CPA REVIEW SCHOOL OF THE PHILIPPINES Manila MANAGEMENT ADVISORY SERVICES WORKING CAPITAL FINANCE THEORY 1.

Compared to other firms in the industry, a company that maintains a conservative working capital policy will tend to have a a. Greater percentage of short-term financing. b. Greater risk of needing to sell current assets to repay debt. c. Higher ratio of current assets to fixed assets. d. Higher total asset turnover. . ! firm following an aggressive working capital strategy would a. Hold substantial amount of fixed assets. b. "inimi#e the amount of short-term borrowing. c. $inance fluctuating assets with long-term financing. d. "inimi#e the amount of funds held in very li%uid assets. &. 'he working capital financing policy that sub(ects the firm to the greatest risk of being unable to meet the firm)s maturing obligations is the policy that finances a. $luctuating current assets with long-term debt. b. *ermanent current assets with long-term debt. c. *ermanent current assets with short-term debt. d. $luctuating current assets with short-term debt. +. ,etermining the appropriate level of working capital for a firm re%uires a. -valuating the risks associated with various levels of fixed assets and the types of debt used to finance these assets. b. Changing the capital structure and dividend policy for the firm. c. "aintaining short-term debt at the lowest possible level because it is ordinarily more expensive than long term debt. d. .ffsetting the profitability of current assets and current liabilities against the probability of technical insolvency. e. "aintaining a high proportion of li%uid assets to total assets in order to maximi#e the return on total investments. /. 0tarrs Company has current assets of 1&22,222 and current liabilities of 1 22,222. 0tarrs could increase its working capital by the !. *repayment of 1/2,222 of next year3s rent. 4. 5efinancing of 1/2,222 of short-term debt with long-term debt. C. *urchase of 1/2,222 of temporary investments for cash. ,. Collection of 1/2,222 of accounts receivable. 6. ! lock-box system !. 5educes the need for compensating balances. 4. *rovides security for late night deposits. C. 5educes the risk of having checks lost in the mail. ,. !ccelerates the inflow of funds. 7. 8gnoring cost and other effects on the firm, which of the following measures would tend to reduce the cash conversion cycle9 a. "aintain the level of receivables as sales decrease. b. 4uy more raw materials to take advantage of price breaks. c. 'ake discounts when offered. d. $orgo discounts that are currently being taken.

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:. ;hich of the following is not a ma(or function in cash management9 a. Cash flow control c. "aximi#ing sales b. Cash surplus investment d. .btaining financing services <. ! precautionary motive for holding excess cash is a. 'o enable a company to meet the cash demands from the normal flow of business activity. b. 'o enable a company to avail itself of a special inventory purchase before prices rise to higher levels. c. 'o enable a company to have cash to meet emergencies that may arise periodically. d. 'o avoid having to use the various types of lending arrangements available to cover pro(ected cash deficits. 12. 'he amount of cash that a firm keeps on hand in order to take advantage of any bargain purchases that may arise is referred to as its !. 'ransactions balance. C. *recautionary balance. 4. Compensating balance. ,. 0peculative balance. 11. !ll of the following are valid reasons for a business to hold cash and marketable securities except to !. 0atisfy compensating balance re%uirements. 4. "aintain ade%uate cash needed for transactions. C. "eet future needs. ,. -arn maximum returns on investment assets. 1 . ;hich of the following actions would not be consistent with good management9 a. 8ncreased synchroni#ation of cash flows. b. "inimi#e the use of float. c. "aintaining an average cash balance e%ual to that re%uired as a compensating balance or that which minimi#es total cost. d. =se of checks and drafts in disbursing funds. 1&. ;hen managing cash and short-term investments, a corporate treasurer is primarily concerned with !. "aximi#ing rate of return. 4. "inimi#ing taxes. C. 8nvesting in 'reasury bonds since they have no default risk. ,. >i%uidity and safety. 1+. 'he economic order %uantity ?-.@A formula can be adapted in order for a firm to determine the optimal mix between cash and marketable securities. 'he -.@ model assumes all of the following except a. 'he cost of a transaction is independent of the dollar amount of the transaction and interest rates are constant over the short run. b. !n opportunity cost is associated with holding cash, beginning with the first dollar. c. 'he total demand for cash is known with certainty. d. Cash flow re%uirements are random. 1/. 'he following are desirable in cash management exceptB a. Cash is collected at the earliest time possible. b. "ost sales are on cash basis and receivables are aged CcurrentD c. *ost-dated checks are not deposited on time upon maturity. d. !ll sales are properly receipted and promptly deposited intact.

