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Exam 16: Working Capital Management

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Question 71

Multiple Choice

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Shulman Inc. has the following data, in thousands. Assuming a 365-day year, what is the firm's cash conversion cycle?

A) 28 days
B) 32 days
C) 35 days
D) 39 days
E) 43 days

F) A) and E)
G) C) and D)

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Question 72

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The average accounts receivable balance is a function of both the volume of credit sales and the days sales outstanding.

A) True
B) False

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Question 73

Multiple Choice

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Albrecht Inc. is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

Changes in a firm's collection policy can affect sales, working capital, and profits.

Hardwig Inc. Hardwig Inc. is considering whether to pursue a restricted or relaxed current asset investment policy. The firm's annual sales are expected to total $3,600,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. -Refer to the data for Hardwig, Inc.Assume now that the company believes that if it adopts a restricted policy, its sales will fall by 15% and EBIT will fall by 10%, but its total assets turnover, debt ratio, interest rate, and tax rate will all remain the same. In this situation, what's the difference between the projected ROEs under the restricted and relaxed policies?

If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.

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

Short-term marketable securities are held for two separate and distinct purposes: (1) to provide liquidity as a substitute for cash and (2) as a non-operating investment. Marketable securities held while awaiting reinvestment are not available for liquidity purposes.

Short-term financing is riskier than long-term financing since, during periods of tight credit, the firm may not be able to rollover (renew) its debt. This is especially true if the funds are used to finance long-term assets rather than short-term assets.

Accruals are "spontaneous," but unfortunately, due to law and economic forces, firms have little control over the level of these accounts.

Loans from commercial banks generally appear on balance sheets as notes payable. A bank's importance is actually greater than it appears from the dollar amounts shown on balance sheets because banks provide nonspontaneous funds to firms.

Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.

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 facts (1) that no explicit interest is paid on accruals and (2) that the firm can control the level of these accounts at will makes them an attractive source of funding to meet working capital needs.

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.

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: What increase in net working capital (in millions of dollars) would enable the firm to meet its target increase in FCF?

Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?