(Difficulty Levels:Easy, Easy/Medium, Medium, Medium/Hard, and
Hard)Please see the preface for information on the AACSB letter
indicators (F, M, etc.) on the subject lines.Multiple
Choice:True/alse(16 Intro) Net working capital F S Answer: bEASY1.
Net working capital, defined as current assets minus the sum of
payablesand accruals, is equal to the current ratio minus the quick
ratio.a. Trueb. False(16 Intro) Net working capital F S Answer:
bEASY2. Net working capital is defined as current assets divided by
current liabilities.a. Trueb. False(16 Intro) Days of working
capital F S Answer: aEASY
. !ays of working capital is the amount of net operating working
capital required per dollar of daily sales.a. Trueb. False(16!)
"orking capital #anage#ent F S Answer: aEASY". !etermining a firm#s
optimal investment in working capital and deciding how that
investment should be financed are critical to working capital
management.a. Trueb. False(16!) "orking capital financing F S
Answer: bEASY$. %n increase in any current asset must be
accompanied by an equal increase in some current liability.a.
Trueb. False& 2'11 (engage )earning. %ll *ights *eserved. +ay
not be scanned, copied or duplicated, or postedto a publicly
accessible website, in whole or in part.Chapter 16:Working Capital
Conceptual M/C Page 1CH!"TE# $% &'#()*+ C!")T!L M!*!+EME*T(16!)
$er#anent c%rr oper assets F S Answer: aEASY,. The concept of
permanent current operating assets reflects the fact thatsome
components of current assets do not shrink to -ero even when a
business is at its seasonal or cyclical low.Thus, permanent current
operating assets represent a minimum level of current assets that
must be financed.a. Trueb. False(16!) &onser'ati'e fin approac(
F S Answer: aEASY.. % conservative current operating asset
financing approach will result inpermanent current assets and some
seasonal current assets being financedusing long/term securities.a.
Trueb. False(16!) Aggressi'e fin approac( F S Answer: aEASY0.
%lthough short/term interest rates have historically averaged less
than long/term rates, the heavy use of short/term debt is
considered to be anaggressive current operating asset financing
strategy because of the inherent risks of using short/term
financing.a. Trueb. False(16)) &as( con'ersion cycle F S
Answer: bEASY1. 2f a firm takes actions that reduce its days sales
outstanding 3!456, then, other things held constant, this will
lengthen its cash conversioncycle 3(((6.a. Trueb. False(16))
&as( con'ersion cycle F S Answer: bEASY1'. 5ther things held
constant, if a firm 7stretches7 3i.e., delays paying6 its accounts
payable, this will lengthen its cash conversion cycle 3(((6.a.
Trueb. False& 2'11 (engage )earning. %ll *ights *eserved. +ay
not be scanned, copied or duplicated, or postedto a publicly
accessible website, in whole or in part.Page 2 Conceptual M/C
Chapter 16:Working Capital(16*) &as( b%+get F S Answer:
aEASY11. 4horter/term cash budgets//say a daily cash budget for the
ne8t month//are generally used for actual cash control while
longer/term cash budgets//say monthly cash budgets for the ne8t
year//are generally used for planning purposes.a. Trueb. False&
2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned,
copied or duplicated, or postedto a publicly accessible website, in
whole or in part.Chapter 16:Working Capital Conceptual M/C Page
3(16,) -oal of cas( #anage#ent F S Answer: aEASY12. (ash is often
referred to as a 7non/earning7 asset.Thus, one goal of cash
management is to minimi-e the amount of cash necessary for
conducting a firm9s normal business activities.a. Trueb. False(16,)
.oti'es for (ol+ing cas( F S Answer: aEASY1. Firms hold cash
balances in order to complete transactions 3both routineand
precautionary6 that are necessary in business operations and as
compensation to banks for providing loans and services.a. Trueb.
False(166) Float F S Answer: aEASY1". For a firm that makes heavy
use of net float, being able to forecast collections and
disbursement check clearings is essential.a. Trueb. False(166)
/ockbo0 F S Answer: aEASY1$. 4etting up a lockbo8 arrangement is
one way for a firm to speed up the collection of payments from its
customers.a. Trueb. False(161) -oal of in'entory #anage#ent F S
Answer: bEASY1,. The overriding goal of inventory management is to
ensure that the firm never suffers a stock/out, i.e., never runs
out of an inventory item.a. Trueb. False(161) -oal of in'entory
#anage#ent F S Answer: aEASY& 2'11 (engage )earning. %ll *ights
*eserved. +ay not be scanned, copied or duplicated, or postedto a
publicly accessible website, in whole or in part.Page 4 Conceptual
M/C Chapter 16:Working Capital1.. The twin goals of inventory
management are 316 to ensure that the inventories needed to sustain
operations are available, but 326 to hold the costs of ordering and
carrying inventories to the lowest possible level.a. Trueb.
False(162) 3ecei'ables balance F S Answer: aEASY10. The average
accounts receivable balance is a function of both the volumeof
credit sales and the days sales outstanding.a. Trueb. False&
2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned,
copied or duplicated, or postedto a publicly accessible website, in
whole or in part.Chapter 16:Working Capital Conceptual M/C Page
5(162) 3ecei'ables aging F S Answer: bEASY11. 2f a firm has a large
percentage of accounts over ' days old, this is proof positive that
its receivables manager is not doing a good :ob.a. Trueb.
False(162) .onitoring recei'ables F S Answer: aEASY2'. The aging
schedule is a commonly used method for monitoring receivables.a.
