Question:Which of the following statements is true?
a.Accepting the credit offered by a supplier is a source of cash.
b.Cash is decreased when new debt is issued to purchase holiday merchandise.
c.Collecting an accounts receivable is a use of cash.
d.Increasing the use of trade credit offered by a supplier is a use of cash.
Which one of the following will increase the operating cycle?
a.increasing the accounts payable period
b.increasing the accounts receivable turnover rate
c.decreasing the cash cycle
d.increasing the inventory period
e.decreasing the accounts payable period
Which one of the following actions should a manager take if he or she wants to decrease the operating cycle?
a.increase the inventory level while maintaining constant sales
b.decrease the rate at which the average inventory is sold
c.decrease the period of time for which credit is granted to customers
d.delay payments to suppliers to decrease the cash cycle
e.purchase all inventory with cash
All else equal, which one of the following will decrease the cash cycle?
a.increasing the credit period granted to a customer
b.increasing the operating cycle
c.decreasing the accounts receivable turnover rate
d.decreasing the accounts payable period
e.increasing the inventory turnover rate
Which one of the following credit terms is most apt to produce the shortest accounts receivable period?
a.2/10, net 30
d.2/20, net 45
e.3/5, net 10
Baker Industries offers credit terms of 2/20, net 60 to Charlie Co. Charlie Co. has an inventory period of 15 days and an operating cycle of 45 days. Given this, which of the following statements are correct?
I. The credit terms of Baker Industries are too restrictive.
II. If Charlie Co. forgoes the discount on its purchases, it will have a negative cash cycle.
III. Baker Industries is financing the accounts receivable of Charlie Co.
IV. If Charlie Co. is delinquent in its payment, Baker Industries should be concerned.
a.I, III, and IV only
b.I, II, III, and IV
c.I and II only
d.III and IV only
e.II, III, and IV only
Which one of the following statements is correct concerning the accounts payable period?
a.The accounts payable period is equal to the cost of goods sold divided by the average accounts payable.
b.Managers generally prefer a shorter accounts payable period than a longer one.
c.Increasing the accounts payable turnover rate increases the accounts payable period.
d.Extending the accounts payable period effectively decreases the cash needs of a firm.
e.An increase in the accounts payable period will increase the operating cycle, all else equal.
A flexible short-term financial policy:
a.tends to lower the selling prices that can be charged versus the prices under a restrictive policy.
b.tends to indicate that the carrying costs of a firm are relatively high as compared to the shortage costs.
c.lowers the costs of maintaining current assets.
d.tends to cause more production interruptions than does a restrictive policy due to inventory shortages.
e.tends to increase the cash inflows of a firm in the future more so than a restrictive policy does.
A firm which adopts a compromise short-term financial policy:
a.relies primarily on short-term debt to meet all of its financing needs.
b.will sometimes have cash surpluses and sometimes have cash shortfalls.
c.will maintain a constant level of long-term debt as the firm increases in size.
d.borrows sufficient long-term money so that short-term financing can be avoided.
e.finances its long-term assets with a combination of short-term and long-term debt.
A negative net cash inflow on a cash budget indicates that a firm:
a.has projected cash disbursements that exceed the projected cash collections.
b.utilizes both short and long-term debt.
c.has cash outflows other than those related to accounts payable.
d.is facing bankruptcy.
e.has funds available for short-term investing.
Williamson Industries has the following current account values for the year.
Account Beginning Balance Ending Balance
Accounts receivable $1,300 $1,450
Inventory 2,100 1,900
Accounts payable 1,500 1,250
These accounts represent a net _____ of cash for the year of:
Ramco Industries has sales for the year of $48,900 and an average inventory of $8,800. The cost of goods sold is equal to 60% of sales and the profit margin is 5%. How many days on average does it take the firm to sell an inventory item?
The accounts receivable turnover rate for the Bradford Bedding Co. has gone from an average of 6.7 times to 7.2 times per year. The days in receivables has:
a.increased by 4 days.
b.decreased by 7 days.
c.increased by 7 days.
d.decreased by 4 days.
e.increased by 5 days.
The Winters Co. has annual sales of $918,700. Cost of goods sold is equal to 55% of sales. The firm has an average accounts payable balance of $72,400. How many days on average does it take The Winters Co. to pay its suppliers?
The Sun Lee Co. has a receivables turnover rate of 11.5, a payables turnover rate of 9.8, and an inventory turnover rate of 13.6. What is the length of the firm’s operating cycle?
