For Modern Corporations, the More Cash They Have, the Better off They Are - PDF

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					MGMT – Fall 2004                         Practice Set – Working Capital            Solutions Posted on November 26th
True/False Questions – Think in terms of structure of your current assets and current liabilities.

    1. As a general rule, it is desirable to finance the permanent assets, including "permanent current assets", with long-
       term debt and equity.

    2. Short-term interest rates are generally lower than long-term interest rates.

    3. The "term structure of interest rates" refers to the relationship between yields on debt and their maturities.

    4. The more short-term financing relative to long-term financing, the more risky the financial structure.

    5. Supply chair management has little impact on financial performance and is primarily a marketing and
       management concept.

    6. The key to current asset planning is the ability of management to forecast sales accurately and then match
       production schedules with the sales forecast.

Multiple Choice Questions

    7. Working capital management is primarily concerned with the management and financing of
       A) cash and inventory.
       B) current assets and current liabilities.
       C) current assets.
       D) receivables and payables.

    8. Pressure for current asset buildup often results from
       A) decline in sales growth.
       B) rapidly expanding sales.
       C) increased demands of short-term creditors.
       D) none of the above.

    9. The term "permanent current assets" implies
       A) the same thing as fixed assets.
       B) nonmarketable assets.
       C) some minimum level of current assets that are not self-liquidating.
       D) inventory.

  10. Normally, permanent current assets should be financed by
      A) long-term funds.
      B) short-term funds.
      C) borrowed funds.
      D) internally generated funds.

  11. Ideally, which of the following types of assets should be financed with long-term financing?
      A) Fixed assets only
      B) Fixed assets and temporary current assets
      C) Fixed assets and permanent current assets
      D) Temporary and permanent current assets

  12. Which of the following is a reason for diminishing liquidity in modern corporations?
      A) High interest rates
      B) Better utilization of cash via computers
      C) Inflation pushes more cash into inventory
      D) All of the above are reasons for diminishing liquidity.

MGMT_134_Practice_Set_WC_MGMT                                              Page 1 of 2
MGMT – Fall 2004                         Practice Set – Working Capital           Solutions Posted on November 26th

  13. Which of the following combinations of asset structures and financing patterns is likely to create the least volatile
      A) Illiquid assets and heavy short-term borrowing
      B) Illiquid assets and heavy long-term borrowing
      C) Liquid assets and heavy long-term borrowing
      D) Liquid assets and no debt

True/False, Fill-In Questions

  14. For modern corporations, the more cash they have, the better off they are.

  15. Float is the difference between the cash balance on the corporate books and the amount credited to the corporation
      by the bank.

  16. Electronic funds transfer will likely increase the use of float.

  17. If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance
      will be $120,000. – Use A/R days

  18. The 5 C's of credit include ____________, _______________, _____________, _____________, ____________

  99. Give the formulas for:
      A)      Accounts Receivable Turnover

       B)      A/R Days

       C)      Inventory Turnover


   A. Mountain Home Systems, Inc. is a well-known and reputable supplier of integrated circuits to manufacturers of
      telecommunications devices. The firm is currently debating whether to expand its sales to car-telephone
      manufacturers. While the firm expects an extra $2 million in sales if it enters this market, it also knows that 15%
      of its sales will ultimately be uncollectible. In addition, collection costs will be 2% on all new sales and the firm's
      production and selling costs are 80% of sales. Mountain Home's tax rate is 30%.

       a) Calculate Mountain Home's additional net income.

       b) If Mountain Home can turn its receivables over 4 times per year, what will its additional investment in
       accounts receivable be and what will the firm earn as an after-tax return on that investment?

       c) Mountain Home management requires that any new project earn a minimum of 15% return on investment.
       Should the firm enter the car-telephone manufacturer market?

   B. Linkup Systems, which provides investors with computerized information about stock prices, is considering the
      establishment of a lockbox system with its bank. The firm receives daily remittances of $1.5 million, and could
      earn 9% on any funds freed up through faster collections. If the lockbox system can save 2 days in the collection
      process, and the firm's bankers will charge $200,000 per year to operate the lockbox system, is it worth it to
      establish the system?

       What if saves 5 days in collections if an ACH firm does both the lock box and cash transfers for $500,000

MGMT_134_Practice_Set_WC_MGMT                                             Page 2 of 2

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