Working Capital Management Test Bank

7/14/2019 14 x11 Financial Management B
Financial Manageme
(B. Working Capital Managemen
B. WORKING CAPITAL MANAGEMENT A. Increase in the ratio of current lia bilities to noncurrent liabilities.
B. Increase in the operating cycle.
C. Decrease in the operating cycle .
THEORIES: D. Increase in the ratio of current assets to current liabilities.
Working capital management
1. Working capital management involves investment and financing decisions related to: Moderate
A. plant and equip ment and current liabilities. 3. Short-term financing plans with high liquidity have:
B. current assets and capital structure. A. high return and hig h ris k
C. current assets and current liabilities. B. moderate return and moderate risk
D. sale s and credit. C. low profit and low risk
D. none of the above
17. The goal of managing working capital, such as inventory, should be to minimize the:
A. costs of carrying inventory Temporary & Permanent working capital
B. opportunit y cost of capital 4. Temporary working capital supports
C. aggregate of carrying and shortage costs A. the cash needs of the company. C. acquisition of capital equip ment.
D. amount of spoila ge or pilferage B. payment of long term debt. D. seasonal peaks.
Working capital financing policy Cash Management

Aggressive Motives for holding cash
5. Zap Company follows an aggressive financing policy in its working capital management while 7. The transaction motive for holding cash is for:
Zing Corporation follows a conservative financing policy. Which one of the following A. a safety cushion C. compensating balance requirements
statements is correct? B. daily operating requirements D. none of the above
A. Zap has low ratio of short-term debt to total debt while Zing has a high ratio of short-
term debt to total debt. Float
B. Zap has a lo w current ratio while Zing has a high current ratio. 8. The difference between the cash balance on the firm's books and the bala nce shown on t
C. Zap has le ss liquidity risk while Zing has more liquidity risk. bank statement is called:
D. Zap finances short-term assets with long-term debt while Zing finances short-term A, the compensating balance C. a safety cushion
assets with short-term debt. B. float D. none of the above
6. Which of the followin g would increase risk? Cash conversion cycle

A. Raise the le vel of workin g capital. 9. The length of time between payment for inventory and the collection of cash is referred to as
B. Decrease the amount of inventory by formulating an effective inventory policy. A. payables deferral period C. operating cycle
C. Increase the amount of short-term borrowing. B. receivables conversion period D. cash conversion cycle
D. Increase the amount of equity financing.
10. As a firm's cash conversion cycle increases, the firm:
Conservative A. becomes less profitable
2. As a company becomes more conservative with respect to working capital policy, it would B. increases its in vestment in working capital
tend to have a(n) C. reduces its accounts payable period
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Financial Manageme
D. incurs more shortage costs D. Increases by the number of units of the safety stock.
11. The longer the firm's accounts payable period, the: 19. Which of the following statements is correct for a firm that currently has total costs of carryi
A. longer the firm's cash conversion cycle is. and ordering inventory that are 50% higher than total carrying costs?
B. shorter the firm's inventory period is. A. Current order size is greater than optimal
C. more the delay in the accounts receivable period. B. Current order size is less than optimal
D. less the firm must invest in working capital. C. Per unit carrying costs are too high
D. The optimal order size is currently being used
12. The average length of time a peso is tied up in current asset is called the:
A. net working capital. C. receivable s conversion period. Trade credit
B. inventory conversion period. D. cash conversion perio d. 20. With credit terms of 3/8, n/30, what is the customer’s payment decision date?
A. Three days after the invoice is received.
Receivables management B. The 8th day is the customer’s decision date.
13. All of these factors are used in credit policy administration except: C. Anytime durin g the period, 8th to the 30th.
A. credit standards C. peso amount of receivables D. The 30th day is the primary decision date.
B. terms of trade D. collection policy
PROBLEMS
14. Which of the following statements is most correct? If a company lowers its DSO, but no Working capital financing
1
changes occur in sales or operating costs, then: . Casie Company turns out 200 calculators a day at a cost of P250 per calculator for materia
A. the company might well end up with a higher debt ratio. and variable conversion cost. It takes the firm 18 days to convert raw materials in
B. the company might well end up with a lower debt ratio. calculator. Casie’s usual credit terms extended to its customers is 30 days, and the fi
C. the company would probably end up with a higher ROE. generally pays its suppliers in 20 days.
D. the company's total asset turnover ratio would probably decline. If the foregoin g cycles are constant, what amount of working capital must Casie Compa
finance?
15. All but which of the following is considered in determining credit policy? A. P1,400,000 C . P 90 0, 00 0
A. Credit standards C. Accounts payable deferral period B. P2,400,000 D. P1,800,000
B. Credit limits D. Collection efforts
Cash conversion cycle
2
Inventory management . Luke Company has an inventory conversion period of 60 days, a receivables convers
16. The use of safety stock by a firm will: period of 45 days, and a payments cycle of 30 days. What is the length of the firm’s ca
A. reduce inventory costs C. have no effect on inventory costs conversion cycle?
B. increase inventory costs D. none of the above A. 90 days C. 54 days
B. 75 days D . 1 05 da ys
18. When a specifie d level of safety stock is carried for an item in inventory, the average
3
inventory level for that item . The Spades Company has an inventory conversion period of 75 days, a receivab
A. decreases by the amount of the safety stock. conversion period of 38 days, and a payable payment period of 30 days. What is the length
B. is one-half the level of the safety stock. the firm’s cash conversion cycle?
C. Increases by one-half the amount of the safety stock. A. 83 days C . 67 day s
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Financial Manageme
B. 113 days D. 45 days B. P1,912.50 D . P 1 88 .5 5
4
. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its Annual savings
9
average daily sales are P100,000. The company has P1.5 million in accounts payable. Its . What are the expected annual savings from a lock-box system that collects 150 checks p
average daily purchases are P50,000. What is the length of the company’s cash conversion day averaging P500 each, and reduces mailing and processing times by 2.5 and 1.5 da
period? respectively, if the annual interest rate is 7%?
A . 50 d ay s C . 30 d ay s A. P 5,250 C . P 21, 000
B. 20 days D . 40 days B. P 13,125 D. P 300,000
Days inventory Receivables management