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16. 'he one item listed below that would warrant the least amount of consideration in credit and collection policy decisions is the !. @uality of accounts accepted. C. Cash discount given. 4. @uantity discount given. ,. >evel of collection expenditures. 17. ;hich of the following investments is not likely to be a proper investment for temporary idle cash9 a. 8nitial public offering of an established profitable conglomerate. b. Commercial paper. c. 'reasury bills. d. 'reasury bonds due within one year. 1:. 'he goal of credit policy is to a. -xtend credit to the point where marginal profits e%ual marginal costs. b. "inimi#e bad debt losses. c. "inimi#e collection expenses. d. "aximi#e sales. 1<. 8t is held that the level of accounts receivable that the firm has or holds reflects both the volume of a firm)s sales on account and a firm)s credit policies. ;hich one of the following items is not considered as part of the firm)s credit policies9 a. 'he minimum risk group to which credit should be extended. b. 'he extent ?in terms of moneyA to which a firm will go to collect an account. c. 'he length of time for which credit is extended. d. 'he si#e of the discount that will be offered. 2. 8n assessing the loan value of inventory, a banker will normally be concerned about the portion of inventory that is work-in-process because a. ;8* inventory is relatively easy to sell because it does not represent a raw material or a finished product. b. ;8* inventory usually has the highest loan value of the different inventory types. c. ;8* generally has the lowest marketability of the various types of inventories. d. ;8* represents a lower investment by a corporation as opposed to other types of inventories. 1. ;hen a company analy#es credit applicants and increases the %uality of the accounts re(ected, the company is attempting to !. "aximi#e sales. C. 8ncrease the average collection period. 4. 8ncrease bad-debt losses. ,. "aximi#e profits. . ! high turnover of accounts receivable, which implies a very short days-sales outstanding, could indicate that the firm !. Has a relaxed ?lenientA credit policy. 4. .ffers small discounts. C. =ses a lockbox system, synchroni#es cash flows, and has short credit terms. ,. Has an inefficient credit and collection department. &. !ccounts receivable turnover will normally decrease as a result of a. 'he write-off of an uncollectible account ?assume the use of the allowance for doubtful accounts methodA. b. ! significant sales volume decrease near the end of the accounting period. c. !n increase in cash sales in proportion to credit sales. d. ! change in credit policy to lengthen the period for cash discounts.

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+. 'he credit and collection policy of !margo Co. provides for the imposition of credit block when the credit line is exceeded andEor the account is past due. ,uring the month, because of the campaign to achieve volume targets, the general manager has waived the credit block policy in a number of instances involving big volume accounts. 'he likely effect of this move is a. ,eterioration of aging of receivables only. b. 8ncrease in the level of receivables only. c. ,eterioration of aging and increase in the level of receivables. d. ,ecrease in collections during the month the move was done. /. !n increase in sales resulting from an increased cash discount for prompt payment would be expected to cause !. !n increase in the operating cycle. 4. !n increase in the average collection period. C. ! decrease in the cash conversion cycle. ,. ! decrease in purchase discounts taken. 6. 8f a firm had been extending trade credit on a E12, netE&2 basis, what change would be expected on the balance sheet of its customer if the firm went to a net cash &2 policy9 a. 8ncreased payables and increased bank loan. b. 8ncreased receivables. c. ,ecreased receivables. d. ,ecrease in cash. 7. 'he level of accounts receivable will most likely increase as a. Cash sales increase and number of says sales. b. Credit limits are expanded, credit sales increase, and credit terms remain the same. c. Credit limits are expanded, cash sales increase, and aging of the receivables is improving. d. Cash sales increase, current receivables ratio to past due increases, credit limits remain the same. :. ! change in credit policy has caused an increase in sales, an increase in discounts taken, a reduction of the investment in accounts receivable, and a reduction in the number of doubtful accounts. 4ased on this information, we know thatB a. Fet profit has increased. b. 'he average collection period has decreased. c. Gross profit has declined. d. 'he si#e of the discount offered has decreased. <. ! strict credit and collection policy is in place in 0tar Co. !s $inance ,irector you are asked to advise on the propriety of relaxing the credit standards in view of stiff competition in the market. Gour advise will be favorable if a. 'he competitor will do the same thing to prevent lost sales. b. there is a decrease in the distribution level of your product, and a more aggressive stance in necessary to retain market share. c. 'he pro(ected margin from increased sales will exceed the cost of carrying the incremental receivables. d. 'he account receivable level is improving, so the company can afford the carrying cost of receivables.

