Quiz Finman WC

UNIVERSIDAD DE MANILA
COLLEGE OF BUSINESS ADMINISTRATION
Financial Management
Name: ___________________________________ Section: __________
Student Number: __________________________
TRUE OR FALSE:
1. The hedging principle involves the matching of the cash flow of an asset with the maturity of a financing
source.
2. Minimizing working capital is accomplished by slowing down the cash conversion cycle.
3. The speculative motive for holding cash relates to the maintenance of balances to be used to satisfy possible and
indefinite needs.
4. The precautionary motive for holding cash addresses the firm’s desire to take advantage of potential profit-
making situations.
5. Large cash investments minimize the chance of insolvency and enhance the firm’s profitability.
6. Current asset investments are always financed with temporary assets.
7. Working capital refers to investment in current assets, while net working capital is the difference between
current assets and current liabilities
8. A firm can reduce net working capital by substituting long-term financing, such as bonds, with short-term
financing, such as one-year notes payable.
9. Notes payable is a spontaneous source of financing.
10.A firm that increases its investment in bonds increases its liquidity.
MULTIPLE CHOICE:
11.Which of the following is most consistent with the hedging principle in working capital management?
a. Fixed assets should be financed with short-term notes payable
b. Inventory should be financed with preferred stock
c. Account receivable should be financed with short-term lines of credit
d. Borrow on a floating rate basis to finance investments in permanent assets.
12.Which of the following is a spontaneous source of financing?

a. Accrued wages c. Trade credit
b. Preferred stock d. Both a and c
13.Which of the following actions would improve a firm’s liquidity?

a. Selling stock and reducing accounts payable
b. Selling stock to purchase equipment
c. Selling bonds and purchasing machinery
d. Both a and c
14.The goal of working capital management is to

a. Achieve a balance between a firm’s non-current assets and non-current liabilities
b. Achieve a balance between profitability and risk that contributes positively to a firm’s value
c. Achieve a balance between short-term and long-term assets so that they add to the achievement of a firm’s
overall goals
d. Achieve a balance between short-term and long-term liabilities so that they add to the achievement of a
firm’s overall goals
15.A firm can reduce its cash conversion cycle by

a. Increasing the operating cycle c. Increasing the average collection period
b. Increasing the average age of inventory d. Increasing the average payment period
16.The following practices or system could extend the cash disbursement, except
a. Lockbox system c. auto debit transfer
b. Playing the float d. centralization of disbursement
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17.The average collection period includes the following
a. The time from the purchase of inventory until the customer mails the payment
b. The time from when the payment is mailed until the firm collected funds in its bank account
c. The time from the payment of inventory purchased until the customer mails the payment
d. None of the above
18.Which of the following actions is likely to reduce the length of a firm’s cash conversion cycle?
a. Reducing the amount of time the firm takes to pay its suppliers
b. Increasing the average days sales outstanding on its accounts receivable
c. Adopting a new inventory system that reduces the inventory conversion period
d. Adopting a new inventory system that increases the inventory conversion period
19.Which of the following is true about a firm’s float?

a. A firm strives to minimize the float for both cash receipts and cash disbursements
b. A firm strives to maximize the float for both cash receipts and cash disbursements
c. A firm strives to minimize the float for cash receipts and maximize the float for cash disbursements
d. A firm strives to maximize the float for cash receipts and minimize the float for cash disbursements
20.A lockbox system

a. Accelerates the inflow of funds
b. Provides security for late night deposits
c. Reduces the need for compensating balances
d. Reduces the risk of having checks lost in the mail.
PSG.LGD Corporation has a permanent funding requirement of P250,000 in operating assets and seasonal
funding requirements that vary up to P1,100,000 and average P180,000. PSG.LGD can borrow short-term
funds at 7% and long-term funds at 9%, and it can earn 6% on the investment of any surplus balances.
21.What is the annual cost of an aggressive strategy for seasonal funding?

a. P12,600 c. P22,500
b. P35,100 d. P66,300
22.What is the annual cost of a conservative strategy for seasonal funding?

a. P121,500 c. P66,300
b. P55,200 d. P22,500
23.The management of DEF Company is considering a lockbox system. The bank will charge P10,000 annually
for the service, which will save the firm approximately P5,000 in processing costs. The lockbox system will
reduce the float for cash receipts for 3 days. The average daily receipts of the company equal to P100,000 and
short-term interest costs are 5%. How much is the net benefit (cost) from adopting the lockbox system?
a. P15,000 c. P5,000
b. P10,000 d. P20,000
24.Runaway Fashions is a national distributor of women’s apparel. The company expects to receive 60,000 checks
during the coming year totaling P48 million. A large bank has offered to install a lock box system at a charge
of P0.35 per processed check. The company is able to earn 12% before tax on additional funds. What is the
minimum amount of total float days that must be saved to make the system worthwhile? Use a 365-day year.
a. 1.33 days c. 1.67 days
b. 2.33 days d. 2.67 days
Consider the following data for Cycles Corporation:

Sales (20% cash sales) P13,500,000
Cost of goods sold 4,374,000
Purchases (60% on account) 19,200,000
Average accounts receivable 1,200,000
Average finished goods inventory 72,900
Raw materials used 3,400,000
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Average raw materials inventory 170,000
Average accounts payable 384,000
The firm spends P21,600,000 in operating cycle investments each year, at a constant rate. Assume a 360-day
year.
25.Calculate the firm’s operating cycle.

a. 6 days c. 46 days
b. 40 days d. 34 days
26.Calculate the firm’s cash conversion cycle.

a. 34 days c. 6 days
b. 40 days d. 46 days
27.Assume that the fixed cost of selling marketable securities is P10 per transaction and the interest rate on
marketable securities is 8% per year. The company estimates that it will make cash payments of P12,500,000
per quarter. Compute for the optimal transaction size.
a. P111,803.40 c. P4,472.14
b. P55,901.70 d. P4,480.00
28.Using data in No. 27, compute for the average cash balance.
a. P111,803.40 c. P4,472.14
b. P55,901.70 d. P4,480.00
29.Using data in No. 27, compute for the total cost of converting marketable securities to cash.
a. P111,803.40 c. P4,472.14
b. P55,901.70 d. P4,480.00
30.Using data in No. 27, compute for the total carrying cost of cash.
a. P111,803.40 c. P4,472.14
b. P55,901.70 d. P4,480.00
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UNIVERSIDAD DE MANILA

COLLEGE OF BUSINESS ADMINISTRATION

12.Which of the following is a spontaneous source of financing?

13.Which of the following actions would improve a firm’s liquidity?

14.The goal of working capital management is to

15.A firm can reduce its cash conversion cycle by

19.Which of the following is true about a firm’s float?

20.A lockbox system

21.What is the annual cost of an aggressive strategy for seasonal funding?

22.What is the annual cost of a conservative strategy for seasonal funding?

Consider the following data for Cycles Corporation:

25.Calculate the firm’s operating cycle.

26.Calculate the firm’s cash conversion cycle.

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