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Exam 16: Working Capital Management

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Question 71

True/False

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Since depreciation is a non-cash charge,it neither appears on nor has any effect on the cash budget.Thus,if the depreciation charge for the coming year doubled or halved,this would have no effect on the cash budget.

A) True
B) False

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Question 72

Multiple Choice

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Which of the following statements is NOT CORRECT?

A) Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
B) Accruals are "free" in the sense that no explicit interest is paid on these funds.
C) A conservative approach to working capital management will result in most if not all permanent assets being financed with long-term capital.
D) The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt.This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.
E) Bank loans generally carry a higher interest rate than commercial paper.

F) A) and E)
G) A) and D)

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Question 73

Multiple Choice

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Edwards Enterprises follows a moderate current asset investment policy,but it is now considering a change,perhaps to a restricted or maybe to a relaxed policy.The firm's annual sales are $400,000;its fixed assets are $100,000;its target capital structure calls for 50% debt and 50% equity;its EBIT is $39,000;the interest rate on its debt is 10%;and its tax rate is 40%.With a restricted policy,current assets will be 15% of sales,while under a relaxed policy they will be 25% of sales.What is the difference in the projected ROEs between the restricted and relaxed policies? Do not round intermediate calculations.

Nogueiras Corp's budgeted monthly sales are $10,500,and they are constant from month to month.40% of its customers pay in the first month and take the 2% discount,while the remaining 60% pay in the month following the sale and do not receive a discount.The firm has no bad debts.Purchases for next month's sales are constant at 50% of projected sales for the next month."Other payments",which include wages,rent,and taxes,are 25% of sales for the current month.Construct a cash budget for a typical month and calculate the average cash gain or loss during the month.Do not round intermediate calculations.

Which of the following statements is CORRECT?

Exhibit 15.1 Zorn Corporation is deciding whether to pursue a restricted or relaxed working capital investment policy. The firm's annual sales are expected to total $4,400,000, its fixed assets turnover ratio equals 4.0, and its debt and common equity are each 50% of total assets. EBIT is $150,000, the interest rate on the firm's debt is 10%, and the tax rate is 40%. If the company follows a restricted policy, its total assets turnover will be 2.5. Under a relaxed policy its total assets turnover will be 2.2. -Refer to Exhibit 15.1.If the firm adopts a restricted policy,how much lower would its interest expense be than under the relaxed policy? Do not round intermediate calculations. ​

The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings.