FIN 3400 Chapter 14 Assignment Questions and Answers- Florida International University
Select all that apply
Which of these can cause a firm to incur
... [Show More] shortage costs? Select all that apply.
Multiple select question.
Granting too little credit to customers
Being out of an inventory item
Borrowing too much from suppliers
Having too little cash on hand
A firm should try to equal the marginal benefit of each dollar invested in net working capital with which
one of these?
Multiple choice question.
Marginal opportunity cost of not having that dollar invested in fixed assets with positive NPVs
Marginal cost of each additional dollar funded by current liabilities
Marginal cost of producing one more item for sale
Marginal interest cost of each additional dollar of debt
When does the operating cycle end?
Multiple choice question.
When a firm pays its supplier
When a product is sold
When a product is finished and ready for sale
When a customer pays for a purchase
What comprises the operating cycle?
Multiple choice question.
Days' sales in inventory - Average collection period
Days' sales in inventory + Cash cycle
Average payment period + Average collection period
Days' sales in inventory + Average collection period
A firm holds inventory on its shelves for 92 days, pays its suppliers in 34 days, and collects payments
from its customers in 29 days, on average. How is the operating cycle calculated?
Multiple choice question.
92 days + 34 days
34 days + 29 days
92 days + 29 days
92 days - 34 days + 29 days
Select all that apply
What must a firm consider regarding its net working capital? Select all that apply.
Multiple select question.
How can a firm get others to finance its current assets?
What is the ideal level of current assets?
What other costs will be incurred if shortage costs are lowered?
How can a firm finance its fixed assets?
Which one of these defines the cash cycle?
Multiple choice question.
Operating cycle - Average collection period
Days' sales in inventory + Average collection period - Average payment period
Average collection period - Average payment period
Days' sales in inventory + Average payment period - Average collection period
True or false: Firms should eliminate all net working capital which they cannot fund internally.
True false question.
True
False
Assume a firm decreases its inventory by 3 days of sales, increases its accounts payable by 4 days, and
increases accounts receivable by 2 days. What is the net change in the cash cycle?
Multiple choice question.
Increase of 1 day
Increase of 3 days
Decrease of 5 days
Decrease of 1 day
Reason:
The cash cycle decreases when the inventory or accounts receivable periods
decrease or when the accounts payable period increases. Net change = -3 +
2 - 4 = -5 days
When does the operating cycle begin?
Multiple choice question.
When raw materials are acquired
When a firm pays for its raw material purchases
When a product is delivered to a customer
When a product is ready for sale
Carrying costs are defined to include which one of these?
Multiple choice question.
Costs required to provide ongoing repairs and maintenance of a firm's equipment
Costs related to securing additional debt financing to fund current asset purchases
Costs associated with the ordering and shipping of new inventory
Explicit costs necessary to maintain the value of the current assets
How will an increase in the time it takes to collect a payment from a customer affect the operating cycle?
Multiple choice question.
The operating cycle will not be affected.
The operating cycle will decrease.
The operating cycle will increase.
The operating cycle will either be unaffected or increase.
A firm has credit sales of $8,400, cost of goods sold of $3,900, inventory of $600, and accounts
receivable of $700. How is the operating cycle computed?
Multiple choice question.
($600/$3,900) + ($700/$8,400)
($3,900/$600) + ($8,400/$700)
[($600 × 365)/$3,900] + [($700 × 365)/$8,400
[$3,900/($600 × 365)] + [$8,400/($700 × 365)]
Select all that apply
Which of these are carrying costs? Select all that apply.
Multiple select question.
Installing cameras to prevent inventory thef
Paying for credit checks on customers who apply for credit
Investing cash in inventory rather than purchasing new equipment
Paying shipping on an out-of-stock item ordered by a customer
Which part of the operating cycle must a firm finance from sources other than current liabilities?
Multiple choice question.
Average collection period
Inventory period, or days' sales in inventory
Average payment period
Cash cycle
Select all that apply
Which of these are shortage costs? Select all that apply.
Multiple select question.
Denying credit to a credit-worthy customer
Overnight delivery cost for an out-of-stock item
Renting additional retail space to display inventory
Throwing away obsolete inventory
Which one of these will increase the cash cycle, all else held constant?
Multiple choice question.
Decreasing the operating period
Decreasing the average payment period
Decreasing the average collection period
Decreasing the days' sales in inventory
Retail stores generally have which type of demand for current assets?
Multiple choice question.
A seasonal demand in addition to a steady year-round current asset demand
A steady asset demand for current assets but a seasonally-influenced demand for fixed assets.
A seasonal demand that peaks in different seasons each year
A steady year-round demand for both fixed and current assets
How are the opportunity costs associated with having capital tied up in current assets rather than in
more productive fixed assets classified?
Multiple choice question.
Marginal costs
Shortage costs
Fixed costs
Carrying costs
Select all that apply
Which of these are characteristics of a flexible financing policy? Select all that apply.
Multiple select question.
Periodic short-term financing
Constant asset requirements
Periodic periods of surplus cash
Periodic investments in marketable securities
What is a restrictive financing policy designed to fund?
Multiple choice question.
Only fixed asset demands
Both year-round and seasonal asset demands
The troughs of asset demand
The peaks of asset demand
Select all that apply
Which of these are carrying costs? Select all that apply.
Multiple select question.
Incurring costs for replenishing inventory
Renting a warehouse for inventory storage
Losing a sale because credit sales are not permitted
Paying for inventory insurance
Select all that apply
Which of these apply to a compromise financing policy as compared to either a restrictive or a flexible
policy? Select all that apply.
Multiple select question.
Less investment in marketable securities than with a flexible policy
Less total asset requirements than with a flexible policy
Less long-term debt and equity financing than with a restrictive policy
Less short-term financing than with a restrictive policy
Select all that apply
Which of these are shortage costs? Select all that apply.
Multiple select question.
Granting credit to a customer who then defaults on payment
Losing a sale due to lack of inventory selection
Gaining a customer by granting credit
Forfeiting a quantity discount because the order size is too small
Which one of these is generally an unsecured loan?
Multiple choice question.
Line of credit
Field warehouse loan
Blanket inventory loan
Banker's acceptance
In the real world, which one of these is the more common situation?
Multiple choice question.
All current assets are financed with current liabilities.
Net working capital is negative.
Current asset demands are steady and financed entirely with equity.
Firms must finance some current assets with long-term debt and/or equity.
How does a $10,000 line of credit work?
Multiple choice question.
$10,000 is borrowed in even increments over the course of the loan period
The $10,000 must be taken as one lump-sum but can be repaid as desired as long as it is repaid within
one year
Borrow, repay, borrow, and repay as long as the maximum amount owed at any one time does not
exceed $10,000
Borrow and repay as desired as long as the total sum of the borrowing does not exceed $10,000 during a
calendar year
A flexible financing policy is designed to finance which one of these?
Multiple choice question.
Fixed asset demand plus the minimum current asset demand
Fixed asset demand plus the average current asset demand
Fixed asset demand only
Maximum fixed and current asset demand
Your bank will lend you $10,000 at 8 percent interest with a compensating balance of $500. Payments
are to be made annually over three years. How is the payment amount computed?
Multiple choice question.
N = 3; I = 8; PV = 10,500; FV = 0; CPT PMT
N = 3; I = 8; PV = 0; FV = 10,500; CPT PMT
N = 3; I = 8; PV = 0; FV = 10,000; CPT PMT
N = 3; I = 8; PV = 10,000; FV = 0; CPT PMT
Select all that apply
Which of these are characteristics of a restrictive financing policy? Select all that apply.
Multiple select question.
Periods of excess cash
A steady investment in marketable securities
Seasonal asset demands which are excluded from long-term debt or equity financing
Periods requiring short-term financing
Select all that apply
Which two of these do firms prefer to use as collateral for a short-term asset-based loan? Select two.
Multiple select question.
Inventory
Equipment
Accounts receivable
Real estate
Select all that apply
Which of these are characteristics of a compromise financing policy? Select all that apply.
Multiple select question.
A higher level of long-term debt and equity financing than under a flexible financing policy
Periods that provide for investment in marketable securities
Partial funding of seasonal asset requirements with long-term debt and/or equity
Periods that require short-term financing
Select all that apply
Which of these applies to accounts receivable factoring? Select all that apply.
Multiple select question.
Factoring occurs prior to the accounts receivables being due.
The factor incurs the cost of any accounts which default.
The selling firm is responsible for any account defaults.
The time value of money is ignored.
Which one of these is generally an unsecured loan?
Multiple choice question.
Commercial loan
Asset-based loan
Mortgage
Accounts receivable assignment
For which type of inventory loan does the borrowing firm get to retain both the ownership and
possession of the inventory?
Multiple choice question.
Both blanket inventory and trust receipt loans
Field warehouse loans only
Trust receipt loans only
Blanket inventory loan only
Select all that apply
Which of these help describe a line of credit arrangement? Select all that apply.
Multiple select question.
The lender may charge a commitment fee
The borrower decides when a draw will be made
If the lender charges a commitment fee, then no interest charges will be imposed.
The borrower decides how much of the line to borrow at any one time
Select all that apply
Which entities issue commercial paper? Select all that apply.
Multiple select question.
Small corporations
All sizes of banks
Medium-to-large corporations
Large banks
A bank will loan you $150,000 with a $10,000 compensating balance or $140,000 with no compensating
balance. The interest rate on the $140,000 loan is 7 percent. Both loans require annual payments over
four years. What must the interest rate be on the $150,000 loan for the payments on both loans to be
same?
Multiple choice question.
9.24 percent
4.01 percent
6.33 percent
5.67 percent
Reason:
N = 4; I = 7; PV = 140,000; FV = 0; CPT PMT; PMT = -41,331.94 N = 4; PV =
150,000; PMT = -41,331.94; FV = 0; CPT I; I = 4.01
Which term refers to a firm's need to keep cash on hand to pay normal expenses such as utilities and
wages?
Multiple choice question.
Compensating balance
Investment opportunity
Transaction facilitation
Replenishment level
Select all that apply
Asset-based loans can be secured by which of these? Select all that apply.
Multiple select question.
Equipment
Inventory
Accounts receivable
Equity shares
Select all that apply
Which of these correctly describe the Baumol model? Select all that apply.
Multiple select question.
The replenishment amount varies over time.
The cash balance always increases from 0 to C*.
Cash is replenished only when it declines to zero.
The cash balance declines at a steady rate.
How can the factoring of accounts receivable best be described?
Multiple choice question.
As the use of accounts receivable as collateral
As an outright sale
As a loan
As a loan with the right of recourse
How is the minimum level of cash established in the Miller-Orr model?
Multiple choice question.
The minimum level is set equal to the lowest cash balance over the past year.
The minimum level is determined by the firm.
The Miller-Orr formula computes the ideal minimum cash level.
The minimum level of cash is set equal to zero.
Select all that apply
A blanket inventory loan has which of these characteristics? Select all that apply.
Multiple select question.
Lender owns the inventory
A lien on all of a firm's inventory
Lender takes possession of the inventory
Borrowing firm owns the inventory
Select all that apply
Which of these Miller-Orr model variables are described correctly? Select all that apply.
Multiple select question.
σ2 = Variance in net daily cash flows
F = The trading cost for marketable securities per transaction
σ = Standard deviation in net daily cash flows
H* = The optimal cash return point
What is commercial paper?
Multiple choice question.
A type of SEC-registered security
Unsecured, long-term debt
A type of long-term bond
A type of money-market security
Which one of these is not considered by either the Baumol or the Miller-Orr models?
Multiple choice question.
A compensating balance requirement may be an average value, not a set minimum requirement.
A firm may have a compensating balance requirement below which the firm's bank account may not fall.
Firms prefer to avoid all short-term borrowing due to its cost.
Transaction costs have risen noticeably since the models were created.
Ken is a successful entrepreneur and the owner of a conglomerate. His firm always keeps extra cash on
hand so Ken can expand the business if a good opportunity arises. This is an example of which reason to
maintain a cash balance?
Multiple choice question.
Investment opportunity
Compensating balance
Safety stock
Transaction facilitation
What is the definition of float?
Multiple choice question.
The time period between a customer mailing a payment and the funds being available to the collecting
firm
The time period between a firm receiving a payment and the funds from that payment being available
for use
The time period between a customer mailing a payment and the payment being deposited in the
collecting firm's bank
The time period between a customer mailing a payment and the collecting firm receiving that payment
Select all that apply
Which of these are assumptions of the Baumol model? Select all that apply.
Multiple select question.
Cash inflows occur simultaneously with cash outflows.
No cash inflows will occur during the period.
A safety stock of cash must be maintained at all times.
Firms have a constant, perfectly predictable cash disbursement rate.
Which assumption does the Miller-Orr model make?
Multiple choice question.
All cash flows occur at the end of each period
Cash inflows occur evenly over the period while outflows occur at the end of each period
Cash outflows occur evenly over the period while inflows occur at the end of each period
Daily cash inflows and outflows are normally distributed
Which one of these is a legal method of slowing disbursements and requires the bank to show a
payment request to the firm prior taking payment?
Multiple choice question.
Zero-balance account
Lock-box account
Concentration account
Draf account
Select all that apply
Which of these are correct definitions of the Miller-Orr model variables? Select all that apply.
Multiple select question.
L = Lower control limit
F = Flotation cost of new debt
Z* = The upper limit for cash balances
iday = Daily interest rate on marketable securities
What is check kiting?
Multiple choice question.
The illegal act of drawing funds from an account when there are insufficient funds to cover the
withdrawal
Mailing a check for payment to a supplier from a bank located a long distance from that supplier to
increase disbursement float
Requiring customers to mail checks to various locations which are geographically disbursed
Transferring funds electronically rather than by physical check
Neither the Baumol nor the Miller-Orr model considers which one of these factors?
Multiple choice question.
Firms may need to sell marketable securities to replenish cash.
Firms have the option of borrowing short-term funds.
Cash inflows may occur on a daily basis.
Firms may wish to maintain a minimum cash balance.
Select all that apply
Which of these are reasons why firms may sometimes have surplus cash? Select all that apply.
Multiple select question.
Saving for a major expenditure
A bond issue was recently sold
Seasonal fluctuations in sales and cash flows
A major customer is late paying its bill
A collecting firm has the most control over which portion of collection float?
Multiple choice question.
Mail float
In-house processing float
The collecting firm has little, if any, control over any portion of collection float.
Availability float
Which one of these is frequently used as an overnight investment for excess cash?
Multiple choice question.
Asset-backed security
Repurchase agreement
Accounts receivable assignment
Treasury note
The Baumol model works best for firms with which one of these characteristics?
Multiple choice question.
Steady daily cash inflows
Fairly predictable cash outflows
Cash inflows that are relatively similar in timing and size to cash outflows
A minimum required cash balance > 0
Ron's Pin Striping has credit terms of 1/5, net 15. How are these terms interpreted?
Multiple choice question.
A discount of 1 percent is granted if payment made within 5 days, full payment due within 15 days.
A discount of 5 percent is granted if payment is made within 1 day, full payment due within 15 days.
A discount of 1/5th, or 20 percent, is granted if payment made at the time of sale, full payment due
within 15 days.
A discount of 1 percent is given if payment made within 15 days, otherwise a 5 percent interest rate will
be charged.
Select all that apply
Which of these describe a zero-balance account? Select all that apply.
Multiple select question.
Requests for payment must be presented to the firm prior to the bank honoring that request.
The account is a checking account for disbursing payments.
Money is transferred in to the account only on days when checks are presented and only in the amount
of those checks.
The account has a zero balance at the end of every day.
Select all that apply
Which of the following are primary considerations in credit analysis? Select all that apply.
Multiple select question.
Borrower's expected future financial condition
Borrower's age (Assume age > 21 years)
Borrower's past payment history
Borrower's current financial condition
Which one of these has significantly reduced both availability float and check kiting?
Multiple choice question.
Jobs and Growth Tax Relief Reconciliation Act
Check Clearing for the 21st Century Act
North American Free Trade Agreement
Securities Exchange Act
Click and drag on elements in order
List the steps of a common collection policy with the first step listed first.
1. Send letter
2. Call customer
3. Hire collection
4. Legal action
Select all that apply
Bob's Outlet is a major producer of children's toys. What does that fact alone indicate about the firm's
cash flows? Select all that apply.
Multiple select question.
Bob's will have an increased supply of cash when retailers pay for their children's holiday toy purchases.
Bob's cash flows will tend to be relatively even throughout the year since the firm is a producer, not a
retailer.
Bob's cash flows are affected by seasonality.
Bob's is not expected to have cash surpluses.
Select all that apply
Which of these are money-market options for investing surplus cash? Select all that apply.
Multiple select question.
Banker's acceptances
Treasury bills
Commercial paper
Treasury bonds
Which one of these conditions is most apt to increase the credit period?
Multiple choice question.
A long-standing customer who is occasionally delinquent but always pays
A new customer with a relatively small-sized order
An outstanding established credit relationship with the seller
A perishable type of product for which the credit sale is being granted
How is credit analysis defined?
Multiple choice question.
A systematic determination of a borrower's ability and willingness to repay a potential loan
A determination of the interest rate that should be applied to a particular loan
A determination of the amount of money required to fund a particular project
A listing of the credit period, cash discount, and type of credit instrument to be used
Select all that apply
Which of these statements related to a firm's collection policy are correct? Select all that apply.
Multiple select question.
Firms should attempt legal action before turning an account over to a collection agency.
Sending delinquency letters tends to be less labor intensive than phone calls so letters are the first step.
Firms may send more than one delinquency letter on the same past due bill.
Firms should make multiple attempts to contact a delinquent account prior to turning the account over
to a collection agency. [Show Less]