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&2. "erkle, 8nc. has a temporary need for funds. "anagement is trying to decide between not taking discounts from one of their three biggest suppliers, or a 1+.7/H per annum renewable discount loan from its bank for & months. 'he suppliers3 terms are as followsB $ort Co. 1E12, net &2 5iley "anufacturing Co. E1/, net 62 0had, 8nc. &E1/, net <2 =sing a &62-day year, the cheapest source of short-term financing in this situation is !. 'he bank. C. 5iley "anufacturing Co. 4. $ort Co. ,. 0had, 8nc. &1. ! company obtaining short-term financing with trade credit will pay a higher percentage financing cost, everything else being e%ual, when !. 'he discount percentage is lower. 4. 'he items purchased have a higher price. C. 'he items purchased have a lower price. ,. 'he supplier offers a longer discount period.

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PRO%LEMS 1. -nert, 8nc.3s current capital structure is shown below. 'his structure is optimal, and the company wishes to maintain it. ,ebt /H *referred e%uity /H Common e%uity 72H -nert3s management is planning to build a 17/ million facility that will be financed according to this desired capital structure. Currently, 11/ million of cash is available for capital expansion. 'he percentage of the 17/ million that will come from a new issue of common shares is !. /2.22H. 4. /6. /H. C. 72.22H. ,. /6.22H. . 4obo >>C3s has an asset base of 11 million. !fter a dividend payment of 1+2,222, 4obo added 1/2,222 to retained earnings. ;hat is 4obo3s internal growth rate9 !. 1H 4. +H C. /H ,. <H &. 8t is the policy of $ran# Corp. that the current ratio cannot fall below 1./ to 1.2. 8ts current liabilities are *+22,222 and the present current ratio is to 1. How much is the maximum level of new short-term loans it can secure without violating the policy9 a. *+22,222 b. *&22,222 c. * 66,667 d. *:22,222 +. ;ildthing !musement Company)s total assets fluctuate between 1& 2,222 and 1+12,222, while its fixed assets remain constant at 1 62,222. 8f the firm follows a maturity matching or moderate working capital financing policy, what is the likely level of its long-term financing9 a. 1 <2,222 b. 1 62,222 d. 1+12,222 e. 1& 2,222 /. Iarrett -nterprises is considering whether to pursue a restricted or relaxed current asset investment policy. 'he firm)s annual sales are 1+22,222J its fixed assets are 1122,222J debt and e%uity are each /2 percent of total assets. -48' is 1&6,222, the interest rate on the firm)s debt is 12 percent, and the firm)s tax rate is +2 percent. ;ith a restricted policy, current assets will be 1/ percent of sales. =nder a relaxed policy, current assets will be / percent of sales. ;hat is the difference in the pro(ected 5.-s between the restricted and relaxed policies9 a.. 1.6H b. 6. H c. &.:H d. /.+H 6. 4ully Corporation purchases raw materials on Iuly 1. 8t converts the raw materials into inventory by 0eptember &2. However, 4ully pays for the materials on Iuly 2. .n .ctober &1, it sells the finished goods inventory. 'hen, the firm collects cash from the sale 1 month later on Fovember &2. 8f this se%uence accurately represents the average working capital cycle, what is the firm3s cash conversion cycle in days9 !. < days. 4. 1&& days. C. 1 & days. ,. 1/& days. 7. Iumpdisk Company writes checks averaging 11/,222 a day, and it takes five days for these checks to clear. 'he firm also receives checks in the amount of 117,222 per day, but the firm loses three days while its receipts are being deposited and cleared. ;hat is the firm)s net float in dollars9 a. 11 6,222 b. 1 7/,222 c. 1 & ,222 d. 1 +,222 :. ;hat is the opportunity cost of keeping a cash balance of 1 million, if the daily interest rate is 2.2 H and the average transaction cost of investing money overnight is 1/29 !. 1/2 4. 1&/2 C. 1+22 ,. 1+2,222

