Sales collections Answer: d Diff: E
111. The Danser Company expects to have sales of $30,000 in January, $33,000 in February, and $38,000 in March. If 20 percent of sales are for cash, 40 percent are credit sales paid in the month following the sale, and 40 percent are credit sales paid 2 months following the sale, what are the cash receipts from sales in March?
a. $55,000 b. $47,400 c. $38,000 d. $32,800 e. $30,000
Accounts receivable balance Answer: a Diff: E
112. If Hot Tubs Inc. had sales of $2,027,773 per year (all credit) and its days sales outstanding was equal to 35 days, what was its average amount of accounts receivable outstanding? (Assume a 365-day year.)
a. $194,444 b. $ 57,143 c. $ 5,556 d. $ 97,222 e. $212,541
Cash conversion cycle Answer: d Diff: E
113. Spartan Sporting Goods has $5 million in inventory and $2 million in accounts receivable. Its average daily sales are $100,000. The company’s payables deferral period (accounts payable divided by daily purchases) is 30 days. What is the length of the company’s cash conversion cycle?
a. 100 days b. 60 days c. 50 days d. 40 days e. 33 days
Cash conversion cycle Answer: a Diff: E
114. For the Cook County Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a 365-day year, what is the length of the firm’s cash conversion cycle?
a. 87 days b. 90 days c. 65 days d. 48 days e. 66 days
Maturity matching Answer: e Diff: E
115. Wildthing Amusement Company’s total assets fluctuate between $320,000 and $410,000, while its fixed assets remain constant at $260,000. If the firm follows a maturity matching or moderate working capital financing policy, what is the likely level of its long-term financing?
a. $ 90,000 b. $260,000 c. $350,000 d. $410,000 e. $320,000
Cost of trade credit Answer: a Diff: E
116. A firm is offered trade credit terms of 3/15, net 45 days. The firm does not take the discount, and it pays after 67 days. What is the nominal annual cost of not taking the discount? (Assume a 365-day year.)
a. 21.71%
b. 22.07%
c. 22.95%
d. 23.48%
e. 24.52%
Cost of trade credit Answer: d Diff: E
117. Dixie Tours Inc. buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What is the nominal annual cost of its non-free trade credit? (Assume a 365-day year.)
a. 17.2%
b. 23.6%
Cost of trade credit Answer: b Diff: E
118. Your company has been offered credit terms on its purchases of 4/30, net 90 days. What will be the nominal annual cost of trade credit if your company pays on the 35th day after receiving the invoice? (Assume a 365-day year.)
a. 30%
b. 304%
c. 3%
d. 87%
e. 156%
Free trade credit Answer: a Diff: E
119. Phillips Glass Company buys on terms of 2/15, net 30 days. It does not take discounts, and it typically pays 30 days after the invoice date. Net purchases amount to $730,000 per year. On average, how much “free” trade credit does Phillips receive during the year? (Assume a 365-day year.) a. $30,000
b. $40,000 c. $50,000 d. $60,000 e. $70,000
Revolving credit agreement cost Answer: b Diff: E
120. Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks. The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment. On the used portion of the loan, Inland paid 1.5 percent above prime for the funds actually borrowed on an annual, simple interest basis. The prime rate was at 9 percent for the year. If Inland 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 cost of the loan agreement for one year?
a. $560,000 b. $650,000 c. $540,000 d. $900,000 e. $675,000
Inventory and NPV Answer: d Diff: E
121. Rojas Computing is developing a new software system for one of its clients. The system has an up-front cost of $75 million (at t = 0). The client has forecasted its inventory levels for the next five years as shown below:
Year Inventory 1 $1.0 billion 2 1.2 billion 3 1.6 billion 4 2.0 billion 5 2.2 billion
Rojas forecasts that its new software will enable its client to reduce inventory to the following levels:
Year Inventory 1 $0.8 billion 2 1.0 billion 3 1.4 billion 4 1.7 billion 5 1.9 billion
After Year 5, the software will become obsolete, so it will have no further impact on the client’s inventory levels. Rojas’ client is evaluating this software project as it would any other capital budgeting project. The client estimates that the weighted average cost of capital for the software system is 10 percent. What is the estimated NPV (in millions of dollars) of the new software system?