5
. What is the in ventory period for a firm with an annual cost of goods sold of P8 million, P1.5 Carrying cost
10
million in average inventory, and a cash conversion cycle of 75 days? . The Camp Company has an inventory conversio n period of 60 days, a receiva
A. 6.56 days C. 52.60 days conversio n period of 30 days, and a payable payment period of 45 days. The Cam
B. 18.75 days D. 67.50 days variable cost ratio is 60 percent and annual fixed costs of P600,000. The current cost
capital for Camp is 12%.
6
. Samaritan Supplies, Inc. has P5 million in inventory and P2 million in accounts receivable. Its If Camp’s annual sales are P3,375,000 and all sales are on credit, what is the firm’s carryin
average daily sales are P100,000. The company has P1.5 million in accounts payable. Its cost on accounts receivable, using 360 days year?
average daily purchases are P50,000. What is the length of the company’s inventory A . P 281 ,2 50 C . P 20 ,2 50
conversion period? B. P168,750 D. P 56,250
A. 50 days C . 12 0 da ys
B . 90 d ay s D . 40 d ay s Average receivables
11
. Caja Company sells on terms 3/10, net 30. Total sales for the year are P900,000. Fo
Cash management percent of the customers pay on the tenth day and take discounts; the other 60 percent pa
Economic conversion quantity (ECQ) on average, 45 days after their purchases.
7
. Simil e Inc. has a total annual cash requirement of P9,075,000 which are to be paid What is the average amount of receivables?
uniformly. Simile has the opportunity to invest the money at 24% per annum. The company A. P70,000 C. P77,200
spends, on the average, P40 for every cash conversion to marketable securities. B . P 77, 50 0 D . P 67 ,5 00
What is the optimal cash conversion size?
12
A. P60,000 C. P45,000 . Palm Company’s budgeted sales for the coming year are P40,500,000 of which 80% a
B . P 55 ,0 00 D . P 72 ,5 00 expected to be credit sales at terms of n/30. Palm estimates that a proposed relaxation
credit standards will increase credit sales by 20% and increase the average collection perio
Opportunity cost from 30 days to 40 days. Based on a 360-day year, the proposed relaxation of credit
8
. Hyperbole Corporation estimates its total annual cash disbursements of P3,251,250 which standards will result in an expected increase in the average accounts receivable balance o
are to be paid uniformly. Hyperbole has the opportunity to invest the money at 9% per A. P 540,000 C. P2,700,000
annum. The company spends, on the average, P25 for every cash conversion to marketable B . P 90 0, 00 0 D. P1,620,000
securities and vice versa.
What is the opportunity cost of keeping cash in the bank account? Investment in receivables
13
A. P3,825.00 C. P4,190.00 . Currently, La Carlota Company has annual sales of P2,500,000. Its average collecti
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Financial Manageme
17
period is 45 days, and bad debts are 3 percent of sales. The credit and collection manager . What is the economic order quantity for the following inventory policy: A firm sells 32,000 ba
is considering instituting a stricter collection policy, whereby bad debts would be reduced to of premium sugar per year. The cost per order is P200 and the firm experiences a carryi
1.5 percent of total sales, and the average collection period would fall to 30 days. However, cost of P0.80 per bag.
sales would also fall by an estimated P300,000 annually. Variable costs are 75 percent of A. 2,000 bags C. 8,000 bags
sales and the cost of carrying receivables is 10 percent. Assume a tax rate of 40 percent B. 4,000 bags D. 16,000 bags
and 360 days per year.
What would be the decrease in investment in receivables if the change were made? Annual demand
18
A. P 9,688 C . P 9 6, 87 5 . Marsman Co. has determined the followin g for a given year:
B. P 12,988 D. P129,975 Economic order quantity (standard order size) 5,000 units
Total cost to place purchase orders for the year P40,000
Comprehensive Cost to place one purchase order P 100
Question Nos. 14 through 16 are based on the following data: Cost to carry one unit for one year P 4
Sonata Company is considerin g changing its credit terms from 2/15, net 30 to 3/10, net 30 in What is Marsman’s estimated annual usage in units?
order to speed collectio ns. At present, 40 percent of Sonata Company‘s customers take the 2 A. 1,000,000 C. 500,000
percent discount. Under the new term, discount customers are expected to rise to 50 percent. B. 2,000,000 D. 1,500,000
Regardless of the credit terms, half of the customers who do not take the discount are expected
to pay on time, whereas the remainder will pay 10 days late. The change does not involve a Required annual return on investment
19
relaxation of credit standards; therefore bad debt losses are not expected to rise above their . BIBO Company is a distributor of videotapes. Pirate Mart is a local retail outlet which se
present 2 percent level. However, the more generous cash discount terms are expected to blank and recorded videos. Pirate Mart purchases tapes from BIBO Company at P300.
increase sales from P2 million to P2.6 million per year. Sonata Company’s variable cost ratio is per tape; tapes are shipped in packages of 20. BIBO Company pays all incoming freigh
75 percent, the interest rate on funds invested in accounts receivable is 9 percent, and the firm’s and Pirate Mart does not inspect the tapes due to BIBO Company's reputation for hig
income tax rate is 40 percent. quality. Annual demand is 104,000 tapes at a rate of 4,000 tapes per week. Pirate Ma
earns 20% on its cash investments. The purchase-order lead time is two weeks.
14
. What are the days sales outstanding (DSO) before and after the change of credit policy? The following cost data are available:
A. 27.0 days and 22.5 days, respectively C. 22.5 days and 21.5 days, respectively Relevant ordering costs per purchase order P80 P90.50
B. 22.5 days and 27.0 days, respectiv ely D. 21.5 days and 22.5 days respectively Carrying costs per package per year 3
Relevant insurance, materials handling, breakage, etc., per year 2 P 4.50
What is the required annual return on investment per package?
15
. The incremental carryin g cost on receivable is A. P6,000 C . P1,200
A . P 8 43 .7 5 C . P 6 43 .7 5 B. P 250 D. P 600
B. P8,889.00 D. P6,667.00
Order quantity
16 20
. The incremental after tax profit from the change in credit terms is . For Raw Materia l L12, a company maintains a safety stock of 5,000 pounds. Its avera
A . P 68 ,4 93 C . P 60 ,6 15 inventory (taking into account the safety stock) is 12,000 pounds. What is the apparent ord
B. P65,640 D. P57,615 quantity?
A. 18,000 lbs. C. 14,000 lbs.
Inventory management B. 6,000 lbs. D. 24,000 lbs
EOQ
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Financial Manageme
Optimal safety stock level A . P 19, 55 0 C . P 38 ,3 00