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<. Hakuna 8nc. sells on terms of &E12, net &2 days. Gross sales for the year are * ,+22,222 and the collections department estimates that &2H of the customers pay on the 12th day and take discountsJ +2H pay on the &2th dayJ and the remaining &2H pay, on the average, +2 days after the purchase. !ssuming &62 days per year, what is the average collection period. a. +2 days. b. 15 days. c. 2 days d. 27 days. @uestions 12 and 11 are based on the following information. ! company has a 12H cost of borrowing and incurs fixed costs of 1/22 for obtaining a loan. 8t has stable, predictable cash flows, and the estimated total amount of net new cash needed for transactions for the year is 117/,222. 'he company does not hold safety stocks of cash. 12. ;hen the average cash balance of the company is higher, the K>ist !L the cash balance is K>ist 4L. >ist ! >ist 4 !. .pportunity cost of holding Higher 4. 'otal transactions costs associated with obtaining Higher C. .pportunity cost of holding >ower ,. 'otal costs of holding >ower 11. 8f the average cash balance for the company during the year is 1 2,<16./2, the opportunity cost of holding cash for the year will be !. 1 ,2<1.6/ 4. 1+,1:&.&2 C. 1:,7/2.22 ,. 117,/22.22 1 . C"5 is a retail mail order firm that currently uses a central collection system that re%uires all checks to be sent to its 4oston head%uarters. !n average of / days is re%uired for mailed checks to be received, + days for C"5 to process them and 1M days for the checks to clear through its bank. ! proposed lockbox system would reduce the mail and process time to & days and the check clearing time to 1 day. C"5 has an average daily collection of 1122,222. 8f C"5 should adopt the lockbox system, its average cash balance would increase by a. 1 /2,222. b. 1+22,222. c. 16/2,222. d. 1:22,222. 1&. ;hat are the expected annual savings from a lockbox system that collects 22 checks per day averaging 1/22 each, and reduces mailing and processing times by .2 and 2./ days, respectively, if the annual interest rate is 6H9 !. 1 /2,222 4. 11 ,222 C. 16,222 ,. 11/,222 1+. ! company has daily cash receipts of 11/2,222. 'he treasurer of the company has investigated a lock box service whereby the bank that offers this service will reduce the company)s collection time by four days at a monthly fee of 1 ,/22. 8f money market rates average +H during the year, the additional annual income ?lossA from using the lock box service would be a. 16,222. b. 1?6,222A. c. 11 ,222. d. 1?1 ,222A. 1/. ! banker has offered to set up and operate a lock box system for your company. ,etails are given below. !verage number of daily payments & / !verage si#e of payments 11, /2 ,aily interest rate 2.2 1H 0aving in mailing time 1.& days 0aving in processing time 2.< days 4ank charges 12.&2 -stimate the annual savings. !ssume /2 processing days per year. !. 1&, 7& 4. 1 ,67/ C. 1 &,/22 ,. 1+7,222

