1. Summary balance sheet data for Greener Gardens Co. is shown below (in thousands of dollars).
The company is in a highly seasonal business, and the data show its assets and liabilities at peak
and off-peak seasons:
Peak Off-Peak
Cash $ 50 $ 30
Marketable securities 0 20
Accounts receivable 40 20
Inventories 100 50
Net fixed assets 500 500
Total assets $690 $620
Payables and accruals $ 30 $ 10
Short-term bank debt 50 0
Long-term debt 300 300
Common equity 310 310
Total claims $690 $620
From this data we may conclude that
a. Greener Gardens’ current asset financing policy is relatively aggressive; that is, the
company finances some of its permanent assets with short-term discretionary debt.
b. Greener Gardens follows a relatively conservative approach to current asset financing;
that is, some of its short-term needs are met by permanent capital.
c. Without income statement data, we cannot determine the aggressiveness or
conservatism of the company’s current asset financing policy.
d. Without cash flow data, we cannot determine the aggressiveness or conservatism of the
company’s current asset financing policy.
e. Greener Gardens’ current asset financing policy calls for exactly matching asset and
liability maturities.
2. Which of the following statements is CORRECT?
a. Although short-term interest rates have historically averaged less than long-term rates,
the heavy use of short-term debt is considered to be an aggressive strategy because of
the inherent risks associated with using short-term financing.
b. If a company follows a policy of “matching maturities,” this means that it matches its use
of common stock with its use of long-term debt as opposed to short-term debt.
c. Net working capital is defined as current assets minus the sum of payables and accruals,
and any decrease in the current ratio automatically indicates that net working capital has
decreased.
d. If a company follows a policy of “matching maturities,” this means that it matches its use
of short-term debt with its use of long-term debt.
e. Net working capital is defined as current assets minus the sum of payables and accruals,
and any increase in the current ratio automatically indicates that net working capital has
increased.
3. Other things held constant, which of the following would tend to reduce the cash conversion
cycle?
a. Place larger orders for raw materials to take advantage of price breaks.
b. Take all discounts that are offered.
c. Continue to take all discounts that are offered and pay on the net date.
d. Offer longer payment terms to customers.
e. Carry a constant amount of receivables as sales decline.
4. Which of the following actions would be likely to shorten the cash conversion cycle?
a. Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
b. Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
c. Adopt a new manufacturing process that saves some labor costs but slows down the
conversion of raw materials to finished goods from 10 days to 20 days.
d. Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
e. Adopt a new manufacturing process that speeds up the conversion of raw materials to
finished goods from 20 days to 10 days.
5. Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax
bracket?
a. Depreciation.
b. Cumulative cash.
c. Repurchases of common stock.
d. Payment for plant construction.
e. Payments lags.
0 comments