Question

What is the conventional method for financing permanent levels of accounts receivable and inventory?

Seleccione una:

a. Bonds and equity

b. Short-term loans

c. Accounts payable and accrued expenses

d. Equity only

Abbot Corporation has an average collection period of 49 days, an inventory conversion period of 83 days, and a payables deferrable period of 36 days. What is Abbott's cash conversion cycle?

Seleccione una:

a. 96 days

b. 70 days

c. 85 days

d. 132 days

An increase in ________ would increase net working capital.

Seleccione una:

a. plant and equipment

b. accounts payable

c. accounts receivable

d. both B and C

The First Webster Bank requires borrowers to maintain a balance of 10% of the line of credit in a non-interest paying account as compensation for providing the line of credit. If the borrower would not normally have deposits in such an account, the APR will be

Seleccione una:

a. the amount borrowed will be higher than the amount needed.

b. the APR will be less than the stated rate.

c. the amount borrowed will be lower than the amount needed.

d. neither the amount borrowed nor the APR will be affected by the required balance.

According to the self-liquidating debt principle permanent assets should be financed with ________ liabilities.

Seleccione una:

a. permanent

b. spontaneous

c. current

d. fixed

Commercial paper

Seleccione una:

a. rates are generally higher than rates on bank loans and comparable sources of short-term financing.

b. generally has a minimum compensating balance requirement.

c. offers the firm with very large credit needs a single source for all its short-term financing.

d. has all of the properties stated above.

Answer 1

1) What is the conventional method for financing permanent levels of accounts receivable and inventory?

Answer : a. Bonds and Equity

Ideally speaking, short-term funds shall be used for short-term purposes; while, long-term funds shall be used for long-term purposes.

Permanent levels of accounts receivable and inventory are part of long-term working capital requirement, and thus should be funded by long-term funds - namely, bonds and equity from the given choices

2) To calculate conversion cycle - add all the current asset items while subtract current liability items

In the given question, conversion cycle will be as follows :

Average collection period + Inventory conversion period - payable deferrals period

= 49 days + 83 days - 36 days = 96 days

Ans : A. 96 days

3) An increase in ............would increase net working capital

Answer : A) Accounts receivable

Increase in any current asset item (such as accounts receivable) will result in increase in working capital, since it indicates that the cash is stuck in the business; or in other words, your customers are to yet pay their dues to you.

On the other hand, accounts payable is a part of current liabilities. When current liabilitites increase it decreases the net working capital. That is because, increase in accounts payable indicate that your creditors are indirectly funding your business (which is equivalent to cash inflow)

Plant and equipments are part of long-term fixed assets. Hence, they do not impact working capital.

4) The APR will be :

b. the APR will be less than the stated rate.

That is because the base amount is higher. If there is an amount deposited, the denominator will be lesser, thus increase the effective rate of borrowing

For instance, if the rate is 10%. The amount of borrowing is $100. While deposited amount is $10

The APR will be : 10/(100-10) = 10/90 = 11.11%

However, if the borrower does not deposit any amount. The APR will be as follows :

10/100 = 10%

5) Permanent assets should be financed with : d. fixed liabilities.

Long-term assets should be financed with fixed liabilities (ling-term), so that the cash flow generated by such assets are matched with repayment terms of long term funds

6) Commercial paper has : d) all of the properties stated above

a. Rates of CPs are higher since they are unsecured in nature and hence riskier

b. It has minimum compensating bal requirement

v. Is single source of ST requirement