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16. @50 makes large cash payments averaging *17,222 daily. 'he company changed from using checks to sight drafts which will permit it to hold unto its cash for one extra day. 8f @50 can use the extra cash to earn 1+H annually, what annual peso return will it earn9 a. *6/ .12 b. *6,/ 1.22 c. *6./ d. * ,&:2 17. 0ixty percent of 4aco3s annual sales of 1<22,222 is on credit. 8f its year-end receivables turnover is +./, what is the average collection period and the year-end receivables, respectively ?assume a &6/-day yearA9 !. :1 days and 11 2,222. C. 7& days and 112:,222. 4. 7& days and 11 2,222. ,. :1 days and 1 22,222. 1:. 4est Computers believes that its collection costs could be reduced through modification of collection procedures. 'his action is expected to result in a lengthening of the average collection period from &2 to &/ daysJ however, there will be no change in uncollectible accounts, or in total credit sales. $urthermore, the variable cost ratio is 62H, the opportunity cost of a longer collection period is assumed to be negligible, the company3s budgeted credit sales for the coming year are 1+/,222,222, and the re%uired rate of return is 6H. 'o (ustify changes in collection procedures, the minimum annual reduction of costs ?using a &62-day year and ignoring taxesA must be !. 1&7/,222 4. 1&7,/22 C. 11 /,222 ,. 1 ,/22 @uestions 1< and 2 are based on the following information. 0nobi#, 8nc. has 1 million invested in 'reasury bills yielding :H per annumJ this investment will satisfy the firm3s need for funds during the coming year. 1<. 8f it costs 1/2 to sell these bills, regardless of the amount, how much should be withdrawn at a time9 !. 1/2,222 4. 1122,222 C. 1 /2,222 ,. 1/22,222 2. 8f 0nobi#, 8nc. needs 1167,222 a month, how fre%uently should the C$. sell off 'reasury bills9 !. !bout every & days. C. !bout every 1/ days. 4. !bout every < days. ,. !bout every 1: days. 1. 'en @)s 8nc. has an inventory conversion period of 62 days, a receivable conversion period of &/ days, and a payment cycle of 6 days. 8f its sales for the period (ust ended amounted to *<7 ,222, what is the investment in accounts receivable9 ?!ssume &62 days a year.A a. *:/, 22 b. *7 ,+/2 c. *<+,/22 d. *7<,622 . 0imba Corp., whose gross sales amounted to *1, 22,222 sold on terms of &E12, net &2. 'he collections manager estimated that &2H of the customers pay on the 12th day and take discountsJ +2H on the &2th dayJ and the remaining &2H pay, on the average, +2 days after the purchase. 8f management would toughen on its collection policy and re%uire that all nondiscount customers pay on the &2th day, how much would be the receivables balance9 a. *62,222 b. *:2,222 c. *72,222 d. Nero
&. *rest Corp. plans to tighten its credit policy. 4elow is the summary of changesB

.ld Few !verage number of days collection 7/ /2 5atio of credit sales to total sales 72H 62H *ro(ected sales for the coming year is *122 million and it is estimated that the new policy will result in a /H loss if the new policy is implemented. !ssuming a &62-day year, what is the effect of the new policy on accounts receivable9 a. ,ecrease of *1& million. c. ,ecrease of */ million. b. Fo change. d. ,ecrease of * 6.67 million.

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+. Fumero 1 Co.)s budgeted sales for the coming year are *<6 million, of which :2H are expected to be credit sales at terms of nE&2. 'he company estimates that a proposed relaxation of credit standards would increase credit sales by &2H and increase the average collection period form &2 days to +/ days. 4ased on a &62-day year, the proposed relaxation of credit standards would result to an increase in accounts receivable balance of a. *6,::2,222 b. *1,< 2,222 c. * ,::2,222 d. *6,2:2,222 /. *hillips Glass Company buys on terms of E1/, net &2. 8t does not take discounts, and it typically pays &2 days after the invoice date. Fet purchases amount to 17 2,222 per year. .n average, how much CfreeD trade credit does *hillips receive during the year9 ?!ssume a &62day year.A a. 1&2,222 b. 1+2,222 c. 1/2,222 d. 162,222 6. 0lippers "art has sales of *& million. 8ts credit period and average collection period are both &2 days and 1H of its sales end as bad debts. 'he general manager intends to extend the credit period to +/ days which will increase sales by *&22,222. However, bad debts losses on the incremental sales would be &H. Costs of products and related expenses amount to +2H exclusive of the cost of carrying receivables of 1/H and bad debts expenses. !ssuming &62 days a year, the change in policy would result to incremental investment in receivables of a. * +,72+. b. *6/,222. c. *721,/7& d. *<,7/2. 7. 'he >iberal 0ales Co. budgeted sales for the coming year are *&2 million of which :2H are expected to be on credit. 'he company wants to change its credit terms from nE&2 to E12, nE&2. 8f the new credit terms are adopted, the company estimates that cash discounts would be taken on +2H of the credit sales and the new uncollectible amount would be unchanged. 'he adoption of the new credit terms would result in expected discount availed of in the coming year of a. *622,222 b. * ::,222 c. *+:2,222 d. *1< ,222 :. "r. 0. "art assumed the presidency of 5iches Corp. He instituted new policies and with respect to credit policy, below is a summary of relevant informationB .ld Credit *olicy Few Credit *olicy 0ales *1,:22,222 *1,<:2,222 !verage collection period &2 days &6 days 'he company re%uires a rate of return of 12H and a variable cost ratio of 62H. =sing a &62day year, the pre-tax cost of carrying the additional investment in receivables under the new policy would be a. *+,:22 b. * ,::2 c. *&,222 d. *+,2:2 <. 'he 0ales ,irector of Can Can Co. suggests that certain credit terms be modified. He estimates the following effectsB 0ales will increase by at least 2H. !ccounts receivable turnover will be reduced to : times from the present turnover of 12 times. 4ad debts, now at 1H of sales will increase to 1./H. 0ales before the proposed changes is at *<22,222. Oariable cost ratio is //H and desired rate of return is 2H. $ixed expenses amount to *1/2,222. 0hould the company allow the revision of its credit terms9 a. Ges, because income will increase by *6:,:/2. b. Ges, because losses will be reduced by *7:,:22. c. Fo, because income will be reduced by *1&,222. d. Fo, because losses will increase by * :,222.

