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Working Capital and Short-Term Financing Techniques

22. What is the cash conversion cycle for a firm with a receivables period of 40 days, a payables period of 30 days, and an inventory period of 60 days?
A) 10 days
B) 50 days
C) 70 days
D) 130 days

23. What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 40 days, and an annual cost of goods sold of $18 million?
A) 14.59 days
B) 46.25 days
C) 70.41 days
D) 136.25 days

24. If managers could automatically change each term in the equation of the cash conversion cycle, which of the following would be expected to provide the most benefit?
A) Decrease numerator of each term by 10%.
B) Decrease denominator of each term by 10%.
C) Increase numerator of each term by 10%.
D) Increase denominator of each term by 10%.

25. Which of the following would not be included among the costs of carrying inventory?
A) Obsolescence
B) Opportunity cost of capital
C) Raw material cost
D) Risk of pilferage

26. When financial managers take action to minimize the carrying costs of current assets, they:
A) are likely to maximize profits.
B) also consider spoilage costs.
C) may increase costs due to shortages.
D) engage in the matching of maturities.

27. Which of the following would act to reduce the carrying costs of inventory?
A) The inventory is capable of spoiling.
B) The inventory will rapidly go out of style.
C) General interest rates decrease in the economy.
D) General interest rates increase in the economy.

28. Which of the following statements about total capital requirement is least likely to be correct for a profitable firm?
A) Requirements remain constant over time.
B) Seasonal variations are often experienced.
C) The trend is often upward-sloping.
D) A portion of working capital is permanent.

29. Which of the following would not be included as a source of short-term financing?
A) Line of credit
B) Increase in the minimum operating cash balance
C) Sale of marketable securities
D) Stretching accounts payable

30. Although commercial paper is unsecured, the companies that issue this short-term security are:
A) typically known to repay all defaults.
B) large firms of top credit quality.
C) small firms of top credit quality.
D) firms that have government-sponsored guarantees for the debt.

Solution Preview

22. What is the cash conversion cycle for a firm with a receivables period of 40 days, a payables period of 30 days, and an inventory period of 60 days?
A) 10 days
B) 50 days
C) 70 days
D) 130 days

Cash conversion cycle is AR period + Inventory Period - Payable Period.
It is 40+60-30=70 days

23. What is the cash conversion cycle for a firm with $3 million average inventories, $1.5 million average accounts payable, a receivables period of 40 days, and an annual cost of goods sold of $18 million?
A) 14.59 days
B) 46.25 days
C) 70.41 days
D) 136.25 days

Inventory Period=average inventory/per day cost of goods sold = 3/(18/365)=60.83 days
Payable Period = average payable/per day COGS = 1.5/(18/365) = 30.42 days
Cash Conversion Cycle = 40+60.83-30.42=70.41 days

24. If managers could automatically change each term in the equation of the cash conversion ...

Solution Summary

The solution explains mutiple choice questions relating to Working Capital and Short-Term Financing Techniques

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