TEST
FINANCIAL MANAGEMENT
NUMBER ONE TIME: 30 MINUTES
1. In finance, "working capital"
means the same thing as:
A. total assets.
B. fixed assets.
C. current assets.
D. current assets minus current
liabilities
2. Which of the following would be
consistent with a more aggressive
approach to financing working
capital?
A. Financing short-term needs
with short-term funds
B. Financing permanent inventory
buildup with long-term debt
C. Financing seasonal needs with
short-term funds
D. Financing some long-term
needs with short-term funds
3. Which asset-liability combination
would most likely result in the
firm's having the greatest risk of
technical insolvency?
A. Increasing current assets while
lowering current liabilities
B. Increasing current assets while
incurring more current
liabilities
C. Reducing current assets,
increasing current liabilities,
and reducing long-term debt.
D. Replacing short-term debt with
equity
4. Which of the following illustrates
the use of a hedging (or matching)
approach to financing?
A. Short-term assets financed
with long-term liabilities
B. Permanent working capital
financed with long-term
liabilities
C. Short-term assets financed
with equity
D. All assets financed with a 50
percent equity, 50 percent
long-term debt mixture
5. __________varies inversely with
profitability.
A. Liquidity.
B. Risk
C. Blue
D. False.
6. Net working capital refers to
A. total assets minus fixed assets
B. current assets minus current
liabilities
C.current assets minus
inventories
D. current assets.
7. Marketable securities are primarily:
A. short-term debt instruments.
B. short-term equity securities.
C. long-term debt instruments
D. long-term equity securities
8. Time consumed in clearing a check
through the banking system.
A. Processing float
B. Deposit float
C. Collection float
D. Availability float
9. A firm's inventory turnover (IT) is
5 times on a cost of goods sold
(COGS) of $800,000. If the IT is
improved to 8 times while the
COGS remains the same, a
substantial amount of funds is
released from or additionally
invested in inventory. In fact,
A. $160,000 is released
B. $100,000 is additionally
invested
C. $60,000 is additionally
invested
1
 D. $60,000 is released
Solution:
IT = 5 = $800,000/ INVENTORY (old)
Therefore, INVENTORY(old)
=$800,000/5 =$160,000
IT = 8= $800,000/INVENTORY (new)
Therefore, Inventory(new) =$800,000/8
=$100,000.
$160,000 - $100,000 =$60,000 released
10.Ninety-percent of Vogel Bird
Seed's total sales of $600,000 is
on credit. If its year-end
receivables turnover is 5, the
average collection period
(based on a 365-day year) and
the year-end receivables are,
respectively:
A. 365 days and $108,000
B. 73 days and $120,000
C. 73 days and $108,000
D. 81 days and $108,000
Solution:
RTD = 365 days/5 = 73 days.
90% x $600,000 = $540,000 in credit
sales.
RT = 5= $540,000/ Receivables
Therefore, Receivables = $540,000/5 =
$108,000.
11. Costs of not carrying enough
15. The trade terms "2/15, net 30"
inventory include:
indicate that:
A. lost sales
B. customer
disappointment
C. possible worker layoffs
D. all of these
12.Increasing the credit period
from 30 to 60 days, in response
to a similar action taken by all
of our competitors, would
likely result in:
A. an increase in the average
collection period
B. a decrease in bad debt
losses
C. an increase in sales
D. higher profits.
13.The credit policy of Spurling
Products is "1.5/10, net 35." At
present 30% of the customers
take the discount, 62% pay
within the net period, and the
rest pay within 45 days of
invoice. What would
receivables be if all customers
took the cash discount?
A. Lower than the present
level
B. No change from the
present level
C. Higher than the present
level.
D. Unable to determine
without more information
14.An increase in the firm's
receivable turnover ratio means
that:
A. it is collecting credit
sales more quickly than
before
B. cash sales have
decreased
C. it has initiated more
liberal credit terms
D. inventories have
increased
A. a 2% discount is offered if
payment is made within 15
days
B. a 15% discount is offered if
payment is made within 30
days
C. a 2% discount is offered if
payment is made within 30
days
D. a 30% discount is offered if
payment is made within 15
days
16.If credit terms of "2/10, net 40"
are offered, the approximate
cost of not taking the discount
and paying at the end of the
credit period would be closest
2
 to which of the following?
(Assume a 365-day year.)
A. 18.6%
B. 24.3%
C. 24.8%
D. 30.0%
Solution:
[2/(100-2)] * [365/(40-10)] = 0.248.
17.When a firm needs short-term
funds for a specific purpose,
the bank loan will likely be a:
A. compensating balance
arrangement
B. revolving credit
agreement
C. transaction loan.
D. line of credit
18.The Houser Company has
negotiated a $500,000
revolving credit agreement
with Chitwood National Bank.
The agreement calls for an
interest rate of 10% on fund
used, a 15% compensating
balance, and a commitment fee
of 1% on the unused amount of
the credit line. Assuming that
the compensating balance
would not otherwise be
maintained, the effective
annual interest cost if the firm
borrows $200,000 for one year
is closest to
A. 11.5 percent
B. 15 percent
C. 26.5 percent
D. 13.53 percent.
Solution:
Interest = .10($200,000) = $20,000
Commitment fee = .01 ($500,000 -
$200,000) = $3,000
Amount of useable loan funds
= $200,000 - (.15 * $200,000) =
$170,000
Annual percentage cost = ($20,000
+ $3,000)/$170,000 = .1353 or
13.53%
19.ABC Co. is considering
granting credit to a new
corporate customer but is
concerned about the customer's
credit history. Which of the
following would provide useful
information to ABC as they
decide whether or not to grant
credit to this customer?
I. the customer's financial
statements
II. an Experian report
III. a credit report from the
customer's bank
IV. a Dun and Bradstreet report
A. III only
B. I and III only
C. II and IV only
D. I, II, and III only
E. I, II, III, and IV
20.Your company purchased
$10,000 worth of inventory on
January 2nd on credit. The
terms of the sale were 3/15, net
45. What is the effective annual
interest rate if you pay the full
amount in 45 days?
A. 3.1 percent
B. 28.0 percent
C. 37.6 percent
D. 44.9 percent