Working Capital Management

Chapter 18

Mechanics

Question 1
Working

capital management involves managing the firms liquidity, which involves managing ____
A. B. C. D.

Current Assets & Current Liabilities Current Assets & Capital Current Liabilities & Capital Current Liabilities Only

A. Current Assets & Current Liabilities

Answer

Question 2
This

involves matching the cash flow generating characteristics of an asset with the maturity of the source of financing used to acquire it.
A.

B.
C. D.

Working Capital Management Cash Budget Self-Liquidating Debt Discretionary Funds

C. Self-Liquidating Debt
Answer

Question 3
Which
A. B. C. D.

of the following is a type of investment in assets?

Bonds Shares of Stock Receivables Financed Inventories

D. Inventories
Answer

Types of Investments in Assets

Definitions & Examples D: Assets that will be liquidated & not replaced within the current year. E: typically Current Assets (Inventories & Accounts Receivables) D: Assets that the firm expects to hold for a period longer than 1 year E: Typically Fixed Assets (Plant & Equipment) & minimum level of investments in Current Assets

Temporary

Permanent

**Figure 18.1 Panel A, pg594

Question 4
Which
A. B. C. D.

is not a type of a source of financing?

Spontaneous Discretionary Temporary Permanent

B. Discretionary
Answer

Types of Investments in Assets

Definitions & Examples

Temporary

D: Assets that will be liquidated & not replaced within the current year. E: typically Current Assets (Inventories & Accounts Receivables)
D: Assets that the firm expects to hold for a period longer than 1 year E: Typically Fixed Assets (Plant & Equipment) & minimum level of investments in Current Assets

Permanent

Types of Sources of Financing

Definitions & Explanations

Spontaneous

D: Financing sources that arise naturally / spontaneously out of day-to-day operations of the business E: Trade Credit / Accounts Payable, Accrued Expenses (wages, salaries, interest, taxes)
D: Current Liabilities the firm incurs on a discretionary basis. Management has to make an overt decision to use this type of financing source E: Unsecured Bank Loans & Commercial Paper D: Long-term Sources of discretionary financing used by the firm E: Intermediate-term Loans, Long-term debt (installment loans & bonds), preferred stock, common equity

Temporary

Permanent

**Figure 18.1 Panel A&B, pg594

Question 5
What

is the inventory period for a Salendrez Corp. if it has an annual cost of goods sold of P8M, P1.5M in average inventory, and cash conversion cycle of 75 days?
A. B. C. D.

68.44 65.25 60.10 70.55

days days days days

A. 68.44 days
Answer

Question 6

Bathan Supplies, Inc. has P5M in inventory & P2M in accounts receivable. Its average daily sales are P100,000. The company has P1.5M in accounts payable. Its average daily purchases are P50,000. What is the length of the cash conversion cycle?
A.
B. C. D.

50 days 53 days 55 days 60 days

C. 55 days
Answer

Question 7
This

is an informal agreement between the borrower & the bank; there is no legal commitment on the part of the bank to provide credit
A.

B.
C. D.

Informal Quotation Maintaining Balance Line of Credit Trade Credit

C. Line of Credit
Answer

Question 8

Tang Commercial Bank & Bihis Corporation agreed to the ff. loan proposal:
Stated interest rate of 10% on a 1-year discounted loan 15% of the loan as compensating balance on zero interest current account to be maintained by Bihis Corporation with Tang Commercial Bank

The loan requires a net proceed of P1.5M. What is the principal amount of the loan applied for as part of the agreement?
A. B.

C.
D.

1,516,667 1,423,333 1,523,333 1,416,667

D. 1,416,667
Answer

Question 9
Explain

assets.

the firms investment in current

Investment in Current Assets 1) Cash and Marketable Securities Too little = potential for defaulting Too many = costly because earn very low rate of return There is a risk-return tradeoff Problem #1: Maintaining a sufficient cash balance Problem #2: Managing the composition of the firms marketable securities portfolio

2) Accounts Receivable Three factors are (1) percentage of credit sales to total sales, (2) level of sales, and (3) credit and collection policies For financial manager: (1) terms of the sale, (2) quality of the customer, and (3) collection efforts 3) Inventories Control of the assets that are produced to be sold in the normal course of the firms operations.

Question 10
What

is the formula to compute for annualized opportunity cost of forgoing the discount?
A. B. C. D.

[365/(1-a)]*[a/(c-b)] [a/(1-a)]*[365/(c-b)] [a/(1-b)]*[365/(a-c)] [(1-a)/a]*[(c-b)/365]

B. [a/(1-a)]*[365/(c-b)]
Answer

And the winner is