Robert’s International currently has an inventory turnover of 15, a receivables turnover of 18, and a payables turnover of 10. How many days are in the cash cycle?
Wie Cast, Inc., has these projected sales estimates:
April May June July
Sales $1,200 $1,300 $1,700 $1,900
The company collects 15% of its sales in the month of sale, 70% in the following month, and another 12% in the second month following the month of sale. Wie Cast never collects 3% of its sales. What is the amount of the June collections?
The Thomas-Nadal Co. has the following estimated sales:
Q1 Q2 Q3 Q4
Sales $3,800 $3,300 $2,800 $4,400
Purchases are equal to 67% of the following quarter’s sales. The accounts receivable period is 45 days and the accounts payable period is 60 days. Assume that there are 30 days in each month. Thomas-Nadal will purchase _____ of goods in quarter 3 and pay their suppliers _____ during quarter 3.
The Mo-Mo Co. purchases are equal to 55% of the following month’s sales. The accounts payable period for the purchases is 60 days while all other expenditures are paid in the month during which they are incurred. Assume that each month has 30 days. The company has compiled this information:
April May June July
Sales $4,500 $5,200 $5,700 $6,100
Payroll expenses 400 500 550 575
Rent and other expenses 900 940 980 1,020
Taxes and insurance 2,500 100 2,500 0
What is the total amount of Mo-Mo’s disbursements for the month of June?
The Complete Co. has projected their first quarter sales at $7,500, second quarter sales at $8,000, and third quarter sales at $8,400. The firm’s cost of goods sold is equal to 55 percent of the next quarter’s sales. The accounts receivable period is 45 days and the accounts payable period is 60 days. At the beginning of the first quarter, the firm has an accounts receivable balance of $3,600 and an accounts payable balance of $2,750. The firm pays $1,200 a month in cash expenses and $200 a month in taxes. At the beginning of the first quarter, the cash balance is $300 and the short-term loan balance is zero. During the first quarter, the firm is planning on spending $2,500 for some new equipment. The firm maintains a minimum cash balance of $25. Assume that each month has 30 days. The net cash flow for the first quarter is _____ and the cumulative cash surplus (deficit) at the end of the first quarter, prior to any short-term borrowing, is:
You live in the U.S. and want to invest in a Japanese company because you believe its stock is uniquely positioned to be unusually profitable over the next 2 years. However, you do not have access to the Japanese financial markets. You could still invest in this stock if the company:
a.issues Samurai bonds.
b.will agree to a swap.
e.trades as an ADR.
Which one of the following statements is accurate concerning the foreign exchange market?
a.As a financial market, the foreign exchange market is second in size only to the New York Stock Exchange.
b.The Foreign Exchange Market has physical trading floors in London, Tokyo, and New York City.
c.Parties are only permitted to participate in the foreign exchange market if they physically exchange goods or services across international boundaries.
d.The euro has yet to be adopted as a key currency in the foreign exchange market.
e.The foreign exchange market is an over-the-counter market.
The U.S. dollar equivalent is 0.3841 for the Brazilian real and 1.8759 for the U.K. pound. This means that:
a.one U.K. pound will buy 1.8759 U.S. dollars.
b.one Brazilian real will buy 1.8759 U.K. pounds.
c.one U.S. dollar will buy 1.8759 U.K. pounds.
d.one U.S. dollar will buy 0.3841 Brazilian reals.
e.0.3841 Brazilian reals are worth 1.8759 U.K. pounds.
Assume that a canned soft drink costs $1 in the U.S. and $1.25 in Canada. At the same time, the currency per U.S. dollar is C$1.25. In this case:
a.spot rates and future rates are equal.
b.absolute purchasing power parity exists.
c.the Fisher formula applies.
d.relative purchasing power parity exists.
e.interest rate parity exists.
Currently, you can exchange $1 for £0.53. Assume that the average inflation rate in the U.S. over the next four years will be 4% annually as compared to 5% in the U.K. Based on relative purchasing power parity, you should expect the _____ over the next 4 years.
a.both the U.S. dollar and the British pound to appreciate against all other currencies
b.British pound to appreciate against all currencies
c.British pound to appreciate against the U.S. dollar
d.U.S. dollar to appreciate against all currencies
e.U.S. dollar to appreciate against the British pound
Suppose that you could buy 27 Russian rubles or 108 Japanese yen last year for $1. Today, $1 will buy you 28 rubles or 104 yen. Over the past year, the:
a.Russian ruble depreciated against the U.S. dollar.
b.Japanese yen depreciated against the U.S. dollar.
c.U.S. dollar appreciated against both the ruble and the yen.
d.U.S. dollar appreciated against the Japanese yen.
e.U. S. dollar depreciated against the Russian ruble.
