CHAPTER 15 – MINDTRAP CHAPTER TEST

1)

If Rubash Corporation bought on terms of 1/10, net 30, what would be its nominal annual cost of costly trade credit? Assume a 365-day year.

 

 

a. 18.4%

 

 

b. 24.5%

 

 

c. 22.5%

 

 

d. 12.5%

 

 

e. 20.0%

2)

If Rubash were able to delay payment until Day 50 rather than pay on Day 30, what would be the new nominal annual cost of its costly trade credit? Assume a 365-day year.

 

 

a. 15.0%

 

 

b. 9.2%

 

 

c. 13.8%

 

 

d. 12.3%

 

 

e. 10.8%

3)

If Rubash were able to delay payment until Day 50 rather than pay on Day 30, what would be the new nominal annual cost of its costly trade credit? Assume a 365-day year.

 

 

a. 15.0%

 

 

b. 9.2%

 

 

c. 13.8%

 

 

d. 12.3%

 

 

e. 10.8%

4)

If Rubash were unable to stretch its trade credit and hence had to pay by Day 30 and it did not take discounts, what would be its effective annual cost of costly trade credit? Assume a 365-day year.

 

 

a. 13.56%

 

 

b. 18.25%

 

 

c. 15.75%

 

 

d. 23.33%

 

 

e. 20.13%

5)

 

a. True

 

b. False

Wu Corporation has been offered a loan of $1,000,000 at a   rate of 8.5%, simple interest, with monthly interest payments and a 365-day   year. What would the effective interest rate be on this loan?

 

 

a. 8.84%

 

 

b. 9.00%

 

 

c. 8.50%

 

 

d. 7.75%

 

 

e. 6.33%

6)

If Wu’s $1,000,000 loan had been 8.5%, add-on, payable in 12 end-of-month installments, what would its APR have been?

 

 

a. 12.33%

 

 

b. 8.99%

 

 

c. 15.34%

 

 

d. 20.00%

 

 

e. 17.50%

7)

Gambona Inc. has sales of $200, net income of $20, total assets of $500, and common equity of $250, all in millions. The new CFO thinks the firm’s current asset investment policy is too relaxed, and she proposes to tighten it, reducing inventories and receivables enough to bring total assets down to $300. The total liabilities/assets ratio will be kept at 50%, so common equity will decline from $250 to $150. Assume that this change has no effect on either sales or net income. Using the DuPont equation, by how much would Gambona’s ROE increase?

 

 

a. 5.33%

 

 

b. 2.75%

 

 

c. 7.88%

 

 

d. 8.00%

 

 

e. 6.25%

8)

Keys International Inc. has the following data: Annual sales = $1,500,000; Cost of goods sold = $1,000,000; Inventories = $250,000; Accounts receivable = $200,000; and Accounts payable = $175,000. Based on a 365-day year, what is Keys’ CCC?

 

 

a. 100.18 days

 

 

b. 66.92 days

 

 

c. 76.04 days

 

 

d. 139.92 days

 

 

e. 50.15 days

9)

Suppose Keys implemented a plan to produce and sell goods faster, collect faster, and delay its own payments still more, all without lowering sales or increasing operating costs, which would reduce its CCC. How would you expect these actions to impact its profits and ROE?

 

 

a. Lower

 

 

b. No change

 

 

c. Raise

10)

Butcher Corporation had $4,000,000 of sales during the last 12 months, its latest accounts receivable balance was $500,000, it allows customers 40 days to pay for purchases, and it does not offer discounts. Which of the following statements is correct using a 365-day year?

 

 

a. On average, Butcher’s customers do not pay on     time. We know this because it allows 40 days for payment yet its DSO is     45.6 days.

 

 

b. On average, Butcher’s customers do pay on     time. We know this because it allows 40 days for payment and its DSO is     only 20.6 days.

 

 

c. We would need more information to determine whether     or not Butchers customers pay on time.

11)

Suppose Butcher changed its credit terms from 40 days to 2/10, net 40, meaning that it would give a 2% discount to anyone who paid by the 10th day. What would you expect to happen to its DSO?

 

 

a. Decrease

 

 

b. Increase

 

 

c. No change

12)

The cash budget shows, often on a monthly basis, expected collections from sales, the cash payments that must be made during the period, and the projected cash flow for the period. Cumulative cash flow is determined, and the target cash balance is subtracted from the cumulative cash flow to determine the firm’s need for financing or surplus cash available for investment. True or false?