a. $233.56 b. $489.98 c. $625.12 d. $813.55 e. $956.43
Inventory turnover ratio and DSO Answer: a Diff: E
122. Bowa Construction’s days sales outstanding is 50 days (on a 365-day basis). The company’s accounts receivable equal $100 million and its balance sheet shows inventory equal to $125 million. What is the company’s inventory turnover ratio?
a. 5.84 b. 4.25 c. 3.33 d. 2.75
Float Answer: d Diff: E
123. Jumpdisk Company writes checks averaging $15,000 a day, and it takes 5 days for these checks to clear. The firm also receives checks in the amount of $17,000 per day, but the firm loses three days while its receipts are being deposited and cleared. What is the firm's net float in dollars?
a. $126,000 b. $ 75,000 c. $ 32,000 d. $ 24,000 e. $ 16,000
Medium:
Cash budget Answer: c Diff: M
124. Chadmark Corporation’s budgeted monthly sales are $3,000. Forty percent of its customers pay in the first month and take the 2 percent discount.
The remaining 60 percent pay in the month following the sale and don’t receive a discount. Chadmark’s bad debts are very small and are excluded from this analysis. Purchases for next month’s sales are constant each month at $1,500. Other payments for wages, rent, and taxes are constant at $700 per month. Construct a single month’s cash budget with the information given. What is the average cash gain or (loss) during a typical month for Chadmark Corporation?
a. $2,600 b. $ 800 c. $ 776 d. $ 740 e. $ 728
ROE and working capital policy Answer: c Diff: M
125. Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy. The firm’s annual sales are
$400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets. EBIT is $36,000, the interest rate on the firm’s debt is 10 percent, and the firm’s tax rate is 40 percent. With a restricted policy, current assets will be 15 percent of sales. Under a relaxed policy, current assets will be 25 percent of sales. What is the difference in the projected ROEs between the restricted and relaxed policies?
a. 0.0%
b. 6.2%
c. 5.4%
d. 1.6%
Inventory conversion period Answer: d Diff: M
126. On average, a firm sells $2,000,000 in merchandise a month. It keeps inventory equal to one-half of its monthly sales on hand at all times.
If the firm analyzes its accounts using a 365-day year, what is the firm’s inventory conversion period?
a. 365.0 days b. 182.5 days c. 30.3 days d. 15.2 days e. 10.5 days
Cash conversion cycle Answer: d Diff: M
127. Porta Stadium Inc. has annual sales of $80,000,000 and keeps average inventory of $20,000,000. On average, the firm has accounts receivable of $16,000,000. The firm buys all raw materials on credit, its trade credit terms are net 35 days, and it pays on time. The firm’s managers are searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels but inventory can be lowered by
$4,000,000 and accounts receivable lowered by $2,000,000, what will be the net change in the cash conversion cycle? Use a 365-day year. Round to the closest whole day.
a. +105 days b. -105 days c. +27 days d. -27 days e. -3 days
Cash conversion cycle Answer: e Diff: M
128. You have recently been hired to improve the performance of Multiplex Corporation, which has been experiencing a severe cash shortage. 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 your estimate of the firm’s current cash conversion cycle?
Current inventory = $120,000.
Annual sales = $600,000.
Accounts receivable = $157,808.
Accounts payable = $25,000.
Total annual purchases = $365,000.
Purchases credit terms: net 30 days.
Receivables credit terms: net 50 days.
Cash conversion cycle Answer: b Diff: M
129. Kolan Inc. has annual sales of $36,500,000 ($100,000 a day on a 365-day basis). On average, the company has $12,000,000 in inventory and
$8,000,000 in accounts receivable. The company is looking for ways to shorten its cash conversion cycle, which is calculated on a 365-day basis. Its CFO has proposed new policies that would result in a 20 percent reduction in both average inventories and accounts receivables.