Trueb. False(162) &re+it policy F S Answer: aEASY21. The four
primary elements in a firm#s credit policy are 316 credit
standards, 326 discounts offered, 36 credit period, and 3"6
collection policy.a. Trueb. False(162) &ollection policy F S
Answer: aEASY22. (hanges in a firm#s collection policy can affect
sales, working capital,and profits.a. Trueb. False(162) 4aking
+isco%nts F S Answer: aEASY2. Not taking cash discounts is costly,
and as a result, firms that do not take them are usually those that
are performing poorly and have inadequate cash balances.a. Trueb.
False(162) &(ange in cre+it policy F S Answer: aEASY2". 4uppose
a firm changes its credit policy from 2;1' net ' to ;1' net '.The
change is meant to meet competition, so no increase in sales
ise8pected.The average accounts receivable balance will probably
declineas a result of this change.a. Trueb. False(165) 4ra+e cre+it
F S Answer: bEASY& 2'11 (engage )earning. %ll *ights *eserved.
+ay not be scanned, copied or duplicated, or postedto a publicly
accessible website, in whole or in part.Page 6 Conceptual M/C
Chapter 16:Working Capital2$. 2f a firm busy on terms of 2;1' net
', it should pay as early as possible during the discount period.a.
Trueb. False& 2'11 (engage )earning. %ll *ights *eserved. +ay
not be scanned, copied or duplicated, or postedto a publicly
accessible website, in whole or in part.Chapter 16:Working Capital
Conceptual M/C Page 7(165) 4ra+e cre+it F S Answer: bEASY2,. Trade
credit can be separated into two componentsnlimited is in a highly
seasonal business, and the followingsummary balance sheet data show
its assets and liabilities at peak and off/peak seasons 3in
thousands of dollars6se a ,$/day year.4ales ?11','''%ccounts
receivable ?1,,'''!ays sales outstanding 3!456 $.'1Benchmark days
sales outstanding 3!456 2'.''a. ? 0,'.0b. ? 0,1.$c. ? 1,1.d.
?1',1.'e. ?12,',.& 2'11 (engage )earning. %ll *ights *eserved.
+ay not be scanned, copied or duplicated, or postedto a publicly
accessible website, in whole or in part.Chapter 16:Working Capital
Prole!" Page 31(16)) In'entory con' perio+ & S Answer:
+.EDI6.0.. Lour firm#s cost of goods sold 3(5M46 average ?2,''','''
per month, and it keeps inventory equal to $'@ of its monthly (5M4
on hand at all times.>sing a ,$/day year, what is its inventory
conversion periodCa. 11.. daysb. 1.' daysc. 1"." daysd. 1$.2 dayse.
1,.. days(16)) In'entory con' perio+ & S Answer: e.EDI6.00.
!ata on 4hin 2nc. for 2''0 are shown below, along with the
inventory conversion period 32(A6 of the firms against which it
benchmarks.The firm#s new (F5 believes that the company could
reduce its inventory enough to reduce its 2(A to the benchmarks9
average.2f this were done,by how much would inventories
declineC>se a ,$/day year.(ost of goods sold G ?0$,'''2nventory
G ?2','''2nventory conversion period 32(A6 G 0$.00Benchmark
inventory conversion period 32(A6 G 0.''a. ? .,1,b. ? 0,121c. ?
1,'2d. ?1',',e. ?11,1$1(16)) $ayables +eferral perio+ & S
Answer: e.EDI6.01. !ata on =ent- 2nc. for 2''0 are shown below,
along with the payables deferral period 3A!A6 for the firms against
which it benchmarks. The firm#s new (F5 believes that the company
could delay payments enough to increase its A!A to the benchmarks9
average.2f this were done, by how much would payables
increaseC>se a ,$/day year.(ost of goods sold G ?.$,'''Aayables
G ?$,'''Aayables deferral period 3A!A6 G 2".Benchmark payables
deferral period G '.''a. ?.,"b. ?0"1c. ?1"d. ?1,'"0e. ?1,1,"&
2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned,
copied or duplicated, or postedto a publicly accessible website, in
whole or in part.Page 32 Prole!" Chapter 16:Working Capital(16))
&as( con'ersion cycle & S Answer: e.EDI6.1'. Lour
consulting firm was recently hired to improve the performance of
4hin/4oenen 2nc, which is highly profitable but has been
e8periencing cash shortages due to its high growth rate.%s one part
of your analysis, you want to determine the firm9s cash conversion
cycle.>singthe following information and a ,$/day year, what is
the firm9s presentcash conversion cycleC%verage inventory G
?.$,'''%nnual sales G ?,'','''%nnual cost of goods sold G
?,','''%verage accounts receivable G ?1,','''%verage accounts
payable G ?2$,'''a. 12'., daysb. 12,.1 daysc. 1., daysd. 1"'.,
dayse. 1"0.' days& 2'11 (engage )earning. %ll *ights *eserved.
+ay not be scanned, copied or duplicated, or postedto a publicly
accessible website, in whole or in part.Chapter 16:Working Capital
Prole!" Page 33(16)) &as( con'ersion cycle & S Answer:
+.EDI6.11. !ewey (orporation has the following data, in
thousands.%ssuming a ,$/day year, what is the firm#s cash
conversion cycleC%nnual sales G ?"$,'''%nnual cost of goods sold G
?1,$''2nventory G ?",'''%ccounts receivable G ?2,'''%ccounts
payable G ?2,"''a. 2$ daysb. 20 daysc. 1 daysd. $ dayse. 0
days(16)) &as( con'ersion cycle & S Answer: +.EDI6.12.
