1.An heuristic approach to evaluating credit policy alternatives, which involves estimating profit effects of each alternative, is the
a.net present value (NPV) approach
b.financial statement approach
c.discounted cash flow approach
d.scenario-based approach
e.liquidity analysis approach
2. In using the net present value (NPV) approach to evaluating credit policy alternatives, all other things equal,
a.the alternative with the highest NPV should be selected
b.the alternative with the lowest NPV should be selected
c.the alternative with the NPV closest to zero should be selected
d .the alternative with the present value of cash inflows closest to zero should be selected
3. Emily Cheney is evaluating a proposal to extend credit to a group of new customers. The new customers will generate an average of $40,000 per day in new sales (net of bad debt). On average, they will pay in 68 days. The variable
cost ratio is 80%, correction expenses are 2% of sales, and the cost of capital is 10%. What is the NPV of one day’s sales if Emily grants credit?
a.$4,226.81
b.$5,190.78
c.$6,483.06
d.$7,200.00
4. You are calculating the NPV of one day’s sales associated with a given credit policy that does not offer a discount and has an average collection period of 45
days. You should discount variable costs over _____ days and credit administration and correction expenses over ______ days.
a.0, 0
b.0, 45
c.45, 45
d.45, 0
5. The annual effective rate of interest for the Calgon Corp. is 12%. If the cash manager typically invests freed-up funds in overnight investments or uses funds
to pay down a credit line on which the company pays daily compounded interest, the appropriate daily opportunity rate for short-term financial decisions would
be:
a.0.12/365
b.(1+ 0.12) / 365
c.[(1+ 0.12)1/365 – 1]
d.(0.12)1/365
6.Traditional but flawed measures used to monitor receivables balances include each of the following except:
a.uncollected balance percentages
b.the aging schedule
c.accounts receivable turnover
d.days sales outstanding
7. Relative to minimizing inventory investment, minimizing bank balances, and slowing payment on payables, surveyed financial executives believed speeding
collection of receivables to be ______________________ as a recommended short-term financial management strategy.
a.more important
b.equally important
c.less important
d.of almost no importance
8.In addition to the bias introduced when sales are changing, DSO and accounts receivable turnover are sensitive to ________________, making them imperfect measures of changing collection experience (Assume they are calculated correctly based on a necessary information.)
a.how high or low the previously calculated figure was
b.the mix of cash and credit sales
c.the stringency of the company’s collection effort
d.the length of the period over which they are calculated
Chapter 7:
1. A ________________ source of financing provides funds automatically as a company’s operations expand.
a)seasonal
b)cyclical
c)spontaneous
d)derivative
e)residual
2.Which of the following constitute(s) a spontaneous financing source?
(I) accounts receivable
(II) accounts payable
(III) deferred expenses
(IV) inventories
(V) accrued expenses
e.
f.
g.
h.
i.
9.
I and II
I and IV
II and III
III and IV
II and V
Credit terms of 2/10, prox net 30 mean that a cash discount of 2% can be taken if payment is made by _________________ or the full invoice must be paid by __________________ .
a.days after the invoice date, 30 days after the invoice date
b.days after the invoice date, the 30th day of this calendar month
c.the 10th day of the next calendar month, 30 days after the invoice date
d.the 10th day of the next calendar month, the 30th day of the next calendar month
e.days after the good are actually received, 30 days after the goods are actually received
10. The advantage of consignment to the retailer is
a. not ever having to pay for the goods
b. not having to pay for the goods until the 30th day of the following month
c. not having to pay for the goods unless they are sold
d. a much larger price mark-up over cost than on items typically sold by the retailer
11. A payables manager is debating which guideline to adopt for his payables practices. Regardless of the NPV effect of doing so, a best ethical rule to follow in determining when to pay invoices is to
a.stretch payables from all suppliers, not just a few
b.stretch payables only to the extent your customers are stretching your receivables
c.stretch only those payables that you think will not show up as paid late in the company’s Dun & Bradstreet report
d.stretch payables only when the company is financially unable to pay them
12. A very important cost of paying an invoice late which is difficult to estimate accurately is
a) lost supplier goodwill
b) interest charges assessed by the supplier
c) the cost of foregone interest revenue
d) the cost of foregone interest expense
e) none of the above
13. The decision rule a payables manager should follow when considering how best to apply NPV analysis to payables decisions is to _______________, so long as
payment is not made late.
a.ignore the NPV and follow usual industry payment practices
b.delay payment for an additional day as long as NPV continues to fall
c.delay payment for an additional day as long as NPV continues to increase
d.always pay within the cash discount period
14. Cleveland Megatron, Inc. is short on cash and finds itself in a “net borrowed position.” It has $2 million of its $5 million credit line available at present,
however. If the annualized cost of credit line borrowing is greater than the annualized cash discount rate, the NPV-maximizing decision is to
a.not take the discount, and pay at the end of the credit period
b.compare the annualized cash discount rate to the daily investment rate, and take the discount if the cash discount rate exceeds the investment rate
c.compare the annualized cash discount rate to the daily investment rate, and take the discount if the cash discount rate is le than the investment rate
d.borrow the necessary funds and take the cash discount
15. The highest tier of ethical decisions, which entails a greater ethical commitment on the part of the decision-maker, is to
a.obey the law
b.consider whether the action would benefit both parties and be prudent, sound, and wise
c.consider whether the well-being of affected parties would be enhanced even if it requires a sacrifice by the decision-maker
d.obey the law as well as cultural mores
16. The most reliable measure of a firm’s payment practices is
a. days purchases outstanding (DPO)
b.payables balance fractions
c.days of cost of goods sold held in inventory
d.payables turnover ratio
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