21
. Each stockout of a product sold by Arnis Co. costs P1,750 per occurrence. The company’s B. P18,750 D. P62,500
carrying cost per unit of inventory is P5 per year, and the company orders 1,500 units of
product 20 times a year at a cost of P100 per order. The probabilities of a stockout at Maximum interest rate
24
various levels of safety stock are: . Narra Company is considerin g a switch to level production. Cost efficiencies will occ
Units of Safety Stock Probability of Stockout under level production and after tax cost would decline by P70,000 but inventory wou
0. 0.50 increase from P1,000,000 to P1,800,000. Narra would have to finance the extra inventory
100. 0.30 a cost of 10.5 percent.
200. 0.14 What is the maximum interest rate that makes level production feasible?
300. 0.05 A. 7.00 percent C. 8.75 percent
400. 0.01 B. 5.83 percent D. 10.00 percent
The optimal safety stock level for the company based on the units of safety stock level
above is Opportunity cost
25
. Diesel Fashion estimates that 90,000 zippers will be needed in the manufacture of hi
A.
B . 200
3 00 units
un it s C.
D . 1400
00 units
un it s selling products for the coming year. Its supplier quoted a price of P25 per zipper. Die
planned to purchase 7,500 units per month but its supplier could not guarantee this delive
22
. Paeng Company uses the EOQ model for inventory control. The company has an annual schedule. In order to ensure availability of these zippers, Diesel is considering the purcha
demand of 50,000 units for part number 6702 and has computed an optimal lot size of 6,250 of all these 90,000 units on January 1. Assuming Diesel can invest cash at 12%, t
units. Per-unit carrying costs and stockout costs are P9 and P4, respectively. The following company’s opportunity cost of purchasing the 90,000 units at the beginning of the year is
data have been gathered in an attempt to determine an appropriate safety stock level: A . P 127 ,5 00 C . P 12 3, 75 0
Units Short Because of Excess Number of Times Short B. P135,000 D. P 264,000
Demand during the Lead Time Period in the last 40 Reorder Cycles
100 8 Trade credit
26
200 10 . If a firm is given a trade credit terms of 2/10, net 30, then the cost to the firm failing to take t
300 14 discount is:
400 8 A. 2.0%. C. 36.7%
What is the optimal safety stock level? B. 30.0%. D. 10.0%.
A. 100 units C. 200 units 27
B. 300 units D. 400 units . The cost of discounts missed on credit terms of 2/10, n/60 is
A. 2.0 percent C. 12.4 percent
Annual inventory costs B. 14.9 percent D. 21.2 percent
23
. Durable Furniture Company uses about 200,000 yards of a particular fabric each year. The
fabric costs P25 per yard. The current policy is to order the fabric four times a year. Bank loans
Discount loan
28
Incremental
about P0.75 ordering
per yard, costs
much are aboutrepresents
of which P200 per the
order, and incremental
opportunity carrying
cost of the costs
funds tied upare
in . You plan to borrow P10,000 from your bank, which offers to lend you the money at a
inventory. percent nominal, or stated, rate on a one-year loan. What is the effective interest rate if t
How much total annual costs are associated with the current inventory policy? loan is a discount loan?
A . 10. 00% C . 12 .45 %
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Financial Manageme
B. 11.11% D . 14.56% B. P1,176 D . P1,224
34
Discount loan with compensating balance . An invoice of a P100,000 purchase has credit terms of 1/10, n/40. A bank loan for 8 perce
29
. What is the effective rate of a 15% discounted loan for 90 days, P200,000, with 10% can be arranged at any time. When should the customer pay the invoice?
compensating balance? Assume 360 days per year. A. Pay on the 1st. C. Pay on the 40th
A. 20.0% C. 17.4% B. Pay on the 10th D. Pay on the 60th
B. 15.0% D. 22.2%
35
Compensating balance with interest . The Peninsula Commercial Bank and Island Corporation agreed to the following loan propos
30
. The Premiere Company obtained a short-term bank loan for P1,000,000 at an annual • Stated interest rate of 10% on a one-year discounted loan; and
interest rate 12%. As a conditio n of the loan, Premiere is required to maintain a • 15% of the loan as compensating balance on zero-interest current account to
compensating balance of P300,000 in its checking account. The checking account earns maintained by Island Corporation with Peninsula Commercial Bank.
interest at an annual rate of 3%. Premiere would otherwise maintain only P100,000 in its The loan requires a net proceeds of P1.5 million. What is the principal amount of loan appli
checking account for transactional purposes. Premiere’s effective interest costs of the loan for as part of the loan agreement?
is A. P1,666,667 C. P1,764,706
A. 12.00% C. 16.30% B. P2,000,000 D. P1,125,000
B. 14. 25% D . 15.86%
Add-on
31
. Perlas Company borrowed from a bank an amount of P1,000,000. The bank charged a 12%
stated rate in an add-on arrangement, payable in 12 equal monthly installments.
A. 22. 15% C . 25.05%
B. 24.00% D. 12.70%
Financing alternative
32
. A company has accounts payable of P5 million with terms of 2% discount within 15 days, net
30 days (2/15 net 30). It can borrow funds from a bank at an annual rate of 12%, or it can
wait until the 30t h day when it will receive revenues to cover the payment. I f it borrows funds
on the last day of the discount period in order to obtain the discount, its total cost will be
A. P 51,000 less C. P 75,500 less
B. P100,000 less D. P 24,500 more
33
. Every 15 days a company receives P10,000 worth of raw materials from its suppliers. The
credit terms for these purchases are 2/10, net 30, and payment is made on the 30th day
after each delivery. Thus, the company is considering a 1-year bank loan for P9,800 (98% of
the invoice amount). If the effective annual interest rate on this loan is 12%, what will be the
net peso savings over the year by borrowing and then taking the discount on the materials?
A. P3,624 C . P4, 800
129
1
. Answer: A
Daily working capital required: 200 x 250 50,000
Total working capital needed: 28 days x 50,000 1,400,000
CCC = 18 + 30 – 20 28 days
2
. Answer: B
Cash Conversion Cycle = Ave. collection period + Inventory cycle days – Ave. Accounts Payable payment days
Inventory cycle in days 60 days
Average collection period 45 days
Operating cycle 105 days
Deduct Accounts payable payment days 30 days
Cash conversion cycle 75 days
3
. Answer: A
Inventory cycle in days 75 days
Average collection period 38 days
Operating cycle 113 days
Deduct Accounts payable payment days 30 days
Cash conversion cycle 83 days
4
. Answer: D
Inventory conversion period (See #4) 50.0 days
Average collection period (2M/0.1M) 20.0 days
Operating cycle 70.0 days
Less: Ave. Accounts Payable payment days (1.5M/0.5M) 30.0 days
Cash conversion period 40.0 days
5
. Answer: D
Inventory turnover:
Cost of goods sold/Ave. Inventory (8M/1.5M) 5.33x
Inventory conversion period (360 days/5.33) 67.5 days
6
. Answer: A
Annual sales 360 days x 100,000 36.0M
Inventory turnover 36M/5M 7.2x
Inventory conversion period 360/7.2 50.0 days
7
. Answer: B
Optimal cash conversion size = (9,075,000 x 40 / 0.24)^1/2 = 55,000
8
. Answer: B
OTS: (2 x P3,251,250 x P25 ÷ 0.09)^1/2 = P42,500
Opportunity cost: P42,500 ÷ 2 x 0.09 P 1,912.50
9
. Answer: C
Reduction in cash float (2.5 + 1.5) 4.0 days
Additional free cash (4 days x 150 x P500) P300,000
Annual savings (P300,000 x 0.07) P 21,000
10
. Answer: C
Average AR 3,375,000/360 x 30 days 281,250
Average investment: 281,250 x 0.60 168,750
Carrying cost: 168,750 x 0.12 20,250
11
. Answer: B
DSO = (.4 x 10) + (.60 x 45) 31 days
Average AR: 900,000/360x31 days P77,500
12
. Answer: D
Credit sale = 40,500,000 x 80% = 32,400,000
Increased credit sales: 32,400,000 x 1.2 = 38,880,000
New Average AR 38,880,000/360 x 40 = 4,320,000
Old Average AR 32,400,000/360 x 30 = 2,700,000
Increase in Average AR 1,620,000
13
. Answer: C
Change in average accounts receivables:
Planned: 2,200,000/360x30 183,333
Present: 2,500,000/360x45 312,500
Decrease in AR balance 129,667
Variable cost ratio 75%
Decrease in investment in AR 96,875
14
. Answer: A
Days’ sales outstanding
Old policy: (.4 x 15) + (.3 x 30) + (.3 x 40) 27.0 days
New policy (.5 x 10) + (.25 x 30) + (.25 x 40) 22.5 days
15
. Answer: A
Average receivable
New policy: 2.6M/360 x 22.5 162,500
Old policy: 2.0M/360 x 27 150,000
Incremental Accounts Receivable 12,500
Incremental carrying cost on receivable 12,500 x 0.75 x 0.09 843.75
16
. Answer: A
Incremental sales 600,000
Variable cost (.75 x 600,000) ( 450,000)
Additional bad debts (600,000 x 2%) ( 12,000)
Additional carrying cost ( 844)
Additional discounts (2,600,000 x .5 x 03) –(2,000,000 x .4 x .02) ( 23,000)
Before tax increase in income 114,156
Less tax 45,663
Incremental income 68,493
17
. Answer: B
EOQ = (2 x 32,000 x 20 ÷ 0.8)^1/2 = 4,000 bags
18
. Answer: B
Number of orders made 40,000/100 400
Annual requirement 400 x 5,000 2,000,000
19
. Answer: C
Investment in 1 package (20 x P300) P6,000
Required annual return: P6,000 x 0.2 P1,200
20
. Answer: C
Average inventory units 12,000
Less safety units 5,000
Average inventory based on EOQ 7,000
Order size 7,000 x 2 14,000
21
. Answer: D
Safety stockStock out Costs (1)Carrying Costs @
P5Total10010,500500P11,0002004,9001,0005,9003001,7501,5003,2504003502,0002,350
Stockout Costs
100 1750 x .30 x 20 orders = 10,500
200 1750 x .05 x 20 = 4,900
300 1750 x .05 x 20 = 1750
400 1750 x .01 x 20 = 350
Optimal safety stock is 400-unit level with a cost of only P2,350 cost.
22
. Answer: B
The optimal safety stock level represents the level that gives the lowest sum of stock out costs and additional
carrying costs. Based on the computation below, the lowest combined costs is P3,340, corresponding to 300-unit
level
First compute the stockout costs based on given probability of demand. Starting with 100-unit level as safety stock, if
the additional demand is 200, the company has stockout of 100 units.
100: (100 x 32* x 0.25) + (200 x 32 x 0.35) + (300 x 32 x 0.20) + (100 x 9) 4,960
200: (100 x 32 x 0.35) + (200 x 32 x 0.20) + (200 x 9) 4,200
300: (100 x 31 x 0.20) + (300 x 9) 3,340
400: (400 x 9) 3,600
stockout per unit x 8 orders per year.
23
. Answer: A
Ordering costs 4 x P200 800
Carrying costs (50,000 ÷ 2 x 0.75 18,750
Total 19,550
24
. Answer: C
Savings in Expenses/additional Investment in Inventory = Maximum Interest Rate
70,000 / (1,800,000 – 1,000,000) = 8.75%
25
. Answer: C
Number of units to be purchased in advance: 90,000 – 7,500 82,500
Average investments in working capital: 82,500 x 0.5* x P25 1,031,250
Opportunity cost 1,031,250 x 0.12 123,750
*The average investment is one-half (82,500 + 0) ÷ 2
26
. Answer: C
k = (2 ÷ 98) x (360 ÷ 20 = 36.7%
The solution assumes that the company foregoes the discount only once during the year.
27
. Answer: B
With credit terms of 2/10, n/60 one must pay on the 10th day choosing to finance the net payment (invoice price minus
the cash discount) at the rate of 2 percent for 50 days, paying the loan on the 60th day. The annualized rate of foregoing
the discount is 14.9 percent.
k = 2/98 x 365/50 = 14.9%
28
. Answer: B
k = 10 ÷ (100 – 10) = 11.11%
29
. Answer: C
Principal 200,000
Less: Discount 200,000 x 0.15 x 90/360 ( 7,500)
Compensating balance ( 20,000)
Net proceeds 172,500
Effective rate: (7,500/172,500) x 360/90 17.4%
30
. Answer: B
Interest expense 1M x 0.12 120,000
Less interest income on additional CA balance (200,000 x 0.03) 6,000
Net interest cost 114,000
Effective interest rate 114,000/(1,000,000 – 200,000) 14.25%
31
. Answer: A
Interest for 1 year 1M x 12% 120,000
Average Principal: [1M + (1M/12)] ÷ 2 541,667
Estimated effective rate 120,000/541,667 22.15%
Alternative solution for approximate effective rate:
(2 x No. of payments x Interest) ÷ [(1 + No. of payments) x Principal]
(2 x 12 x P120,000) ÷ (13 x P1M) = 22.15%
32
. Answer: C
Discount 5M x 0.02 100,000
Interest (5M x 0.98 x 0.12) x 15/360 = 24,500
Savings = 75,500
33
. Answer: A
Purchase discount 10,000 x 0.02 x 200 purchases 4,800
Interest on borrowed money 9,800 x 0.12 1,176
Savings 3,624
Number of purchases: 360 days/15-day interval 200
34
. Answer: B
The cost of discounts missed is 12.3% which is more than the 8 percent that the bank charges. The company should
borrow on the 10th, pay the invoice, and finance at 8% for the next 30 days (pay off the bank on the 40th).
Cost of foregoing discount: (1 ÷ 99) x (360 ÷ 30) = 12.31%
35
. Answer; B
Net proceeds in pesos P1,500,000
Divided by net proceeds percentage 1.00 – 0.1 – 0.15 0.75
Principal amount P2,000,000

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Working Capital Management Test Bank

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7/14/2019 14 x11 Financial Management B

Working capital financing policy Cash Management

6. Which of the followin g would increase risk? Cash conversion cycle

B. 113 days D. 45 days B. P1,912.50 D . P 1 88 .5 5

Days inventory Receivables management

Optimal safety stock level A . P 19, 55 0 C . P 38 ,3 00

B. 11.11% D . 14.56% B. P1,176 D . P1,224

k = 2/98 x 365/50 = 14.9%

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