The company anticipates that these policies will also reduce sales by 10 percent. Accounts payable will remain unchanged. What effect would these policies have on the company’s cash conversion cycle? Round to the nearest whole day.
a. -40 days b. -22 days c. -13 days d. +22 days e. +40 days
Cash conversion cycle Answer: e Diff: M
130. Gaston Piston Corp. has annual sales of $50,735,000 and maintains an average inventory level of $15,012,000. The average accounts receivable balance outstanding is $10,008,000. The company makes all purchases on credit and has always paid on the 30th day. The company is now going to take full advantage of trade credit and pay its suppliers on the 40th day. If sales can be maintained at existing levels but inventory can be lowered by $1,946,000 and accounts receivable lowered by $1,946,000, what will be the net change in the cash conversion cycle? (Assume there are 365 days in the year.)
a. -14.0 days b. -18.8 days c. -28.0 days d. -25.6 days e. -38.0 days
Accounts payable balance Answer: e Diff: M
131. Your firm buys on credit terms of 2/10, net 45 days, and it always pays on Day 45. If you calculate that this policy effectively costs your firm $159,621 each year, what is the firm’s average accounts payable balance? (Hint: Use the nominal cost of trade credit and carry its cost out to 6 decimal places.)
a. $1,234,000 b. $ 75,000 c. $ 157,500 d. $ 625,000 e. $ 750,000
EAR cost of trade credit Answer: e Diff: M
132. Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting until Day 30.
You point out that the nominal cost of not taking the discount and paying on Day 30 is approximately 37 percent. But since your firm is not taking discounts and is paying on Day 20, what is the effective annual cost of your firm’s current practice, using a 365-day year?
a. 36.7%
b. 105.4%
c. 73.4%
d. 43.6%
e. 109.0%
EAR cost of trade credit Answer: e Diff: M
133. Hayes Hypermarket purchases $4,562,500 in goods over a 1-year period from its sole supplier. The supplier offers trade credit under the following terms: 2/15, net 50 days. If Hayes chooses to pay on time but not to take the discount, what is the average level of the company’s accounts payable, and what is the effective annual cost of its trade credit? (Assume a 365-day year.)
a. $208,333; 17.81%
b. $416,667; 17.54%
c. $416,667; 27.43%
d. $625,000; 17.54%
e. $625,000; 23.45%
EAR cost of trade credit Answer: d Diff: M
134. A firm is offered trade credit terms of 2/8, net 45 days. The firm does not take the discount, and it pays after 58 days. What is the effective annual cost of not taking this discount? (Assume a 365-day year.)
a. 21.63%
b. 13.35%
c. 14.90%
d. 15.89%
e. 18.70%
Costly trade credit Answer: a Diff: M
135. Phranklin Pharms Inc. purchases merchandise from a company that gives sales terms of 2/15, net 40 days. Phranklin Pharms has gross purchases of $819,388 per year. What is the maximum amount of costly trade credit Phranklin could get, assuming it abides by the supplier’s credit terms?
(Assume a 365-day year.) a. $88,000
b. $33,000 c. $55,000 d. $50,000 e. $44,000
Stretching accounts payable Answer: e Diff: M
136. C+ Notes’ business is booming, and it needs to raise more capital. The company purchases supplies from a single supplier on terms of 1/10, net 20 days, and it currently takes the discount. One way of getting the needed funds would be to forgo the discount, and C+’s owner believes she could delay payment to 40 days without adverse effects. What is the effective annual rate of stretching the accounts payable?
a. 10.00%
b. 11.11%
c. 11.75%
d. 12.29%
e. 13.01%
Changes in working capital and free cash flow Answer: b Diff: M
137. Allen Brothers is interested in increasing its free cash flow (which it hopes will result in a higher EVA and stock price). The company’s goal is to generate $180 million of free cash flow over the upcoming year.