!esai 2nc. has the following data, in thousands.%ssuming a ,$/day
year, what is the firm#s cash conversion cycleC%nnual sales G
?"$,'''%nnual cost of goods sold G ?','''2nventory G ?",$''%ccounts
receivable G ?1,0''%ccounts payable G ?2,$''a. 20 daysb. 2 daysc. $
daysd. 1 dayse. " days& 2'11 (engage )earning. %ll *ights
*eserved. +ay not be scanned, copied or duplicated, or postedto a
publicly accessible website, in whole or in part.Page 34 Prole!"
Chapter 16:Working Capital(16)) &as( con'ersion cycle & S
Answer: a.EDI6.1. Nervos 2nc. had the following data for 2''0 3in
millions6.The new (F5 believes 316 that an improved inventory
management system could lower the average inventory by ?",''', 326
that improvements in the credit department could reduce receivables
by ?2,''', and 36 that the purchasing department could negotiate
better credit terms and thereby increase accounts payable by
?2,'''.Furthermore, she thinks that thesechanges would not affect
either sales or the costs of goods sold.2f these changes were made,
by how many days would the cash conversion cycle be
loweredC5riginal *evised%nnual sales< unchanged ?11','''
?11','''(ost of goods sold< unchanged ?0',''' ?0','''%verage
inventory< lowered by ?",''' ?2',''' ?1,,'''%verage
receivables< lowered by ?2,''' ?1,,''' ?1",'''%verage
payables< increased by ?2,''' ?1',''' ?12,'''!ays in year ,$
,$a. ".'b. .."c. "1.2d. "$.e. "1.0& 2'11 (engage )earning. %ll
*ights *eserved. +ay not be scanned, copied or duplicated, or
postedto a publicly accessible website, in whole or in part.Chapter
16:Working Capital Prole!" Page 35(16)) &as( con'ersion cycle
& S Answer: b.EDI6.1". Fdison 2nc. has annual sales of
?,,$'',''', or ?1'',''' a day on a ,$/day basis.The firm#s cost of
goods sold is .$@ of sales.5n average, the company has ?1,''','''
in inventory and ?0,''',''' in accounts receivable.The firm is
looking for ways to shorten its cash conversioncycle.2ts (F5 has
proposed new policies that would result in a 2'@ reduction in both
average inventories and accounts receivable.4he alsoanticipates
that these policies would reduce sales by 1'@, while the payables
deferral period would remain unchanged at $ days.=hat effectwould
these policies have on the company#s cash conversion cycleC*oundto
the nearest whole day.a. /2, daysb. /22 daysc. /10 daysd. /1"
dayse. /11 days(16)) &as( con'ersion cycle & S Answer:
e.EDI6.1$. Oan !en Borsh (orp. has annual sales of ?$',.$,''', an
average inventory level of ?1$,'12,''', and average accounts
receivable of ?1',''0,'''.The firm#s cost of goods sold is 0$@ of
sales.The company makes all purchases on credit and has always paid
on the 'th day.Dowever, it now plans to take full advantage of
trade credit and to pay its suppliers on the "'th day.The (F5 also
believes that sales can be maintained at the e8isting level but
inventory can be lowered by ?1,1",,''' and accounts receivable by
?1,1",,'''.=hat will be the net change in the cash conversion
cycle, assuming a ,$/day yearCa. /2,., daysb. /21.$ daysc. /2.0
daysd. /,." dayse. /"'.$ days(16*) &as( b%+get & S Answer:
c.EDI6.1,. Nogueiras (orp9s budgeted monthly sales are ?$,''', and
they are constant from month to month."'@ of its customers pay in
the first month and take the 2@ discount, while the remaining ,'@
pay in the monthfollowing the sale and do not receive a
discount.The firm has no bad debts.Aurchases for ne8t month9s sales
are constant at $'@ of pro:ected sales for the ne8t month.P5ther
payments,Q which include wages, rent, and ta8es, are 2$@ of sales
for the current month.(onstruct a cash budget for a typical month
and calculate the average net cash flow during the month.a.
?1,'12b. ?1,1$'c. ?1,21'd. ?1,2.1e. ?1,"& 2'11 (engage
)earning. %ll *ights *eserved. +ay not be scanned, copied or
duplicated, or postedto a publicly accessible website, in whole or
in part.Page 36 Prole!" Chapter 16:Working Capital& 2'11
(engage )earning. %ll *ights *eserved. +ay not be scanned, copied
or duplicated, or postedto a publicly accessible website, in whole
or in part.Chapter 16:Working Capital Prole!" Page 37(166) /ockbo0
& S Answer: +.EDI6.1.. =hitmer 2nc. sells to customers all over
the >.4., and all receipts comein to its headquarters in New
Lork (ity.The firm#s average accounts receivable balance is ?2.$
million, and they are financed by a bank loanat an 11@ annual
interest rate.The firm is considering setting up a regional lockbo8
system to speed up collections, and it believes this would reduce
receivables by 2'@.2f the annual cost of the system is ?1$,''',
what pre/ta8 net annual savings would be reali-edCa. ?21,1,'b.
?2,"''c. ?,,'''d. ?"','''e. ?"",'''(165) 4ra+e cre+it: no# cost
& S Answer: a.EDI6.10. % firm buys on terms of ;1$, net "$.2t
does not take the discount, and it generally pays after ,'
days.=hat is the nominal annual percentage cost of its non/free
trade credit, based on a ,$/day yearCa. 2$.'1@b. 2..$1@c. '.$@d.