13)

A UCC-1 is a document filed with a state agency that indicates specific assets, such as inventory, accounts receivable, and equipment, have been pledged as collateral for a loan. This prevents firms from using the same assets as collateral to secure loans from different lenders. It is terribly important that potential lenders check with the state to see if the UCC-1 has already been filed before agreeing to make a secured loan, and then to file the UCC-1 if they do make a loan. True or false?

 

a. True

 

b. False

14)

What effect has the development of credit and debit cards had on firms’ cash balances?

 

 

a. Increased required cash balances

 

 

b. No effect

 

 

c. Decreased required cash balances

15)

There have been huge improvements in transportation services in recent years. What effect have these changes had on firms’ inventory holdings as measured by the ratio of inventories to sales?

 

 

a. No effect on inventories.

 

 

b. Decreased inventories relative to sales because firms     can receive orders quickly.

 

 

c. Increased inventories relative to sales because     customers now expect rapid delivery.

16)

If a firm finances all of its temporary current assets plus some of its permanent current assets with short-term debt, what type of financing policy would it have?

 

 

a. Aggressive

 

 

b. Conservative

 

 

c. Maturity matching

17)

A firm carries relatively large amounts of cash, marketable securities, and inventories, and a liberal credit policy results in a high level of receivables. Which of the following current asset investment policies best reflects this firm’s policy?

 

 

a. Restricted

 

 

b. Moderate

 

 

c. Relaxed

18)

GE is a manufacturing firm that sells on credit, whereas Amazon is an Internet retailer that sells goods manufactured by others and collects (via credit cards) at about the same time it ships goods. Which of the following statements is correct?

 

 

a. Amazon will have a longer CCC than GE.

 

 

b. both firms’ CCCs will be the same.

 

 

c. Do not have enough information to answer.

 

 

d. GE will have a longer CCC than Amazon.

19)

Companies must be large, well-known, and financially strong in order to use commercial paper financing. Because commercial paper borrowers are generally less risky than prime loan borrowers, and because commercial paper is more liquid than a promissory note, we should expect the average rate charged on commercial paper to be below the prime rate. True or false?

20)

When a firm borrows on a short-term basis from a bank, which of the following instruments would be used to state the terms and conditions involved with the debt?

 

 

a. Credit line

 

 

b. Mortgage bond

 

 

c. Promissory note

 

 

d. Certificate of indebtedness

21)

Suppose a firm does the following: (1) Switches from manufacturing the goods it sells to buying and then reselling them, (2) changes from giving customers 60 days to pay to 30 days, and (3) begins paying its own suppliers in 60 rather than 30 days. What would happen to its CCC?

 

 

a. Decrease

 

 

b. No change

 

 

c. Increase

22)

Working capital is equal to the firm’s current assets, whereas net operating working capital is equal to current assets minus the difference between current liabilities and notes payable. This assumes that all current assets are used in the firm’s normal operations. True or false?

 

a. True

 

b. False

23)

If a firm finances its permanent current assets with long-term debt and equity, and finances its temporary current assets with short-term debt, what type of financing policy would it have?

 

 

a. Maturity matching

 

 

b. Aggressive

 

 

c. Conservative

24)

Unlike bank loans and costly trade credit, accruals are typically considered to have a zero cost. True or false?

 

a. True

 

b. False

25)

What are the two main types of assets typically used as collateral for a short-term business loan?

 

 

a. Inventories and fixed assets

 

 

b. Bonds and stocks

 

 

c. Accounts receivable and fixed assets

 

 

d. Fixed assets and bonds

 

 

e. Inventories and accounts receivable

26)

The stronger a firm’s financial position, the easier it is for it to borrow on good terms. Consequently, the firm’s optimal holdings of cash and securities will be smaller than if its financial position were weak. True or false?

 

a. True

 

b. False

27)

Depreciation is a major source of cash, so it shows up on the cash budget as a cash inflow. True or false?

 

a. True

 

b. False

28)

Suppose a firm’s cash flows do not occur uniformly throughout the month—for example, suppose most of the payments must be made early in the month while most customers pay later in the month. This would have no effect on the firm’s borrowing requirements as estimated using a monthly cash budget because cash flows would be evened out by the end of the month. True or false?

 

a. True

 

b. False

 
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