Xtra Credit

Ross Baker 6.
Which of the following is not part of net

AGEC 424 working capital?
Xtra Credit a. accounts payable
b. marketable securities
1. The term "net working capital" means: c. retained earnings
a. the firm's gross working capital minus d. inventory
spontaneous financing e. accounts payable
b. the firm's cash, accounts receivable, and
inventory minus short-term payables and 7. An effective program of working capital
accruals management requires that:
c. the firm's current assets minus its current a. the firm run with the absolute minimum in
liabilities each current asset account.
d. all of the above b. a series of cost/benefit tradeoffs be
considered because running a business is
2. Seasonal peaks in business are supported easier with more working capital than
by: with less, but holding working capital costs
a. permanent working capital money
b. long-term financing c. large inventories be maintained to
c. temporary working capital adequately service customers
d. discretionary financing d. credit can be easily granted to customers to
encourage higher sales
3. Working capital policy involves a tradeoff
between easier operation and ____. 8. Temporary working capital is
a. more working capital a. the seasonal borrowing capacity of a firm
b. spontaneous liabilities b. incremental working capital necessary to
c. temporary financing finance slower than expected collections of
d. the cost of carrying short-term assets customer receivables
c. incremental working capital necessary to
4. Working capital increases when ____ support peak activity in seasonal
decreases. businesses
a. accounts receivable d. additional payroll cost and expenses
b. inventory incurred during seasonal peaks
c. accounts payable
d. Cash 9. Which of the following is accepted
financing wisdom?
5. An aggressive working capital policy a. The maturity of funds used to support a
a. uses more short-term financing than long- project should roughly match the project's
term duration.
b. uses short-term financing to support only b. Because firms can use their own equity as
the peaks of temporary working capital they choose, equity can be used to finance
c. supports a portion of permanent working projects of any duration.
capital with short-term financing c. Any project can appropriately be supported
d. Both a & b by funding with a shorter maturity.
e. Both a & c d. Any project can appropriately be supported
by funding with a longer maturity.
1
10. Which of the following factors does not c. The working capital itself can be used to
directly affect the firm's investment in collateralize the loan.
working capital? d. All of the above.
a. the firm's inventory and credit policies
b. the age of the firm's plant and equipment 15. In the context of working capital an
c. the firm's sales level accrual is not
d. the length of the firm's operating cycle a. an estimate of an obligation of the firm
b. effectively a short term loan from the
unpaid supplier of services
11. All other things equal, a policy of c. an adjustment to the accrued depreciation
financing with a relatively ____ account
proportion of short-term debt will tend to d. a source of spontaneous financing
result in ____ earnings.
a. large, lower 16. All but one of the following are associated
b. constant, higher with short-term debt?
c. constant, lower a. Easily available to most companies.
d. large, higher b. It is usually the lowest cost financing.
c. It is a flexible form of financing.
12. Which of the following working capital d. It is usually used to finance long-term
financing policies subjects the firm to the assets.
greatest risk?
a. financing temporary working capital with 17. Which of the following is true regarding
long-term debt pledged receivables?
b. financing permanent working capital with a. They are collateral for a loan.
long-term debt b. Uncollected accounts are usually the
c. financing permanent working capital with responsibility of the lender.
short-term debt c. The process involves factoring.
d. financing temporary working capital with d. Both a & b
short-term debt
18. Credit terms of 1/10, net 30 mean
13. Which of the following represents a. purchases made between the first and
spontaneous financing? tenth day of the month must be paid by
a. the origination of a 9-month bank loan month end
b. the issuance of a note payable with a b. if the vendor is not paid within 30 days, 1%
maturity of less than one year interest is charged for every 10 days
c. an increase accounts payable resulting thereafter
from the purchase of inventories on 30-day c. the vendor will grant a discount of 10% for
credit payment within 30 days
d. a and c d. the vendor will grant a 1% discount if paid
e. all of the above within 10 days; otherwise the bill is due in
full within 30 days
14. Why will banks extend short-term
working capital financing to companies to 19. Credit extended in connection with goods
which they would not extend long-term purchased for resale is called
credit? a. commercial paper.
a. Conditions are unlikely to deteriorate too b. bank loans.
badly in the short term. c. trade credit or payables.
b. Working capital loans are "self liquidating." d. commercial credit.
2
c. increase ACP.
20. A compensating balance arrangement d. all of the above
between a firm and its bank e. none of the above
a. increases the return on the loan to the
bank. 25. Relaxation of credit policy results in
b. forces the firm to keep a minimum balance a. an increase in credit sales.
in its checking account. b. a decrease in credit expenses.
c. increases the cost of the loan to the firm. c. a decrease in investment in receivables.
d. all of the above d. b and c
e. all of the above
21. When a firm factors its accounts
receivable as opposed to pledging them, 26. Which of the following is not a cost of
the firm will: carrying inventory?
a. offer the lender the accounts receivable as a. breakage and theft
collateral to the loan b. obsolescence
b. sell the accounts receivable at a discount c. financing and storage costs
to the lender d. slower inventory turnover
c. in all cases, remain liable for any
uncollected accounts sold to the lender 27. A firm has a $5 million revolving credit
d. none of the above agreement with its bank at 1.5% over
prime with a commitment fee of .5%
22. Which of the following is not a reason unborrowed balance. What is the total
that firms typically hold cash? cost of borrowing in a month when the
a. to make routine transactions prime rate is 8% if the firm borrowed $2
b. to satisfy compensating balance million prior to the beginning of the
requirements month and takes down an additional $1
c. to earn interest million two thirds through the month on
d. to be able to respond to emergencies and the 21st? (Correct answers may differ due
opportunities to rounding.)
a. $21,875
23. Which of the following credit and b. $20,833
collections decisions would typically not c. $20,417
increase the accounts receivable balance? d. $19,583
a. extending credit to less creditworthy
customers
b. increasing the discount offered for prompt 28. What is the effective rate on an 8% loan
payment subject to a 20% minimum compensating
c. extending the time allowed for payment of balance?
a customer's bill a. 9.6%
d. delaying dunning letters from the credit b. 10%
department c. 8.13%
e. all of the above would typically increase d. none of the above
the accounts receivable balance
24. More aggressive collection procedures

