If the accounts receivable cycle is 70 days and the accounts payable cycle is 80 days, what would the operating cycle be?

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Question 1 

Assume a firm’s production process requires an average of 80 days to go from raw materials to finished products and another 40 days before the finished goods are sold. If the accounts receivable cycle is 70 days and the accounts payable cycle is 80 days, what would the operating cycle be?

 

110 days

 

130 days

 

190 days

 

270 days

Question 2 

The time between ordering materials and collecting cash from receivables is known as the:

 

operating cycle

 

cash conversion cycle

 

accounts receivable period

 

term payable cycle

Question 3 

The time between when the firm pays its suppliers and when it collects money from its customers is known as the:

 

operating cycle

 

cash conversion cycle

 

accounts receivable period

 

clearing cycle

Question 4 

Which of the following is not an advantage of short-term borrowing?

 

flexibility

 

establishing continuous relationships   with a bank or financial institution

 

frequent renewals

 

lower cost

Question 5 

In June, Erie Plastics had an ending cash balance of $35,000. In July, the firm had total cash receipts of $40,000 and total cash disbursements of $50,000. The minimum cash balance required by the firm is $25,000. At the end of July, Erie Plastics had

 

an excess cash balance of $25,000

 

An excess cash balance of $0

 

required financing of $10,000

 

required financing of $25,000

Question 6 

A compensating balance on a bank loan effectively ____________ the cost of the loan.

 

raises

 

lowers

 

has no effect on

 

has an indeterminate effect on

Question 7 

In order to borrow $100,000 for a 10% loan on discount basis, the firm will actually have to borrow:

 

$110,000

 

$111,111

 

$100,000

 

$90,000

Question 8 

When old short-term debt is replaced by new short-term debt as the old debt comes due, the process is known as:

 

compensating balance

 

rolling the debt

 

fluctuating financing

 

re-terming

Question 9 

Which of the following short-term sources of funds is available only to the financially strongest concerns?

 

trade credit

 

commercial bank loans

 

finance company loans

 

commercial paper

Question 10 

If a firm actually sells its accounts receivable, the process is known as:

 

wholesale financing

 

pledging

 

field crediting

 

factoring

Question 11 

The ratio between the present value of a project’s cash inflows and the present value of its initial investment is called the:

 

MIRR.

 

IRR.

 

PI.

 

NPV.

Question 12 

Internal rate of return (IRR) and net present value (NPV) methods:

 

generally arrive at the same   accept/reject decisions

 

are less sophisticated than the   payback period

 

cannot make use of the same cash   flows

 

can be substituted for by the payback   period

Question 13 

Which of the following is not considered a stage in the capital budgeting process?

 

development

 

production

 

implementation

 

selection

Question 14 

The internal rate of return concept is best explained by which of the following?

 

rate where NPV is equal to zero

 

point where initial investment has   been returned

 

marginal cost of capital

 

average book value

Question 15 

The payback period concept is best explained by which of the following?

 

marginal cost of capital

 

point where initial investment has   been returned

 

rate where NPV is equal to zero

 

accounting rate of return

Question 16 

The cost of debt:

 

is typically higher than the cost of   preferred stock

 

must be adjusted to an after-tax cost

 

is higher than the cost of retained   earnings

 

is the lowest component cost because   corporations can deduct 70 percent of the interest expense

Question 17 

As a general rule, the capital structure that maximizes stock price also:

 

minimizes the weighted average cost   of capital

 

maximizes the weighted average cost   of capital

 

minimizes the required rate of return   on equity

 

maximizes the cost of debt

Question 18 

The after-tax cost of debt for a firm in the 35% tax bracket with a before-tax cost of debt of 6% is:

 

6%

 

2.1%

 

3.9%

 

5.8%

Question 19 

Ningbo Shipping has issued preferred stock at its $125 per share par value. The stock will pay a $15 annual dividend. The cost of issuing and selling the stock was $4 per share. The cost of Ningbo Shipping preferred stock is:

 

7.2%.

 

12.0%.

 

12.4%.

 

15%.

Question 20 

A firm’s mix of debt and equity defines the firm’s:

 

capital structure

 

working capital

 

net working capital

 

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