Unit 12: Working Capital Management - Practice Quiz

1 What does net working capital represent?

2 Which working capital policy maintains relatively high levels of current assets?

3 Under an aggressive financing policy, a firm relies more heavily on which source of finance?

4 Which principle is followed by a matching working capital policy?

5 Which item is normally classified as a current asset?

6 Compared with a conservative policy, an aggressive working capital policy generally offers what combination?

7 What generally happens to liquidity risk when a firm holds more cash?

8 Why can holding excessive current assets reduce profitability?

9 Which risk is most directly associated with insufficient working capital?

10 A firm increases its return by reducing idle current assets. What may increase at the same time?

11 What is the primary objective of cash management?

12 Which document estimates future cash receipts and cash payments?

13 Which motive for holding cash relates to meeting routine business payments?

14 Which motive for holding cash provides protection against unexpected events?

15 What is a marketable security in cash management?

16 What are accounts receivable?

17 What does a firm's credit policy primarily determine?

18 What is the purpose of an accounts receivable aging schedule?

19 Why might a firm offer a cash discount to credit customers?

20 What is a bad debt?

21 A company finances all seasonal current assets and part of its permanent current assets with short-term debt. Which working capital financing policy is it using?

22 A firm's permanent current assets are $800,000, while seasonal current assets range from $0 to $300,000. Under a matching policy, how much long-term financing should normally support current assets?

23 Which situation most clearly indicates that a company is following a conservative working capital policy?

24 A firm has current assets of $1,200,000 and current liabilities of $750,000. If it replaces $150,000 of short-term debt with long-term debt, what is its new net working capital?

25 Why does a matching policy generally finance inventory built for a three-month sales peak with a three-month bank loan?

26 A profitable firm reduces its inventory safety stock without changing sales. What is the most likely immediate effect?

27 A firm shifts from long-term financing costing 9% to short-term financing costing 6%. Assuming other factors remain unchanged, what trade-off does the firm make?

28 A company increases current assets by $200,000 while total assets and EBIT remain unchanged because it sells an equal amount of fixed assets. What is the likely effect?

29 Which action is most likely to reduce liquidity risk while also reducing expected profitability?

30 A company has an operating cycle of 75 days and an average payment period of 30 days. What is its cash conversion cycle?

31 A firm expects annual cash usage of $1,800,000, incurs $75 per securities conversion, and has an annual opportunity cost of 6%. Using the Baumol model, what is the approximate optimal transfer amount?

32 A lockbox system reduces collection time by 2 days. Average daily collections are $120,000, and the annual opportunity cost is 8%. What is the maximum annual fee the firm should pay?

33 In a Miller-Orr cash management model, the lower limit is $20,000 and the return point is $50,000. What is the upper control limit?

34 A company delays disbursements by one day without damaging supplier relationships. If daily payments average $90,000, what is the primary financial benefit?

35 Which combination is most appropriate when selecting marketable securities for temporary surplus cash?

36 A supplier offers credit terms of , net . Using a 365-day year, what is the approximate annualized cost of not taking the discount?

37 A firm has annual credit sales of $3,650,000. Its average collection period rises from 30 to 40 days, and variable costs equal 75% of sales. What is the incremental investment in receivables?

38 A firm's receivables are 40% in the 20-day category and 60% in the 50-day category. What is the weighted average collection period?

39 A proposed relaxation of credit standards would add $80,000 of contribution margin, $25,000 of bad-debt losses, $12,000 of collection costs, and $18,000 of receivables carrying costs. What is the expected change in annual profit?

40 An aging schedule shows that total receivables are unchanged, but a larger proportion has moved into categories more than 60 days overdue. What is the best interpretation?

41 A firm has fixed assets of million, permanent current assets of million, and seasonal current assets ranging from zero to million. Long-term financing is fixed at million, while short-term borrowing fills any funding gap. Assuming short-term borrowing is the only current liability, how should the policy be classified, and what happens to net working capital (NWC)?

42 A company needs million of financing. Policy A uses million long term at and million short term; Policy B uses million long term and million short term. The short-term rate is with probability and with probability . In the high-rate state, refinancing disruption costs are under A and under B. Which policy minimizes expected annual financing and disruption costs?