should
a. increase credit sales.
b. decrease accounts receivable.
3
29. CNN Corporation needs $750,000 and 32. Hatter Enterprises has current assets of
plans to borrow from its bank under the $15 million and a current ratio of 3. The
terms of its line-of-credit arrangement. bank has offered Hatter a $13 million
These terms call for a minimum revolving credit agreement at an interest
compensating balance of 12 percent. How rate of 10%. Hatter will have to pay a
much will CNN have to borrow to obtain commitment fee of 1% on the unused
the needed cash? balance. Assuming that current assets and
a. $750,000 the current ratio remain constant,
b. $798,307 calculate the total annual financing
c. $840,000 charge associated with this agreement if
d. $852,273 Hatter borrows enough to support all of
its net working capital.
a. $1,030,000
b. $1,240,000
c. $1,310,000
d. $1,390,000
30. If the prompt payment discount is
foregone, which of the following credit
terms implies the customer is borrowing
at a rate that is less than 20% (assume
365 days per year)?
a. 2/10, net 30
b. 1.5/10, net 30
c. 1/10, net 20
d. 3/20, net 75
e. all of the above imply borrowing at 20% or
more.
31. If a vendor's invoice states terms of sale

of 2/10 net 60, the implied annual cost of
interest from foregoing the discount
would be:
a. 13.2%
b. 14.6%
c. 2.0%
d. 13.7%

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Ross Baker 6.

Which of the following is not part of net

24. More aggressive collection procedures

31. If a vendor's invoice states terms of sale

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