Translation exposure to exchange rate risk is primarily associated with the:
a.actual operations of a firm.
b.daily exchange of a firm s cash receipts.
c.daily fluctuations in the exchange rate and a firm s accounts payable.
d.accounting for a firm s overseas ventures.
e.cash investments of a firm.
If interest rate parity exists between country A and country B, then:
a.the spot and forward exchange rates between the two countries must be equal.
b.the interest rate in country B must equal the interest rate in country A.
c.investors will prefer the risk-free investment of one country over the risk-free investment of the other country.
d.significant covered interest arbitrage opportunities exist between currency A and currency B.
e.the percentage difference between the spot and forward rates is equal to the interest rate differential between country A and country B.
Which of the following is (are) an example of short-run exposure to exchange rate risk?
I. A few years ago, you built a factory overseas to take advantage of the lower raw materials cost. Today, those costs have increased such that your overseas factory no longer provides a cost advantage to your firm.
II. Your firm owns land in Canada valued at C$1 million. That value has remained constant in Canadian dollars for the past two years. However, the financial statements of your firm, which are expressed in U.S. dollars, reflect a 5 percent increase in the value of that property over the past year.
III. You order a shipment of diamonds from South Africa at a cost of 5 million South African rand. You wait until the shipment arrives to pay for the order. When you pay the invoice, your cost in U.S. dollars has increased by $1,500 since the order date.
IV. You sold some equipment to a firm in the U.K. at an invoice price of £300,000. At the time of the sale, the invoice price was worth $565,000. However, when the firm paid the invoice and you exchanged the funds into dollars, you only received $558,000.
a.II and IV only
b.III and IV only
d.I and II only
Suppose that a firm builds a factory overseas, staffs it with foreign workers, uses materials supplied by foreign companies, and finances the entire operations with a loan from a foreign bank located in the same town as the factory. This firm is probably trying to greatly reduce, or eliminate, any:
a.short-run exposure to exchange rate risk.
b.long-run exposure to exchange rate risk.
c.translation exposure to exchange rate risk.
d.interest rate disparities.
e.political risk associated with the foreign operation.
You can exchange $1 for either 0.7707 euros or 0.5331 British pounds. What is the cross rate between the pound and the euro?
Currently, you can exchange $1 for 105 yen or €0.74 in New York. In Tokyo, the exchange rate is ¥1 = €0.0075. If you have $1,000, how much profit can you earn using triangle arbitrage?
The spot rate on the Canadian dollar is 1.24. Interest rates in Canada are expected to average 2.8% while they are anticipated to be 3.1% in the U.S. What is the expected exchange rate five years from now?
A steak dinner in the U.S. costs $25, while the exact meal costs 300 pesos across the border in Mexico. Purchasing power parity implies that the Peso/$ exchange rate is:
The current spot rate between the U.K. and the U.S. is £0.5331 per $1. The expected inflation rate in the U.S. is 4.5%. The expected inflation rate in the U.K. is 3.6%. If relative purchasing power parity exists, the exchange rate next year will be:
Currently, you can exchange 100 for $126.48. The inflation rate in Euroland is expected to be 2.8% as compared to 3.4% in the U.S. Assuming that relative purchasing power parity exists, the exchange rate 2 years from now should be:
The spot rate between Canada and the U.S. is C$1.2378 = $1, while the 1-year forward rate is C$1.2240 = $1. The risk-free rate in Canada is 3.6%. The risk-free rate in the U.S. is 4.5%. How much profit can you earn on a loan of $10,000 by utilizing covered interest arbitrage?
The 1-year forward rate for the British pound is £.5429 = $1. The spot rate is £.5402 = $1. The interest rate on a risk-free asset in the U.K. is 3%. If interest rate parity exists, a 1 year risk-free security in the U.S. is yielding _____.
The spot rate between Japan and the U.S. is ¥104.02 = $1, while the 1-year forward rate is ¥105.13 = $1. A 1-year risk-free security in the U.S. is yielding 4.2%. What is the rate of return on a 1-year risk-free security in Japan assuming that interest rate parity exists?
A U.S. firm has total assets valued at €125,000 located in Germany. This valuation did not change from last year. Last year, the exchange rate was €1.1 = $1. Today, the exchange rate is €0.8 = $1. By what amount did these assets change in value on the firm s U.S. financial statements?
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