.1@e. ,..@(165) 4ra+e cre+it: no# cost & S Answer: e.EDI6.11.
%tlanta (ement, 2nc. buys on terms of 2;1$, net '.2t does not take
discounts, and it typically pays ,' days after the invoice date.Net
purchases amount to ?.2',''' per year.=hat is the nominal annual
percentage cost of its non/free trade credit, based on a ,$/day
yearCa. 1'.0,@b. 12.'.@c. 1."1@d. 1".1'@e. 1,.$$@(165) 4ra+e
cre+it: no# cost & S Answer: b.EDI6.1''. Lour company has been
offered credit terms of ";', net 1' days.=hat will be the nominal
annual percentage cost of its non/free trade credit if it pays 12'
days after the purchaseC3%ssume a ,$/day year.6a. 1,.'$@b. 1,.1'@c.
1..."@d. 10.,@e. 11.$,@& 2'11 (engage )earning. %ll *ights
*eserved. +ay not be scanned, copied or duplicated, or postedto a
publicly accessible website, in whole or in part.Page 38 Prole!"
Chapter 16:Working Capital(165) 4ra+e cre+it: EA3 cost & S
Answer: +.EDI6.1'1. Bumpas Fnterprises purchases ?",$,2,$'' in
goods per year from its sole supplier on terms of 2;1$, net $'.2f
the firm chooses to pay on time but does not take the discount,
what is the effective annual percentage cost of its non/free trade
creditC3%ssume a ,$/day year.6a. 2'.11@b. 21.1.@c. 22.20@d. 2."$@e.
2".,@(165) 4ra+e cre+it:EA3 cost & S Answer: c.EDI6.1'2. % firm
buys on terms of 2;0, net "$ days, it does not take discounts, and
it actually pays after $0 days.=hat is the effective annual
percentage cost of its non/free trade creditC 3>se a ,$/day
year.6a. 1"."@b. 1$.1'@c. 1$.01@d. 1,.,1@e. 1..$2@(165) Free tra+e
cre+it & S Answer: a.EDI6.1'. Buskirk (onstruction buys on
terms of 2;1$, net ,' days.2t does not take discounts, and it
typically pays on time, ,' days after the invoicedate.Net purchases
amount to ?"$',''' per year.5n average, how much PfreeQ trade
credit does the firm receive during the yearC3%ssume a ,$/day year,
and note that purchases are net of discounts.6a. ?10,"1b. ?11,"10c.
?2',01d. ?21,"'0e. ?22,".1(165) &ostly tra+e cre+it & S
Answer: a.EDI6.1'". 2ngram 5ffice 4upplies, 2nc., buys on terms of
2;1$, net $' days.2t does not take discounts, and it typically pays
on time, $' days after the invoice date.Net purchases amount to
?"$',''' per year.5n average, what is the dollar amount of costly
trade credit 3total credit R free credit6 the firm receives during
the yearC3%ssume a ,$/day year, and note that purchases are net of
discounts.6a. ?",1$1b. ?"$,'0c. ?".,$."d. ?"1,1$2e. ?$2,"$'&
2'11 (engage )earning. %ll *ights *eserved. +ay not be scanned,
copied or duplicated, or postedto a publicly accessible website, in
whole or in part.Chapter 16:Working Capital Prole!" Page 3915 50 da
ys 365 2 1002 (165) &ostly tra+e cre+it & S Answer: a
.EDI6.1'$. *oton 2nc. purchases merchandise on terms of 2;1$, net
"', and its grosspurchases 3i.e., purchases before taking off the
discount6 are ?0'',''' per year.=hat is the ma8imum dollar amount
of costly trade credit the firm could get, assuming it abides by
the supplier9s credit termsC3%ssume a ,$/day year.6a. ?$,,11b.
?$,,0"c. ?$1,2'd. ?,2,1,e. ?,$,2.1(165) 4otal tra+e cre+it & S
Answer: a.EDI6.1',. Sirk !evelopment buys on terms of 2;1$, net ,'
days.2t does not take discounts, and it typically pays on time, ,'
days after the invoice date.Net purchases amount to ?$$',''' per
year.5n average, what is the dollar amount of total trade credit
3costly I free6 the firm receives during the year, i.e., what are
its average accounts payableC3%ssume a ,$/day year, and note that
purchases are net of discounts.6a. ? 1',"11b. ? 1",12c. ? 11,,.0d.
?1'",,,2e. ?1'1,01$(165) Stretc(ing accts payable & S Answer:
e.EDI6.1'.. %ffleck 2nc.#s business is booming, and it needs to
raise more capital. The company purchases supplies on terms of 1;1'
net 2', and it currentlytakes the discount.5ne way of getting the
needed funds would be to forgo the discount, and the firm#s owner
believes she could delay payment to "' days without adverse
effects.=hat would be the effectiveannual percentage cost of funds
raised by this actionC3%ssume a ,$/day year.6a. 1'.$1@b. 11.1$@c.
11.."@d. 12.,@e. 1.'1@& 2'11 (engage )earning. %ll *ights
*eserved. +ay not be scanned, copied or duplicated, or postedto a
publicly accessible website, in whole or in part.Page 40 Prole!"