43 Annual sales are million and cost of goods sold is million, using a -day year. A policy changes DIO from to days, DSO from to days, and DPO from to days. What is the net change in operating working-capital investment?

44 A seasonal inventory purchase has an invoice price of million and terms , net . Inventory will be sold for cash on day , and no other cash is available. A bank will lend at a simple annual rate of using a -day year. The firm may borrow on day to take the discount or borrow on day to pay the full invoice. Which choice has the lower cost as of day ?

45 A firm must finance million of permanent current assets for two years. A one-year revolver costs in year 1 and will renew at in year 2 with probability ; otherwise, emergency year-2 financing costs . A two-year term loan costs annually. Ignoring taxes and discounting, which statement is correct?

46 A firm has total assets of million, current assets of million, current liabilities of million, and EBIT of million. It uses million of idle cash to repay million of short-term debt, but lower transaction balances reduce annual EBIT by . What happens immediately to EBIT-based ROA and the current ratio?

47 A firm with million of equity needs million of seasonal debt. EBIT is million with probability and million with probability . Short-term debt costs normally but in the downturn; term debt always costs . The tax rate is . Which comparison is correct?

48 Increasing safety stock by would recover million of annual sales currently lost to stockouts. The product's contribution margin is . For of recovered sales, customers would otherwise buy an internal substitute with a contribution margin; the other sales would be completely lost. Inventory carrying cost is , and expected obsolescence is of the added inventory. What is the annual net benefit?

49 A firm is considering retaining an additional million cash buffer earning instead of investing it in marketable securities yielding . A liquidity crisis has a annual probability, and the buffer would reduce crisis costs from to . Under a risk-neutral expected-value rule, what should the firm do?

50 A company initially has current assets of million and current liabilities of million. It acquires million of additional inventory entirely on short-term supplier credit. Before any inventory is sold, what happens to liquidity measures?

51 Under the Baumol model, annual cash disbursements are million, each securities conversion costs , and the annual opportunity cost is . The firm must also maintain a nonspendable safety balance of . What are the optimal transfer size and average total cash balance?

52 In a Miller–Orr cash-management model, the lower limit is , transaction cost is , daily net-cash-flow standard deviation is , and the daily interest rate is . Using and , what are the return point and upper limit?

53 A lockbox would reduce collection float by two days on average daily receipts of million. Released funds earn annually. The bank charges per year and requires a noninterest-bearing compensating balance funded from the released cash. What is the annual net benefit?

54 A treasury manager can delay the debit value date of a million payment by two days but would lose a processing rebate. Funds earn annually on a -day basis. Ignoring relationship effects, should the payment be delayed?

55 A firm begins the month with of available cash, expects receipts of and disbursements of million, and requires an ending available balance of . A bank loan requires a compensating balance equal to of the amount borrowed; that balance is unavailable for operations. What minimum gross borrowing is required?

56 A firm has annual credit sales of million, a -day DSO, a bad-debt rate, and a variable-cost ratio. A proposed policy would raise sales to million, DSO to days, and bad debts to . The required return on receivables investment is , and a -day year is used. What is the approximate annual net effect before tax?

57 A firm with annual credit sales of million currently collects in days. It proposes terms of , net , and expects of customers to take the discount while all others continue paying on day . Sales and bad debts will not change. The variable-cost ratio is , and the required return is . What is the annual net effect?

58 Receivables are aged 0–30 days, aged 31–60 days, aged 61–90 days, and aged over 90 days. Expected default rates are , , , and , respectively. A collection program costing would reduce the last two rates to and without affecting other balances. Should it be adopted?

59 Each month, a firm factors a million receivables pool with a -day collection period. The factor advances , charges a fee on face value, and charges annual interest on the advance for days using a -day year. The factor assumes bad debts currently equal to of sales, and the firm saves in administration. What is the monthly net benefit?

60 A credit applicant would make a purchase with a variable cost of . If payment occurs, the firm receives the full invoice. If default occurs, it recovers of the invoice but incurs an additional collection cost. The firm requires expected profit of at least per approved applicant. What minimum probability of full payment justifies approval?