r } \text { Sales } & \$ 110,000 \\\text { Accounts receivable } & \$ 16,000 \\\text { Days sales outstanding (DSO) } & 53.09 \\\text { Benchmark days sales outstanding (DSO) } & 20.00\end{array}$

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.)

For a firm that makes heavy use of net float,being able to forecast collections and disbursement check clearings is essential.

The longer its customers normally hold inventory,the longer the credit period supplier firms normally offer.Still,suppliers have some flexibility in the credit terms they offer.If a supplier lengthens the credit period offered,this will shorten the customer's cash conversion cycle but lengthen the supplier firm's own CCC.

A conservative current operating asset financing approach will result in permanent current assets and some seasonal current assets being financed using long-term securities.

The aging schedule is a commonly used method for monitoring receivables.

Buchholz Corporation follows a moderate current asset investment policy,but it is now considering a change,perhaps to a restricted or maybe to a relaxed policy.The firm's annual sales are $400,000; its fixed assets are $100,000; its target capital structure calls for 50% debt and 50% equity; its EBIT is $35,000; the interest rate on its debt is 10%; and its tax rate is 40%.With a restricted policy,current assets will be 15% of sales,while under a relaxed policy they will be 25% of sales.What is the difference in the projected ROEs between the restricted and relaxed policies?

A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period,assuming the borrower maintains its financial strength.

Trade credit can be separated into two components: free trade credit,which is credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.

Which of the following statement completions is CORRECT? If the yield curve is upward sloping,then the marketable securities held in a firm's portfolio,assumed to be held for emergencies,should

Which of the following actions would be likely to shorten the cash conversion cycle?

Safety Window and Door Co.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 $450,000 per year.On average,how much "free" trade credit does the firm receive during the year? (Assume a 365-day year,and note that purchases are net of discounts.)

Krackle Korn Inc.had credit sales of $3,500,000 last year and its days sales outstanding was DSO = 35 days.What was its average receivables balance,based on a 365-day year?