Question

2. Which of the following statements is FALSE? a. A portion of a firm's investment in its accounts receivable and inventory is temporary and results from seasonal fluctuations in the firm's business or unanticipated shocks. b. In a perfect capital market, the choice of financing is irrelevant; thus how the firm chooses to finance its short-term cash needs cannot affect value. c. The matching principle indicates that the firm should finance permanent working capital with short-term sources of funds. d. Following the matching principle should, in the long run, help minimize a firm's transaction costs.

22. Which of the following would decrease a firm's cash conversion cycle? a. Increase the accounts receivable days b. Increase the accounts payable days c. Increase the cash days d. Increase the inventory days

31. MTN Enterprises, LTD. had sales of $154 million this year and an average accounts receivable of $18 million per day. Its credit terms specify “2/14 net 40.” Based on this information, how long does it take MTN to collect on its sales (on average)? a. 8.5 days b. 28 days c. 43 days d. 13 days

Answer 1

2. The false statement is c. " he matching principle indicates that the firm should finance permanent working capital with short-term sources of funds". The matching principle states that a firm should fund its permanent working capital with long term sources.

22. The firm's conversion cycle will reduce by b. "Increase the accounts payable days".

Cash conversion cycle = Days inventory outstanding + Days sales outstanding - Account payable days

Therefore, a increase in overall account payable days would result in a decrease in cash conversion cycle.

31. Calculation of Accounts receivable turnover ratio

     = Credit sales / average accounts receivable

     = $154 million / $18 million

     = 8.55

Average collection period = 365 days / Accounts receivable turnover ratio

                                     = 365/8.55

                                     = 43 days (approx)

Hence, the correct answer is c. "43 days"

Assumptions:

1. 365 days in a year

2. Total sales = credit sales