IHI 58

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Question 1
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
Answer
consist mainly of long-term securities because they pay higher rates.
consist mainly of short-term securities because they pay higher rates.
consist mainly of U.S. Treasury securities to minimize interest rate risk.
consist mainly of short-term securities to minimize interest rate risk.
be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.
Question 2
Other things held constant, which of the following will cause an increase in net working capital?
Answer
Cash is used to buy marketable securities.
A cash dividend is declared and paid.
Merchandise is sold at a profit, but the sale is on credit.
Long-term bonds are retired with the proceeds of a preferred stock issue.
Missing inventory is written off against retained earnings.
Question 3
Which of the following statements is CORRECT?
Answer
Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit department.
If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm’s DSO will probably increase.
If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts.
If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July.
If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.
Question 4
Which of the following statements is NOT CORRECT?
Answer
A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.
Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60.
Managing working capital is important because it influences financing decisions and the firm’s profitability.
Question 5
Which of the following statements is CORRECT?
Answer
Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.
Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.
If a company follows a policy of “matching maturities,” this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.
Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.
If a company follows a policy of “matching maturities,” this means that it matches its use of short-term debt with its use of long-term debt.
Question 6
Which of the following statements is CORRECT?
Answer
Under normal conditions, a firm’s expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm’s risk.
Conservative firms generally use no short-term debt and thus have zero current liabilities.
A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt.
If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.
If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.
Question 7
A lockbox plan is most beneficial to firms that
Answer
have suppliers who operate in many different parts of the country.
have widely dispersed manufacturing facilities.
have a large marketable securities portfolio and cash to protect.
receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
have customers who operate in many different parts of the country.
Question 8
Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take?
Answer
Increase average inventory without increasing sales.
Take steps to reduce the DSO.
Start paying its bills sooner, which would reduce the average accounts payable but not affect sales.
Sell common stock to retire long-term bonds.
Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
Question 9
Which of the following statements is most consistent with efficient inventory management? The firm has a
Answer
below average inventory turnover ratio.
low incidence of production schedule disruptions.
below average total assets turnover ratio.
relatively high current ratio.
relatively low DSO.
Question 10
Which of the following actions would be likely to shorten the cash conversion cycle?
Answer
Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
Question 11
A lockbox plan is
Answer
used to protect cash, i.e., to keep it from being stolen.
used to identify inventory safety stocks.
used to slow down the collection of checks our firm writes.
used to speed up the collection of checks received.
used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
Question 12
Which of the following items should a company report directly in its monthly cash budget?
Answer
Its monthly depreciation expense.
Cash proceeds from selling one of its divisions.
Accrued interest on zero coupon bonds that it issued.
New shares issued in a stock split.
New shares issued in a stock dividend.
Question 13
Which of the following statements concerning the cash budget is CORRECT?
Answer
Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax payments.
Cash budgets do not include financial items such as interest and dividend payments.
Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
Changes that affect the DSO do not affect the cash budget.
Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.
Question 14
Which of the following statements is NOT CORRECT?
Answer
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
Accruals are “free” in the sense that no explicit interest is paid on these funds.
A conservative approach to working capital management will result in most if not all permanent current operating assets being financed with long-term capital.
The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.
Bank loans generally carry a higher interest rate than commercial paper.
Question 15
Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?
Answer
The firm must make a known future payment, such as paying for a new plant that is under construction.
The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline.
The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.
The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
The firm just won a product liability suit one of its customers had brought against it.