Chapter 16:Working Capital(161!) 3e'ol'ing cre+it agree#ent & S
Answer: b.EDI6.1'0. =eiss 2nc. arranged a ?1,''',''' revolving
credit agreement with a groupof banks.The firm paid an annual
commitment fee of '.$@ of the unused balance of the loan
commitment.5n the used portion of the revolver, itpaid 1.$@ above
prime for the funds actually borrowed on a simple interest
basis.The prime rate was .2$@ during the year.2f the firm borrowed
?,,''',''' immediately after the agreement was signed and repaid
the loan at the end of one year, what was the total dollar
annualcost of the revolverCa. ?20$,'''b. ?'','''c. ?1$,'''d.
?',.$'e. ?".,200(16)) &as( con'ersion cycle & S Answer:
a;A3D1'1. 4oenen 2nc. had the following data for 2''0 3in
millions6.The new (F5 believes that the company could improve its
working capital management sufficiently to bring its N=( and ((( up
to the benchmark companies# level without affecting either sales or
the costs of goods sold.4oenenfinances its net working capital with
a bank loan at an 0@ annual interest rate, and it uses a ,$/day
year.2f these changes had been made, by how much would the firm#s
pre/ta8 income have increasedC 5riginalBenchmark!ata *elated
((((((4ales ?1'','''(ost of goods sold ?0','''2nventory 32(A6
?2',''' 11.2$ 0.''*eceivables 3!456 ?1,,''' $0."' 2'.''Aayables
3A!A6 ?$,'''22.01 '.''12,.0" 20.''a. 1,1'1b. 2,'12c. 2,'1d. 2,$1e.
2,.0"& 2'11 (engage )earning. %ll *ights *eserved. +ay not be
scanned, copied or duplicated, or postedto a publicly accessible
website, in whole or in part.Chapter 16:Working Capital Prole!"
Page 41(16)) &as( con'ersion cycle & S Answer: c;A3D11'.
+argetis 2nc. carries an average inventory of ?.$','''.2ts annual
sales are ?1' million, its cost of goods sold is .$@ of annual
sales, and its average collection period is twice as long as its
inventory conversion period.The firm buys on terms of net ' days,
and it pays on time.2ts new (F5 wants to decrease the cash
conversion cycle by 1' days, based on a ,$/day year.De believes he
can reduce the average inventory to ?,".,2,' with no effect on
sales.By how much must the firm also reduce its accounts receivable
to meet its goal in the reduction of the cash conversion cycleCa.
?12,,'b. ?1',1.c. ?1,,10,d. ?1",0,e. ?1$1,'2.(165) 4ra+e cre+it:
EA3 cost & S Answer: b;A3D111. 4uppose the credit terms offered
to your firm by its suppliers are 2;1' net ' days.Lour firm is not
taking discounts, but is paying after 2$ days instead of waiting
until !ay '.Lou point out that the nominal cost of not taking the
discount and paying on !ay ' is appro8imately [email protected] since your
firm is neither taking discounts nor paying on the due date, what
is the effective annual percentage cost 3not the nominal cost6 of
its costly trade credit, using a ,$/day yearCa. ,'.@b. ,.$@c.
,,..@d. .'.'@e. ..$@(165) Acco%nts payable balance & S Answer:
e;A3D112. %ggarwal 2nc. buys on terms of 2;1' net ', and it always
pays on the 'th day.The (F5 calculates that the average amount of
costly trade credit carried is ?.$,'''.=hat is the firm#s average
accounts payablebalanceC%ssume a ,$/day year.a. ?"$0,1,'b.
?"02,2.c. ?$'.,,$,d. ?$",.$e. ?$,2,$''& 2'11 (engage )earning.
%ll *ights *eserved. +ay not be scanned, copied or duplicated, or
postedto a publicly accessible website, in whole or in part.Page 42
Prole!" Chapter 16:Working Capital(165) Fin st#ts an+ tra+e cre+it
& S Answer: +;A3D11. Mon-ales (ompany currently uses ma8imum
trade credit by not taking discounts on its purchases.The standard
industry credit terms offered by all its suppliers are 2;1' net '
days, and the firm pays on time.The new (F5 is considering
borrowing from its bank, using short/term notes payable, and then
taking discounts.The firm wants to determine the effect of this
policy change on its net income.2ts net purchases are ?11,.,' per
day, using a ,$/day year.The interest rate on the notes payable is
1'@, and the ta8 rate is "'@.2f the firm implements the plan, what
is the e8pected change in net incomeCa. ?2,1,"b. ?",,11c. ?,,$2,d.
?0,""0e. ?"',.'(&o#p) In'entory t%rno'er an+ DS8 & S
Answer: c;A3D11". Narruk (onstruction9s !45 is $' days 3on a ,$/day
basis6, accounts receivable are ?1'' million, and its balance sheet
shows inventory of ?12$ million.=hat is the inventory turnover
ratioCa. "..b. $.2,c. $.0"d. ,."2e. ..'.& 2'11 (engage
)earning. %ll *ights *eserved. +ay not be scanned, copied or
duplicated, or postedto a publicly accessible website, in whole or
in part.Chapter 16:Working Capital Prole!" Page 43(&o#p)
"orking capital< F&F & S Answer: b;A3D11$. +adura 2nc.
wants to increase its free cash flow by ?10' million during the
coming year, which should result in a higher FO% and stock
price.The (F5 has made these pro:ections for the upcoming year<
FB2T is pro:ected to equal ?0$' million. Mross capital e8penditures
are e8pected to total to ?,' million versus depreciation of ?12'
million, so its net capital e8penditures should total ?2"' million.