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&2. ;asting 5esource Co. has annual credit sales of *+ million. 8ts average collection period is +2 days and bad debts are /H of sales. 'he credit and collection manager is considering instituting a stricter collection policy, whereby bad debts would be reduced to H of total sales, and the average collection period would fall to &2 days. However, sales would also fall by an estimated */22,222 annually. Oariable costs are 62H of sales and the cost of carrying receivables is 1 H. !ssuming a tax rate of &/H and &62 days a year, the incremental change in the profitability of the company if stricter policy would be implemented would be a. Nero as the positive and negative effects offset each other. b. ! reduction in net income by *72,222. c. ! reduction in net income by *&:,&/2. d. ! reduction in net income by *&/,+22. &1. *hranklin *harms 8nc. purchases merchandise from a company that gives sales terms of E1/, net +2. *hranklin *harms has gross purchases of 1:22,222 per year. ;hat is the maximum amount of costly trade credit *hranklin could get, assuming they abide by the suppliers credit terms9 ?!ssume a &62-day year.A a. 1:7,111. 2 b. 1& ,666.72 c. 1/+,+++./2 d. 1/ , 66.67 & . Crest Co. has the opportunity to increase annual sales by *1 million by selling to new riskier customers. 8t has been estimated that uncollectible expenses would be 1/H and collection costs /H. 'he manufacturing and selling costs are 72H of sales and corporate tax is &/H. 8f it pursues this opportunity, the after tax profit will a. 8ncrease by *&/,222. c. 8ncrease by *6/,222. b. 8ncrease by *<7,/22. d. 5emain the same. &&. ! firm currently sells 1/22,222 annually with &H bad debt losses. 'wo alternative policies are available. *olicy ! would increase sales by 1/22,222, but bad debt losses on additional sales would be :H. *olicy 4 would increase sales by an additional 11 2,222 over *olicy ! and bad debt losses on the additional 11 2,222 of sales would be 1/H. 'he average collection period will remain at 62 days ?6 turns per yearA no matter the decision made. 'he profit margin will be 2H of sales and no other expenses will increase. !ssume an opportunity cost of 2H. ;hat should the firm do9 !. "ake no policy change. 4. Change to only *olicy !. C. Change to *olicy 4 ?means also taking *olicy ! firstA. ,. !ll policies lead to the same total firm profit, thus all policies are e%ual. &+. ! firm that often factors its accounts receivable has an agreement with its finance company that re%uires the firm to maintain a 6H reserve and charges 1H commission on the amount of receivables. 'he net proceeds would be further reduced by an annual interest charge of 12H on the monies advanced. !ssuming a &62-day year, what amount of cash ?rounded to the nearest dollarA will the firm receive from the finance company at the time a 1122,222 account that is due in <2 days is turned over to the finance company9 !. 1<&,222 4. 1<2,222 C. 1:&,722 ,. 1<2,67/ @uestions &/ through &7 are based on the following information. $lesher, 8nc.3s credit manager studied the bill-paying habits of its customers and found that <2H of them were prompt. 0he also discovered that H of the slow payers and /H of the prompt ones subse%uently defaulted. 'he company has &,222 accounts on its books, none of which has yet defaulted. &/. Calculate the total number of expected defaults, assuming no repeat business is on the hori#on. !. 7</ 4. 21 C. 1&/ ,. 66 &6. Given average revenues from sales of 11, 22 and the cost of sales of 11,122, what is the average expected profit or loss from extending credit to slow payers9 !. 1122 profit. 4. 116+ loss. C. 1 2 loss. ,. 1 6+ loss.

