1. Summary balance sheet data for Greener Gardens Co. is shown below (in thousan
ID: 2621402 • Letter: 1
Question
1. Summary balance sheet data for GreenerGardens Co. is shown below (in thousands of dollars). The company is in a highly seasonalbusiness, and the data show its assetsand 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 concludethat
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. GreenerGardens followsa relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.
c. Without income statementdata, we cannot determine the aggressiveness or conservatism of the company's currentasset financing policy.
d. Without cash flow data,we cannot determine the aggressiveness or conservatism of the company's currentasset financing policy.
e. Greener Gardens'current asset financingpolicy calls for exactly matchingasset and liability maturities.
2. Which of the followingstatements 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 inherentrisks 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-termdebt as opposedto short-term debt.
c. Net working capitalis defined as currentassets minus the sum of payables and accruals, and any decrease in the currentratio automatically indicates that net workingcapital 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 capitalis defined as currentassets minus the sum of payables and accruals, and any increase in the currentratio automatically indicates that net workingcapital has increased.
3. Other things held constant, which of the followingwould tend to reducethe cash conversion cycle?
a. Place larger ordersfor raw materials to take advantageof 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 longerpayment terms to customers.
e. Carry a constantamount of receivables as sales decline.
4. Which of the followingactions would be likely to shortenthe cash conversion cycle?
a. Change the creditterms offered to customers from 3/10 net 30 to 1/10 net 50.
b. Begin to take discountson inventory purchases; we buy on termsof 2/10 net 30.
c. Adopt a new manufacturing processthat saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
d. Change the creditterms offered to customers from 2/10 net 30 to 1/10 net 60.
e. Adopt a new manufacturing processthat speeds up the conversion of raw materials to finished goods from 20days to 10 days.
5. Which of the followingis NOT directlyreflected 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.
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
Explanation / Answer
1.c. Without income statementdata, we cannot determine the aggressiveness or conservatism of the company's currentasset financing policy. 2.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 inherentrisks associated with using short-term financing. 3.a.Place larger ordersfor raw materials to take advantageof price breaks 4.e.Adopt a new manufacturing processthat speeds up the conversion of raw materials tofinished goods from 20days to 10 days. 5.d. Payment for plant construction.
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