The ta8 rate is "'@. There will be no changes in cash or marketable
securities, nor will there be any changes in notes payable or
accruals.=hat increase in net working capital 3in millions of
dollars6 would enable the firm to meet its target increase in
F(FCa. ? .2b. ? 1'c. ?1'0d. ?1'e. ?1$,Multiple Part:(The following
data apply to Problems 136-138.)Norn (orporation is deciding
whether to pursue a restricted or rela8ed currentasset investment
policy.The firm#s annual sales are e8pected to total ?,,'',''', its
fi8ed assets turnover ratio equals ".', and its debt and common
equity are each $'@ of total assets.FB2T is ?1$',''', the interest
rate on the firm#s debt is 1'@, and the ta8 rate is "'@.2f the
company follows a restricted policy, its total assets turnover will
be 2.$.>nder a rela8ed policy its total assets turnover will be
2.2.(161) "& in'est#ent policy & S Answer: +.EDI6.11,. 2f
the firm adopts a restricted policy, how much lower would its
interest e8pense be than under the rela8ed policyCa. ? 0,"10b. ?
0,0,1c. ? 1,2.d. ? 1,010e. ?1','1& 2'11 (engage )earning. %ll
*ights *eserved. +ay not be scanned, copied or duplicated, or
postedto a publicly accessible website, in whole or in part.Page 44
Prole!" Chapter 16:Working Capital(161) "& in'est#ent< 38E
& S Answer: b.EDI6.11.. =hat#s the difference in the pro:ected
*5Fs under the restricted and rela8ed policiesCa. 1.2'@b. 1.$'@c.
1.0'@d. 2.1,@e. 2.$1@& 2'11 (engage )earning. %ll *ights
*eserved. +ay not be scanned, copied or duplicated, or postedto a
publicly accessible website, in whole or in part.Chapter 16:Working
Capital Prole!" Page 45(161) "& in'est#ent< 38E & S
Answer: a.EDI6.110. %ssume now that the company believes that if it
adopts a restricted policy, its sales will fall by 1$@ and FB2T
will fall by 1'@, but its total assets turnover, debt ratio,
interest rate, and ta8 rate will all remain the same.2n this
situation, what#s the difference between the pro:ected *5Fs under
the restricted and rela8ed policiesCa. 2.2"@b. 2.",@c. 2..'@d.
2.10@e. .2.@& 2'11 (engage )earning. %ll *ights *eserved. +ay
not be scanned, copied or duplicated, or postedto a publicly
accessible website, in whole or in part.Page 46 Prole!" Chapter
16:Working Capital!*-&E#- !*D -'L.T)'*-& 2'11 (engage
)earning. %ll *ights *eserved. +ay not be scanned, copied or
duplicated, or postedto a publicly accessible website, in whole or
in part.Chapter 16:Working Capital #n"$er" Page 47CH!"TE# $%1(16
Intro) Net working capital F S Answer: bEASY2(16 Intro) Net working
capital F S Answer: bEASY(16 Intro) Days of working capital F S
Answer: aEASY"(16!) "orking capital #anage#ent F S Answer:
aEASY$(16!) "orking capital financing F S Answer: bEASY,(16!)
$er#anent c%rr oper assetsF S Answer: aEASY.(16!) &onser'ati'e
fin approac( F S Answer: aEASY0(16!) Aggressi'e fin approac( F S
Answer: aEASY1(16)) &as( con'ersion cycle F S Answer:
bEASY1'(16)) &as( con'ersion cycle F S Answer: bEASY11(16*)
&as( b%+get F S Answer: aEASY12(16,) -oal of cas( #anage#ent F
S Answer: aEASY1(16,) .oti'es for (ol+ing cas( F S Answer:
aEASY1"(166) Float F S Answer: aEASY1$(166) /ockbo0 F S Answer:
aEASY1,(161) -oal of in'entory #anage#ent F S Answer: bEASY1.(161)
-oal of in'entory #anage#ent F S Answer: aEASY10(162) 3ecei'ables
balance F S Answer: aEASY11(162) 3ecei'ables aging F S Answer:
bEASY2'(162) .onitoring recei'ables F S Answer: aEASY21(162)
&re+it policy F S Answer: aEASY22(162) &ollection policy F
S Answer: aEASY2(162) 4aking +isco%nts F S Answer: aEASY2"(162)
&(ange in cre+it policy F S Answer: aEASY2$(165) 4ra+e cre+it F
S Answer: bEASY2,(165) 4ra+e cre+it F S Answer: bEASY2.(165) 4ra+e
cre+it F S Answer: aEASY20(165) 4ra+e cre+it F S Answer:
aEASY21(165) 4ra+e cre+it F S Answer: aEASY'(165) &ost of tra+e
cre+it F S Answer: aEASY1(165) &ost of tra+e cre+it & S
Answer: aEASY2(165) &ost of tra+e cre+it F S Answer:
aEASY(161!) 3e'ol'ing cre+it F S Answer: aEASY"(16!) .at%rity
#atc(ing F S Answer: a.EDI6.$(16!) .at%rity #atc(ing F S Answer:
b.EDI6.,(16!) Aggressi'e financing F S Answer: a.EDI6..(16!)