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&7. Given revenues from sales of 11, 22 and the cost of sales of 11,122, what would the average level of revenues that makes it worthwhile to extend credit to slow payers9 !. 11,&6+.22 4. 11,&:<.7+ C. 11,+12. 6 ,. 11,/12. 6 &:. .n cash discounts, all of the following statements do not apply except a. 8f a firm buys *12,222 of goods on terms of 1E12, net &2 and pays within the discount period, the amount paid would be *<,222. b. 'he cost of not taking a cash discount is always higher than the cost of a bank loan. c. ;ith trade terms of E1/, net 62, if the discount is taken the buyer receive +/ days of credit. d. 'he cost of not taking the discount is higher for terms of E12, net 62 than for E12, net &2. &<. Gour firm buys on credit terms of E12, net +/, and it always pays on ,ay +/. 8f you calculate that this policy effectively costs your firm 11/7,/22 each year, what is the firm)s average accounts payable balance9 a. 11, &+,222 b. 16 /,222 c. 17/2,222 d. 11/7,/22 +2. 0uppose the credit terms offered to your firm by your suppliers are E12, net &2 days. .ut of convenience, your firm is not taking discounts, but is paying after 2 days, instead of waiting until ,ay &2. Gou point out that the nominal cost of not taking the discount and paying on ,ay &2 is around &7 percent. 4ut since your firm is not taking discounts and is paying on ,ay 2, what is the effective annual cost of your firm)s current practice, using a &62-day year9 a. &6.7H b. +&.6H c. 126.<H d. 7&.+H +1. ;hat is the effective annual interest rate on a <H annual percentage rate automobile loan that has monthly payments9 !. <H 4. <.&:H C. <.:1H ,. 12.<+H + . Corbin, 8nc. can issue &-month commercial paper with a face value of 11,222,222 for 1<:2,222. 'ransaction costs will be 11, 22. 'he effective annuali#ed percentage cost of the financing, based on a &62-day year, will be !. :.+:H. 4. :.66H. C. :.22H. ,. .22H. +&. !4C Company finances all of its seasonal inventory needs from the local bank at an effective interest cost of <H. 'he firm)s supplier promises to extend trade credit on terms that will match the <H bank credit rate. ;hat terms would the supplier have to offer ?approximatelyA9 a. E12, nE62. b. E12, nE122. c. E12, nE<2. d. &E12, nE62. ++. ! company has accounts payable of 1/ million with terms of H discount within 1/ days, net &2 days ? E1/ net &2A. 8t can borrow funds from a bank at an annual rate of 1 H, or it can wait until the &2th day when it will receive revenues to cover the payment. 8f it borrows funds on the last day of the discount period in order to obtain the discount, its total cost will be !. 1/1,222 less. 4. 17/,/22 less. C. 1122,222 less. ,. 1 +,/22 more. +/. -very 1/ days a company receives 112,222 worth of raw materials from its suppliers. 'he credit terms for these purchases are E12, net &2, and payment is made on the &2th day after each delivery. 'hus, the company is considering a 1-year bank loan for 1<,:22 ?<:H of the invoice amountA. 8f the effective annual interest rate on this loan is 1 H, what will be the net dollar savings over the year by borrowing and then taking the discount on the materials9 !. 1&,6 + 4. 11,176 C. 1+,:22 ,. 11, +

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