Question 1

A. What is the cash cycle for White Bluffs, Inc. if all sales are credit sales.
B. If you knew that Accounts Payables were $4884 last year, what effect would this have on your estimate of the cash cycle. Show and explain why.
A. See answer for question 52 for Days in Inventory and Receivables.
Accounts Payables Turnover = CGS/Accounts Payables = 28461/2754 = 10.334.
Days in Payables = 365/10.334 = 35.32.
Cash Cycle = 124.39 - 35.32 = 89.07.
B. Average Accounts Payable = (4884 + 2754)/2 = 3819.
Accounts Payable Turnover = 28461/3819 = 7.452
Days in Accounts Payable = 365/7452 = 48.98.
Cash Cycle = 124.39 - 48.98 = 75.41.
- Cash Cycle would be lower, which is better because White Bluffs has greater use of trade financing.

Accepted Answer

The answer of A. What is the cash cycle for...

Question 2

Compensating balances:

Accepted Answer

Compensating balances increase the effective interest rate earned by banks on credit lines because they require the borrower to maintain a minimum balance in a non-interest-bearing account, effectively reducing the amount of credit available for the borrower's use while the bank earns interest on the total loan amount.

Question 3

A. What is the operating cycle for White Bluffs, Inc. if all sales are on credit?
B. If you knew that Accounts Receivables were $3,250 the prior year, what effect would this have on your estimate of the operating cycle. Show and explain why.
A. Inventory Turnover = CGS/Inventory = 28461/7280 = 3.909.
Days in Inventory = 365/3.909 = 93.37 days.
Accounts Receivable Turnover = Sales/A/R = 44,466/3779 = 11.767.
Days in Receivables = 365/11.767 = 31.02.
Operating Cycle = Days in Inventory + Days in Receivable = 93.37 + 31.02 = 124.39.
B. Average Accounts Receivable = 3779 + 3250/2 = 3514.50
A/R Turnover = 44,466/3514.50 = 12.652.
Days in Receivables = 365/12.652 = 28.85.
Operating Cycle = 93.37 + 28.85 = 122.22.
- Operating Cycle falls because of a smaller average tied up in receivables to generate sales.

Accepted Answer

The answer of A. What is the operating cycle for...

Question 4

In a loan arranged through the assignment of accounts receivable the lender:

Accepted Answer

In a loan arrangement involving the assignment of accounts receivable, the lender typically has a lien on the receivables and recourse to the borrower if the receivables fail to satisfy the loan obligations. The lender does not usually accept the actual receivable to be collected directly nor assume full risk of default.

Question 5

A firm borrows $7 million through a credit line and is required to keep $350,000 as a compensating balance. The credit line carries a 11% interest rate. Calculate the effective interest rate on the loan if it is repaid after 1 year.

Accepted Answer

The answer of A firm borrows $7 million through a...

Question 6

The three basic forms of inventory loans include:

Accepted Answer

The three basic forms of inventory loans are blanket inventory lien, field warehouse financing, and trust receipt. These forms offer different ways for businesses to secure financing using their inventory as collateral.

Question 7

Firms hold cash, in part, to satisfy compensating balances. Compensating balances are:

Accepted Answer

Compensating balances are cash balances held at commercial banks by firms to compensate or pay for banking services implicitly. This practice is common in business banking relationships.

Question 8

It has been argued that if one could perfectly synchronize a firm's cash inflows and outflows, short-term financial planning would be unnecessary. Do you agree? What actions can the firm's financial decision-makers take to reduce the degree of asynchronization? Why should this be a concern?

Accepted Answer

The answer of It has been argued that if one...

Question 9

A firm that is buying something from a supplier may effectively arrange for the bank to pay the outstanding bill using a:

Accepted Answer

A banker's acceptance is a financial instrument used in international trade where a bank guarantees a payment at a future date, effectively allowing firms to arrange for the bank to pay outstanding bills to suppliers.

Question 10

The most common way to finance a temporary cash deficit is the use of:

Accepted Answer

Unsecured bank loans are commonly used by businesses to cover temporary cash deficits due to their flexibility and relatively quick approval process.

Question 11

Restrictive short-term financial policies regarding current asset management include three basic actions. List and briefly describe each action.

Accepted Answer

The answer of Restrictive short-term financial policies regarding current asset...

Quiz 27: Short-Term Finance and Planning