Aggressi'e financing F S Answer: b.EDI6.0(16)) &as( con'ersion
cycle F S Answer: a.EDI6.1(16)) &as( con'ersion cycle F S
Answer: a.EDI6."'(16*) &as( b%+get F S Answer: b.EDI6."1(16*)
&as( b%+get F S Answer: a.EDI6."2(16*) &as( an+ capital
b%+gets F S Answer: b.EDI6."(16*) &as( b%+get an+ +epreciation
F S Answer: b.EDI6.""(166) &as( flow sync(roni7ation F S
Answer: a.EDI6."$(166) /ockbo0 & S Answer: b.EDI6.Funds
generated = Days saved Checks per day = $375,000Return n !unds
generated = Funds generated Rate ! return = $22,500 "
$25,000",(162) 3ecei'ables balance F S Answer: b.EDI6.".(162)
3ecei'ables an+ growt( & SAnswer: b.EDI6.#ccunts rece$va%&e
'$&& $ncrease %y 10()*hat percentage $ncrease 'u&d ccur
regard&ess ! the &eve& ! the cash sa&es)+ven $!
cashsa&es 'ere ,0(, rece$va%&es 'u&d st$&&
$ncrease %y 10( under the assu-pt$ns $n the .uest$n)"0(162)
3ecei'ables an+ growt( & S Answer: a.EDI6."1(162)
&ollection policy F S Answer: a.EDI6.$'(162) &as( 's cre+it
sales F SAnswer: b.EDI6.Depart-ent stres, aut dea&ers,and -any
thers se&& n cred$t, us$ng $nterest %ear$ng ntes
paya%&e)*he $nterest rate n th$s cred$t can e/ceed the !$r-0s
cst ! cap$ta&, -ak$ng cred$t sa&es -re pr!$ta%&e than
cash sa&es)$1(162) DS8 an+ past9+%e acco%nts & S Answer:
b.EDI6.$2(165) 4ra+e cre+it F S Answer: b.EDI6.$(16 Intro) "orking
capital & S Answer: cEASY$"(16!) &%rrent asset financing
& S Answer: aEASY$$(16)) &as( con'ersion cycle & S
Answer: bEASY$,(166) /ockbo0 & S Answer: +EASY$.(166) /ockbo0
& S Answer: eEASY$0(162) &re+it policy & S Answer:
eEASY$1(16!) &%rrent asset financing & S Answer:
c.EDI6.,'(16!) &%rrent asset financing & S Answer:
b.EDI6.,1(16)) &as( con'ersion cycle & S Answer:
+.EDI6.,2(16)) &as( con'ersion cycle & S Answer:
a.EDI6.,(16*) &as( b%+get & S Answer: b.EDI6.,"(16*)
&as( b%+get & S Answer: a.EDI6.,$(16*) &as( b%+get
& S Answer: b.EDI6.,,(16*) &as( b%+get & S Answer:
e.EDI6.,.(161) In'entory #anage#ent & S Answer: b.EDI6.,0(162)
3ecei'ables #anage#ent & S Answer: b.EDI6.,1(162) Days sales
o%tstan+ing (DS8) & S Answer: c.EDI6..'(161:) .arketable
sec%rities & S Answer: c.EDI6..1(161:) .arketable sec%rities
& S Answer: +.EDI6..2(&o#p) &%rrent asset financing
& S Answer: b.EDI6..(&o#p) &%rrent asset financing
& S Answer: a.EDI6.."(&o#p) S(ort9ter# financing & S
Answer: a.EDI6..$(&o#p) "orking capital policy & S Answer:
+.EDI6..,(&o#p) "orking capital concepts & S Answer:
b.EDI6...(&o#p) "orking capital concepts & S Answer:
c.EDI6..0(16!) .at%rity #atc(ing & S Answer: eEASY1'er tta&
asset range $320,0002pper tta& asset range $310,0004$n$-u-
tta& assets = F# 5 4$n) C# = $320,000 = 1* De%t 5 +.u$ty#
-atur$ty -atch$ng p&$cy $-p&$es that !$/ed assets and
per-anent current assets are !$nanced '$th &ng6ter-surces)*h$s
$s $ts -st &$ke&y &eve& ! &ng6ter-
!$nanc$ng).1(16)) &as( con'ersion cycle & S Answer:
+EASY7nventry cnvers$n per$d = 50 days#verage c&&ect$n
per$d = 17 days8aya%&es de!erra& per$d = 25 daysCCC = 7nv)
cnv) per$d 5 #vg) c&&) per$d 9 8ay) de!) per$d = 32
days0'(16)) &as( con'ersion cycle & S Answer: bEASY7nventry
cnvers$n per$d = 3: days#verage c&&ect$n per$d = 1,
days8aya%&es de!erra& per$d = 20 daysCCC = 7nv) cnv) per$d
5 #vg) c&&) per$d 9 8ay) de!) per$d = 37 days01(16))
&as( con'ersion cycle & S Answer: bEASY7nventry cnvers$n
per$d = 31 days#verage c&&ect$n per$d = 31 days8aya%&es
de!erra& per$d = 3: daysCCC = 7nv) cnv) per$d 5 #vg)
c&&) per$d 9 8ay) de!) per$d = 33 days02(16)) &as(
con'ersion cycle & S Answer: +EASYCCC = 7nv) cnv) per$d 5
#vg)c&&) per$d 9 8ay) de!erra& per$d#ge !
rece$va%&es = #vg) c&&) per$d = 35 days#ge ! $nventry =
7nv) cnv) per$d = 6, days#ge ! paya%&es = 8ay) de!) per$d = 30
daysCCC = 7nv) cnv) per$d 5 #vg) c&&) per$d 9 8ay) de!)
per$d = 73 days0(16*) &as( b%+get & S Answer:
+EASY8ay-ents;Cash 20(8ay 2nd -nth 30(8ay 3rd -nth
30(C&&ect$ns r$g$na& D@ >r$g) rece$va%&es =
$,,,730.(16)) In'entory con' perio+ & SAnswer:
+.EDI6.4nth&y C>E< = $2,000,0007nventryAC>E< =
50)0(#nnua& C>E< = $23,000,000#vg) $nventry =
$1,000,0007nv) cnv) per$d = 7nv)AC>E< per day =
7nv)A?#nnua& C>Er$g$na& Bench-ark 7C8 atDataRe&ated
7C8 7C8 Bench-ark 1eve&Cst ! gds s&d $:5,0007nventry and
7C8 $20,000 :5):: 3:)00De' $nventry = 7C8 ?C>Er$g$na& 7nv) 9
De' 7nv) = $11,151#&ternat$ve s&ut$n; ?Change $n
7C8A>r$g$na& 7C8@ >r$g) 7nv) = $11,15101(16)) $ayables
+eferral perio+ & SAnswer: e.EDI6.>r$g$na& Bench-ark
8aya%&es atDataRe&ated 8D8 8D8 Bench-ark 1eve&Cst ! gds
s&d $75,0007nventry and 8D8 $5,000 23)33 30)00De' paya%&es
= 8D8 ?C>EEE< per day = 36)35#vg) c&&) per$d =
Rece$va%&esAE< per day = 27):1CCC = 7nv) cnv) per$d 5 #vg)
c&&) per$d 9 8ay) de!) per$d = 33)76 days12(16)) &as(
con'ersion cycle & SAnswer: +.EDI6.#nnua& sa&es
$35,000#nnua& cst ! gds s&d ?C>EE< per day =
53)75#vg) c&&) per$d = Rece$va%&esAE< per day =
30)32CCC = 7nv) cnv) per$d 5 #vg) c&&) per$d 9 8ay) de!)
per$d = 3:),3 days1(16)) &as( con'ersion cycle & S Answer:
a.EDI6. >r$g$na& Rev$sed#nnua& sa&es; unchanged
$110,000 $110,000Cst ! gds s&d; unchanged $:0,000
$:0,000#verage $nventry; &'ered %y $3,000 $20,000
$16,000#verage rece$va%&es; &'ered %y $2,000 $16,000
$13,000#verage paya%&es; $ncreased %y $2,000 $10,000
$12,000Days $n year 365 3657nv) cnv) per$d =
7nv)A?C>Er$g$na& Bench-ark Bench-arkData Re&ated
CCCCCC1eve&s Er$g) #AR 9 De' #AR = $136,,:6111(165) 4ra+e
cre+it: EA3 cost & S Answer: b;A3DD$scunt (2( Det days
30D$scunt days 10 #ctua& days t pay-ent 25+#R = I1 5 D$sc)
(A?100 9 D$sc) (@JI365A?#ctua& days 9 D$sc) 8er$d@J 9 1 =
63)3,(112(165) Acco%nts payable balance & S Answer:
e;A3DD$scunt (2( Det days 30D$scunt days 10 #ctua& days t
pay-ent 30Cst&y trade cred$t $375,000 KearsAday 365Cst&y
trade cred$t = 8urchases per day ?Days cred$t $s utstand$ng 9
D$scunt per$d@$375,000 = 8urchases per day 208urchases per day =
$1:,750Free trade cred$t = 8urchases per day D$scunt per$dFree
trade cred$t = $1:,750 10Free trade cred$t = $1:7,500*ta& trade
cred$t = Cst&y trade cred$t 5 Free trade cred$t*ta& trade
cred$t = $375,000 5 $1:7,500*ta& trade cred$t = $562,50011(165)
Fin st#ts an+ tra+e cre+it & S Answer: +;A3DD$scunt (2( Det
days 30D$scunt days 10 #ctua& days t pay-ent 30Det
purchasesAday $11,760 DaysAyear 365#nnua& $nterest rate 10)00(
*a/ rate 30)00(#A8D d$sc) = Det purchasesAday #ctua& days t
pay-ent#A8D d$sc) = $11,760 30 = $352,:00#A8D$sc) = Det
purchasesAday D$scunt days#A8D$sc) = $11,760 10 = $117,600#-unt
needed t %e !$nanced =#A8D d$sc) 9 #A8D$sc)#-unt needed t %e
!$nanced = $352,:00 9 $117,600 = $235,200#dd$t$na& $nterest cst
= #-unt needed t %e !$nanced #nnua& $nterest rate#dd$t$na&
$nterest cst = $235,200 10)00( = $23,520Erss purchases = ?Det
purchasesAday 365@A?1 9 D$sc) (@Erss purchases = $11,760 365A,:)00(
= $3,3:0,000D$scunts &st = Erss purchases D$scunt (D$scunts
&st = $3,3:0,000 2)00( = $:7,600 8re6ta/ sav$ngs = D$scunts
&st 9#dd$t$na& $nterest8re6ta/ sav$ngs = $:7,600 9 $23,520
= $63,0:0#!ter6ta/ sav$ngs = 8re6ta/ sav$ngs ?1 9 *@#!ter6ta/
sav$ngs = $63,0:0 60)00( = $3:,33:11"(&o#p) In'entory t%rno'er
an+ DS8 & S Answer: c;A3DD50 DaysAyear 365Rece$va%&es $100
7nventry $1252se D e.uat$n t !$nd sa&es;D = Rece$va%&esA?+
= Det $nc-eA+.u$ty 6)50( 5)00(D$!!erence $n R>+s = 1)50(110(161)
"& in'est#ent< 38E& SAnswer: a.EDI6.( Change $n
sa&es 615)00(( Change $n +B7* 610)00(De' sa&es
$3,060,000De' +B7* $135,000Restr$cted;*#*> = + = 2)23(