1. FIN 534 Week 10 Quiz 9
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Finance 534 week 10 quiz 9
Question 1
Which of the following statements is NOT CORRECT?
Answer
Commercial paper can be issued by virtually any firm so long as it is willing to pay
the going interest rate.
Accruals are "free" in the sense that no explicit interest is paid on these funds.
A conservative approach to working capital management will result in most if not
all permanent current operating assets being financed with long-term capital.
The risk to a firm that borrows with short-term credit is usually greater than if it
borrowed using long-term debt. This added risk stems from the greater variability
of interest costs on short-term debt and possible difficulties with rolling over short-
term debt.
Bank loans generally carry a higher interest rate than commercial paper.
2 points
Question 2
Which of the following statements is CORRECT?
Answer
Accruals are an expensive but commonly used way to finance working capital.
A conservative financing policy is one where the firm finances part of its fixed
assets with short-term capital and all of its net working capital with short-term
funds.
If a company receives trade credit under terms of 2/10 net 30, this implies that the
company has 10 days of free trade credit.

2. One cannot tell if a firm has a conservative, aggressive, or moderate current
asset financing policy without an examination of its cash budget.
If a firm has a relatively aggressive current asset financing policy vis-à-vis other
firms in its industry, then its current ratio will probably be relatively high.
2 points
Question 3
Which of the following statements is CORRECT?
Answer
Shorter-term cash budgets, in general, are used primarily for planning purposes,
while longer-term budgets are used for actual cash control.
The cash budget and the capital budget are developed separately, and although
they are both important to the firm, one does not affect the other.
Since depreciation is a non-cash charge, it neither appears on nor has any effect
on the cash budget.
The target cash balance should be set such that it need not be adjusted for
seasonal patterns and unanticipated fluctuations in receipts, although it should be
changed to reflect long-term changes in the firm's operations.
The typical cash budget reflects interest paid on loans as well as income from the
investment of surplus cash. These numbers, as well as other items on the cash
budget, are expected values; hence, actual results might vary from the budgeted
amounts.
2 points
Question 4
Helena Furnishings wants to reduce its cash conversion cycle. Which of the
following actions should it take?
Answer
Increase average inventory without increasing sales.
Take steps to reduce the DSO.
Start paying its bills sooner, which would reduce the average accounts payable
but not affect sales.

3. Sell common stock to retire long-term bonds.
Sell an issue of long-term bonds and use the proceeds to buy back some of its
common stock.
2 points
Question 5
Which of the following actions would be likely to shorten the cash conversion
cycle?
Answer
Adopt a new manufacturing process that speeds up the conversion of raw
materials to finished goods from 20 days to 10 days.
Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
Adopt a new manufacturing process that saves some labor costs but slows down
the conversion of raw materials to finished goods from 10 days to 20 days.
Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
2 points
Question 6
Which of the following statements is CORRECT?
Answer
Trade credit is provided only to relatively large, strong firms.
Commercial paper is a form of short-term financing that is primarily used by large,
strong, financially stable companies.
Short-term debt is favored by firms because, while it is generally more expensive
than long-term debt, it exposes the borrowing firm to less risk than long-term
debt.
Commercial paper can be issued by virtually any firm so long as it is willing to pay
the going interest rate.
Commercial paper is typically offered at a long-term maturity of at least five years.

4. 2 points
Question 7
Which of the following is NOT a situation that might lead a firm to increase its
holdings of short-term marketable securities?
Answer
The firm must make a known future payment, such as paying for a new plant that
is under construction.
The firm is going from its peak sales season to its slack season, so its receivables
and inventories will experience a seasonal decline.
The firm is going from its slack season to its peak sales season, so its receivables
and inventories will experience seasonal increases.
The firm has just sold long-term securities and has not yet invested the proceeds
in operating assets.
The firm just won a product liability suit one of its customers had brought against
it.
2 points
Question 8
Which of the following statements is CORRECT?
Answer
Depreciation is included in the estimate of cash flows (Cash income +
Depreciation), hence depreciation is set forth on a separate line in the cash
budget.
If cash inflows from collections occur in equal daily amounts but most payments
must be made on the 10th of each month, then a regular monthly cash budget will
be misleading. The problem can be corrected by using a daily cash budget.
Sound working capital policy is designed to maximize the time between cash
expenditures on materials and the collection of cash on sales.
If a firm wants to generate more cash flow from operations in the next month or
two, it could change its credit policy from 2/10 net 30 to net 60.

5. If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of
its sales in September, then its DSO as it is typically calculated (with sales per for
past 12 months/365) would probably be lower in October than in August.
2 points
Question 9
Which of the following items should a company report directly in its monthly cash
budget?
Answer
Its monthly depreciation expense.
Cash proceeds from selling one of its divisions.
Accrued interest on zero coupon bonds that it issued.
New shares issued in a stock split.
New shares issued in a stock dividend.
2 points
Question 10
Which of the following is NOT directly reflected in the cash budget of a firm that is
in the zero tax bracket?
Answer
Payments lags.
Depreciation.
Cumulative cash.
Repurchases of common stock.
Payment for plant construction.
2 points
Question 11
Which of the following statements is CORRECT?
Answer

6. Under normal conditions, a firm's expected ROE would probably be higher if it
financed with short-term rather than with long-term debt, but using short-term
debt would probably increase the firm's risk.
Conservative firms generally use no short-term debt and thus have zero current
liabilities.
A short-term loan can usually be obtained more quickly than a long-term loan, but
the cost of short-term debt is normally higher than that of long-term debt.
If a firm that can borrow from its bank at a 6% interest rate buys materials on
terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we
would expect to see zero accounts payable on its balance sheet.
If one of your firm's customers is "stretching" its accounts payable, this may be a
nuisance but it will not have an adverse financial impact on your firm if the
customer periodically pays off its entire balance.
2 points
Question 12
Other things held constant, which of the following would tend to reduce the cash
conversion cycle?
Answer
Carry a constant amount of receivables as sales decline.
Place larger orders for raw materials to take advantage of price breaks.
Take all discounts that are offered.
Continue to take all discounts that are offered and pay on the net date.
Offer longer payment terms to customers.
2 points
Question 13
Other things held constant, which of the following will cause an increase in net
working capital?
Answer
Cash is used to buy marketable securities.

7. A cash dividend is declared and paid.
Merchandise is sold at a profit, but the sale is on credit.
Long-term bonds are retired with the proceeds of a preferred stock issue.
Missing inventory is written off against retained earnings.
2 points
Question 14
Which of the following statements is CORRECT?
Answer
Other things held constant, the higher a firm's days sales outstanding (DSO), the
better its credit department.
If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no
change in sales volume occurs, then the firm's DSO will probably increase.
If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm
probably has some past-due accounts.
If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp
peak in December, then its DSO as it is typically calculated (with sales per for
past 12 months/365) would probably be lower in January than in July.
If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10
net 60, then its sales should increase, and this should lead to an increase in sales
per day, and that should lead to a decrease in the DSO.
2 points
Question 15
A lockbox plan is
Answer
used to protect cash, i.e., to keep it from being stolen.
used to identify inventory safety stocks.
used to slow down the collection of checks our firm writes.
used to speed up the collection of checks received.

8. used primarily by firms where currency is used frequently in transactions, such as
fast food restaurants, and less frequently by firms that receive payments as
checks.