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13 questions
Net working capital is defined as ________.
current liabilities minus current assets
total liabilities minus total assets
current assets minus current liabilities
total assets minus total liabilities
The goal of working capital management is to ________.
achieve a balance between short-term and long-term liabilities so that they add to the achievement of a firm's overall goals
achieve a balance between a firm's non-current assets and non-current liabilities
achieve a balance between profitability and risk that contributes positively to a firm's value
achieve a balance between short-term and long-term assets so that they add to the achievement of a firm's overall goals
A(n) ________ in current assets increases net working capital, thereby ________ the risk of insolvency.
increase; reducing
increase; increasing
decrease; increasing
decrease; reducing
In working capital management, risk is measured by the probability that a firm will be ________.
unable to earn profits from day-to-day operations
unable to repay its long-term obligations
unable to pay its bills as they come due
unable to pay annual dividends to stockholders
If a firm increases its current assets relative to total assets, ________.
it reduces return and reduces risk
it increases return and increases risk
it increases return and reduces risk
it reduces return and increases risk
The conservative funding strategy is a strategy by which a firm finances at least its seasonal requirements, and possibly some of its permanent requirements, with short-term funds and the balance of its permanent requirements with long-term funds.
TRUE
FALSE
Under an aggressive funding strategy, a firm funds its seasonal requirements with short-term debt and its permanent requirements with long-term debt.
TRUE
FALSE
A firm has an operating cycle of 120 days, an average collection period of 40 days, and an average payment period of 30 days. The firm's average age of inventory is ________ days.
50
80
90
70
A firm has a cash conversion cycle of 80 days, an average collection period of 25 days, and an average age of inventory of 70 days. Its operating cycle is ________ days.
130
105
95
60
A firm with a cash conversion cycle of 175 days can stretch its average payment period from 30 days to 45 days. This will result in a/an ________.
decrease of 30 days in the cash conversion cycle
increase of 30 days in the cash conversion cycle
increase of 30 days in the cash conversion cycle
decrease of 15 days in the cash conversion cycle
A firm has annual operating outlays of $1,800,000 and a cash conversion cycle of 60 days. If the firm currently pays 12 percent for financing and reduces its cash conversion cycle to 50 days, the annual savings is ________. (Assume a 365-day year.)
$5,917.81
$4,652.19
$5,917.81
) $2,160.23
Fizzy Animators, Inc. currently makes all sales on credit and offers no cash discount. The firm is considering a 3 percent cash discount for payment within 10 days. The firm's current average collection period is 90 days, sales are 400 films per year, selling price is $25,000 per film, variable cost per film is $18,750, and the average cost per film is $21,000. The firm expects that the change in credit terms will result in a minor increase in sales of 10 films per year, that 75 percent of the sales will take the discount, and the average collection period will drop to 30 days. The firm's bad debt expense is expected to become negligible under the proposed plan. The bad debt expense is currently 0.5 percent of sales. The firm's required return on equal-risk investments is 20 percent. (Assume a 360-day year.) What is the net result of increasing the cash discount?
-$58,750
+$128,750
-$33,750
+$33,750
Caren's Canoes is considering relaxing its credit standards to encourage more sales. As a result, sales are expected to increase 15 percent from 300 canoes per year to 345 canoes per year. The average collection period is expected to increase to 40 days from 30 days and bad debts are expected to double the current 1 percent level. The price per canoe is $850, the variable cost per canoe is $650 and the average cost per unit at the 300 unit level is $700. The firm's required return on investment is 20 percent. (Assume a 360-day year). What is the net result of implementing the proposed plan?
$3,952
$3,869
$2,084
-$2,084
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