Allen’s CFO has made the following projections for the upcoming year:
EBIT is projected to be $850 million.
Gross capital expenditures are expected to total $360 million, and its depreciation expense is expected to be $120 million. Thus, its net capital expenditures are expected to total $240 million.
The firm’s tax rate is 40 percent.
The company forecasts that there will be no change in its cash and marketable securities, nor will there be any changes in notes payable or accruals. Which of the following will enable the company to achieve its goal of generating $180 million in free cash flow?
a. Accounts receivable increase $470 million, inventory increases $230 million, and accounts payable increase $790 million.
b. Accounts receivable increase $470 million, inventory increases $230 million, and accounts payable increase $610 million.
c. Accounts receivable decrease by $500 million, inventory increases by
$480 million, and accounts payable decline by $80 million.
d. Accounts receivable decrease by $400 million, inventory increases by
$480 million, and accounts payable increase by $80 million.
e. Accounts receivable increase by $500 million, inventory increases by
$100 million, and accounts payable decline by $480 million.
Aging Schedule Answer: b Diff: M
138. Short Construction offers its customer’s credit terms of 2/10, net 30 days, while Fryman Construction offers its customer’s credit terms of 2/10, net 45 days. The aging schedules for each of the two companies’
accounts receivable are reported below:
Short Construction Fryman Construction
Age of Value of Percentage of Value of Percentage of Account (Days) Account Total Value Account Total Value
0-10 $58,800 60% $ 73,500 50%
11-30 19,600 20 29,400 20
31-45 14,700 15 29,400 20
46-60 2,940 3 10,290 7
Over 60 1,960 2 4,410 3
Total Receivables $98,000 $147,000
Which company has the greatest percentage of overdue accounts and what is their percentage of overdue accounts?
a. Fryman; 50% overdue.
b. Short; 20% overdue.
c. Fryman; 30% overdue.
d. Fryman; 3% overdue.
e. Short; 40% overdue.
Lockbox Answer: e Diff: M
139. Cross Collectibles currently fills mail orders from all over the U.S.
and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $2.5 million and is financed by a bank loan with 11 percent annual interest. Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 20 percent. The annual cost of the system is $15,000.
What is the estimated net annual savings to the firm from implementing the lockbox system?
a. $500,000 b. $ 30,000 c. $ 60,000 d. $ 55,000 e. $ 40,000
Tough:
Cash conversion cycle Answer: c Diff: T
140. Jordan Air Inc. has average inventory of $1,000,000. Its estimated annual sales are $10 million and the firm estimates its receivables conversion period to be twice as long as its inventory conversion period. The firm pays its trade credit on time; its terms are net 30 days. The firm wants to decrease its cash conversion cycle by 10 days.
It believes that it can reduce its average inventory to $863,000.
Assume a 365-day year and that sales will not change. By how much must the firm also reduce its accounts receivable to meet its goal of a 10-day reduction in its cash conversion cycle?
a. $ 101,900 b. $1,000,000 c. $ 136,986 d. $ 333,520 e. $ 0
Financial statements and trade credit Answer: d Diff: T
141. Quickbow Company currently uses maximum trade credit by not taking discounts on its purchases. Quickbow is considering borrowing from its bank, using notes payable, in order to take trade discounts. The firm wants to determine the effect of this policy change on its net income.
The standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and Quickbow pays in 30 days. Its net purchases are $11,760 per day, using a 365-day year. The interest rate on the notes payable is 10 percent and the firm’s tax rate is 40 percent. If the firm implements the plan, what is the expected change in Quickbow’s net income?
a. -$23,520 b. -$31,440 c. +$23,520 d. +$38,448 e. +$69,888
Accounts payable balance Answer: d Diff: T
142. Dalrymple Grocers buys on credit terms of 2/10, net 30 days, and it always pays on the 30th day. Dalrymple calculates that its annual costly trade credit is $375,000. What is the firm’s average accounts payable balance? Assume a 365-day year.
a. $187,475 b. $374,951 c. $223,333