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Exam 16: Supply chains and working capital management

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Question 21

True/False

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When deciding whether or not to take a trade discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.

A) True
B) False

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Question 22

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Which of the following statements is CORRECT?

A) In managing a firm's accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently.
B) Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales.
C) Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio.
D) Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
E) A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually.Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate.

F) A) and B)
G) B) and E)

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Question 23

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Sanders Enterprises arranged a revolving credit agreement of $9, 000, 000 with a group of banks.The firm paid an annual commitment fee of 0.5% of the unused balance of the loan commitment.On the used portion of the revolver, it paid 1.5% above prime for the funds actually borrowed on a simple interest basis.The prime rate was 3.25% during the year.If the firm borrowed $6, 000, 000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar annual cost of the revolver?

An increase in any current asset must be accompanied by an equal increase in some current liability.

One of the effects of ceasing to take trade credit discounts is that the firm's accounts payable will rise, other things held constant.

The calculated cost of trade credit can be reduced by paying late.

On average, a firm collects checks totaling $250, 000 per day.It takes the firm approximately 4 days from the day the checks were mailed until they result in usable cash for the firm.Assume that (1)a lockbox system could be employed which would reduce the cash conversion procedure to 2 1/2 days and (2)the firm could invest any additional cash generated at 6% after taxes.The lockbox system would be a good buy if it costs $25, 000 annually.

Summary balance sheet data for Greener Gardens Co.is shown below (in thousands of dollars) .The company is in a highly seasonal business, and the data show its assets and liabilities at peak and off-peak seasons: From this data we may conclude that

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

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.

Marshall Inc.recently hired your consulting firm to improve the company's performance.It has been highly profitable but has been experiencing cash shortages due to its high growth rate.As one part of your analysis, you want to determine the firm's cash conversion cycle.Using the following information and a 365-day year, what is the firm's present cash conversion cycle?

Which of the following statements is CORRECT?

If the yield curve is upward sloping, then short-term debt will be cheaper than long-term debt.Thus, if a firm's CFO expects the yield curve to continue to have an upward slope, this would tend to cause the current ratio to be relatively low, other things held constant.

Brothers Breads has the following data.What is the firm's cash conversion cycle?

Monar Inc.'s CFO would like to decrease its cash conversion cycle by 10 days (based on a 365 day year) .The company carries average inventory of $750, 000.Its annual sales are $10 million, its cost of goods sold is 75% of annual sales, and its average collection period is twice as long as its inventory conversion period.The firm buys on terms of net 30 days, and it pays on time.The CFO believes he can reduce the average inventory to $647, 260 with no effect on sales.By how much must the firm also reduce its accounts receivable to meet its goal in the reduction of the cash conversion cycle?

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact)sense even though it is possible to match maturities on an ex ante (expected)basis.

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.)

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.

Whitson Co.is looking for ways to shorten its cash conversion cycle.It has annual sales of $36, 500, 000, or $100, 000 a day on a 365-day basis.The firm's cost of goods sold is 75% of sales.On average, the company has $9, 000, 000 in inventory and $8, 000, 000 in accounts receivable.Its CFO has proposed new policies that would result in a 20% reduction in both average inventories and accounts receivable.She also anticipates that these policies would reduce sales by 10%, while the payables deferral period would remain unchanged at 35 days.What effect would these policies have on the company's cash conversion cycle? Round to the nearest whole day.

Howes Inc.purchases $4, 562, 500 in goods per year from its sole supplier on terms of 2/15, net 50.If the firm chooses to pay on time but does not take the discount, what is the effective annual percentage cost of its non-free trade credit? (Assume a 365-day year.)