1. Which of the following actions are likely to reduce the length of a company's cash conversion cycle?

a. Adopting a just-in-time inventory system which reduces the inventory conversion period.
b. Reducing the average days sales outstanding (DSO) on its accounts receivable.
c. Reducing the amount of time the company takes to pay its suppliers.
d. All of the answers above are correct.
e. Answers a and b are correct.

2. A lockbox plan is most beneficial to firms which

a. Send payables over a wide geographic area.
b. Have widely disbursed manufacturing facilities.
c. Have a large marketable securities account to protect.
d. Hold inventories at many different sites.
e. Make collections over a wide geographic area.

3. Which of the following statement completions is most correct? If the yield curve is upward sloping, then a firm's marketable securities portfolio, assumed to be held for liquidity purposes, should be

a. Weighted toward long-term securities because they pay higher rates.
b. Weighted toward short-term securities because they pay higher rates.
c. Weighted toward U.S. Treasury securities to avoid interest rate risk.
d. Weighted toward short-term securities to avoid interest rate risk.
e. Balanced between long- and short-term securities to minimize the effects of either an upward or a downward trend in interest rates.

4. Which of the following statements is most correct?

a. Compensating balance requirements apply only to businesses, not to individuals.
b. Compensating balances are essentially costless to most firms, because those firms would normally have such funds on hand to meet transactions needs anyway.
c. If the required compensating balance is larger than the transactions balance the firm would ordinarily hold, then the effective cost of any loan requiring such a balance is increased.
d. Banks are prohibited from earning interest on the funds they force businesses to keep as compensating balances.
e. All of the statements above are false.

5. Which of the following statements is most correct?

a. If credit sales as a percentage of a firm's total sales increases, and the volume of credit sales also increases, then the firm's accounts receivable will automatically increase.
b. It is possible for a firm to overstate profits by offering very lenient credit terms which encourage additional sales to financially "weak" firms. A major disadvantage of such a policy is that it is likely to increase uncollectible accounts.
c. A firm with excess production capacity and relatively low variable costs would not be inclined to extend more liberal credit terms to its customers than a firm with similar costs that is operating close to capacity.
d. Firms use seasonal dating primarily to decrease their DSO.
e. Seasonal dating with terms 2/15, net 30 days, with April 1 dating, means that if the original sale took place on February 1st, the customer can take the discount up until March 15th, but must pay the net invoice amount by April 1st.

6. Which of the following statements is incorrect about working capital policy?

a. A company may hold a relatively large amount of cash if it anticipates uncertain sales levels in the coming year.
b. Credit policy has an impact on working capital since it has the potential to influence sales levels and the speed with which cash is collected.
c. The cash budget is useful in determining future financing needs.
d. Holding minimal levels of inventory can reduce inventory carrying costs and cannot lead to any adverse effects on profitability.
e. Managing working capital levels is important to the financial staff since it influences financing decisions and overall profitability of the firm.

7. 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%; the ROEs are equal.
b. 6.2%
c. 5.4%
d. 1.6%
e. 3.8%

8. 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

9. Ski Lifts Inc. is a highly seasonal business. The following summary balance sheet provides data for peak and off-peak seasons (in thousands of dollars):

Peak Off-peak
Cash $ 50 $ 30
Marketable securities 0 20
Accounts receivable 40 20
Inventories 100 50
Net fixed assets 500 500
$690 $620
Spontaneous
liabilities $ 30 $ 10
Short-term debt 50 0
Long-term debt 300 300
Common equity 310 310
$690 $620

From this data we may conclude that

a. Ski Lifts has a working capital financing policy of exactly matching asset and liability maturities.
b. Ski Lifts' working capital financing policy is relatively aggres¬sive; that is, the company finances some of its permanent assets with short-term discretionary debt.
c. Ski Lifts follows a relatively conservative approach to working capital financing; that is, some of its short-term needs are met by permanent capital.
d. Without income statement data, we cannot determine the aggressiveness or conservatism of the company's working capital financing policy.
e. Both statements a and c are correct.

10. Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

a. Convenience of location.
b. Competitive cost of services provided.
c. Size of the bank's deposits.
d. Experience of personnel.
e. Loyalty and willingness to assume lending risks.

11. Coverall Carpets Inc. is planning to borrow $12,000 from the bank. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the approximate (nominal) rate of interest on the 10.19 percent add-on loan?

a. 5.10%
b. 10.19%
c. 12.00%
d. 20.38%
e. 30.57%

Multiple part:

(The following information applies to the next two problems 14 & 15.)

Delta Industries buys on terms of 2/10, net 30, but generally does not pay until 40 days after the invoice date. The firm purchases $1,080,000 net in materials per year. (Use a 360-day year.)

12. How much "costly" trade credit does the firm use on average each year?

a. $ 20,000
b. $ 30,000
c. $ 60,000
d. $ 90,000
e. $100,000

13. What is the effective annual cost of not taking the discount?

a. 27.4%
b. 26.5%
c. 25.4%
d. 24.7%
e. 23.5%