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1.
Suppose a firm decides to minimize its holdings of current assets, relative to sales. Which statements are true?
Answer
| 1. |
The firm’s expected profits will decrease. |
|
2. |
The firm’s expected profits will increase. |
|
3. |
The risk of the firm’s profits will decrease. |
|
4. |
The risk of the firm’s profits will increase. |
2. A firm uses the EOQ model to detemine its optimal order quantity, but is considering adding a safety stock of 1,000 units to meet unexpected demand, or to cover demand during variations in lead time. Check all of the statements that are correct if it starts holding safety stocks.
Answer
|
a. |
The firm’s annual total carrying cost (TCC) will increase. |
|
b. |
The firm’s annual total ordering cost (TOC) will decrease. |
|
c. |
The firm’s annual total inventory cost (TIC) will increase. |
3. Match the term in the left column with the description in the right column.
credit period length of time customers are given to pay for purchases
discount reduction in amount owed if invoice is paid early
credit standard required financial strength of acceptable credit customer
collection policy procedures followed to collect past-due accounts
1. A firm currently currently purchases the Economic Order Quantity (Q*) of a particular item from its supplier. The supplier is offering a 3% discount if the firm will buy in lots of 1,000 instead.
The firm expects to sell 5,000 units of the item per year. It’s cost is $50 per unit and the cost to place an order is about $20 per order. The annual carrying costs are 30% of the inventory value.
Calculate the firm’s net savings from taking the discount.
Enter your result rounded to the nearest integer. Do not include a dollar sign.
Net savings from taking the discount = Reduction in purchase price – TIC discount quantity + TIC optimal quantity
2.
A firm uses the EOQ model to determine its optimal reorder quantity.The firm sells 93,910 units per year, and there is a 9 day lag between ordering and receiving new inventory.What is the order point (also known as reorder point)?Assume a 365 day year, round to the nearest integer, enter with no punctuation.
3. 3. Refer to the firm’s financial statements. If the firm adopts a more stringent collections policy, it expects to reduce DSO to 28 days, without having a significant effect on sales. What will be the firms average accounts receivable balance under the new policy?
Round your result to the nearest integer, and enter it with no punctuation of any kind.
DSO = accounts receivable / (annual credit sales / 365)
Assume all sales are credit sales.
Answer: 3,500
A firm buys inventory from suppliers that offer terms of 4/17 net 35. The firm does not currently take the offered discount. What is the “nominal annual cost” to the firm of not taking the discount?
Enter your result rounded to the nearest integer %. Assume a 365 day year.
Answer
Please me yours! If different!
a.
Continue to pay on day 30.
b.
Borrow from the bank and pay on day 30.
c.
Borrow from the bank and pay on day 10 to get the discount.
4. Unlike the Baumol model, the Miller-Orr model of cash management assumes that the firm’s net cash flows are known and constant
False or true
5. A firm has marginal tax rates as follows:
Federal tax rate
31%
State tax rate
5%
The firm in considering purchasing a corporate commercial paper issue with a before-tax return of 7% for its marketable securities portfolio. Calculate the after-tax return for the commercial paper.
6. Relative to short-term debt, the use of long-term debt usually results in __________.
Check all that are correct.
Answer
a.
Lower interest costs
b.
Higher interest costs
c.
Lower profitability
d.
Higher profitability
e.
Lower risk
f.
Higher risk
Check all of the following that are correct for a firm that holds safety stocks (above the EOQ optimal quantity).
Answer
a.
Carrying costs are higher.
b.
Transactions costs are higher.
c.
Total inventory costs (TIC) is higher.
d.
The time period between reorders decreases.
A firm sells $360,000 of goods per year on credit, on terms of 2/15 net 35. If 39% of customers take the discount and pay in 15 days, and the remainder pay the full invoice amount in 35 days, what is the firm’s DSO (day’s sales outstanding)?
Round your result to the nearest integer
7. Which of the following it not a typical characteristic of marketable securities?
Answer
a.
High rate of return
b.
Safe from default risk
c.
Highly liquid
d.
Short-term to reduce “interest rate” risk
Suppose a firm’s supplier offer terms of 2/10 net 30. The firm often pays its invoices on day 20, and does not qualify for the discount as a result. What effect does this early payment have on the cost to the firm of not taking the offered discount?
Answer
a.
decreases the cost of foregoing the discount
b.
no effect on the cost of foregoing the discount
c.
increases the cost of foregoing the discount
A firm sells $335,876 of goods per year on credit. If customers take an average of 31 days to pay, what is the firm’s average accounts receivable balance? (Assume a 365 day year).
Round your answer to the nearest integer.Enter the result without any punctuation (i.e. dollar sign or commas).
8. A firm buys $273,750 per year from suppliers that offer terms of 1/10 net 30. The firm does not currently take the offered discount. If the firm can borrow against a line of credit at the bank at an interest rate of 15%, it should:
Assume a 365 day year.
Answer
a.
Continue to pay on day 30.
b.
Borrow from the bank and pay on day 30.
c.
Borrow from the bank and pay on day 10 to get the discount.
9. firm is considering borrowing $50,000 from its bank for 60 days to meet working capital needs. The bank offers a loan with a stated rate of 11% and discount interest. The bank uses a 360 day year to calculate interest. Calculate the APR for the loan. Enter the result in percentage format with one decimal place. For example, enter 4.5%
10. A firm with a high level of “cash and marketable securities” on its balance sheet is most likely to be using the _______ net operating working capital policy.
Answer PLEASE ENTER YOURS!
a.
restricted
b.
relaxed
c.
moderate
11. A firm’s cash conversion cycle has increased by 10 days over the last year. Check all the items below that could account for the observed increase.
Answer
a.
the firm’s customers pay more quickly than in the past
b.
the firm’s customers pay more slowly than in the past
c.
the firm’s inventory sells more quickly than in the past
d.
the firm’s inventory sells more slowly than in the past
e.
the firm pays its supplier’s more quickly than in the past
f.
the firm pays its supplier’s more slowly than in the past
