17. Other things held constant, which of the following would lead to a shorter c

Question

17.       Other things held constant, which of the following would lead to a shorter cash conversion cycle?

a.         Cash is used to buy marketable securities.

b.         A company pays their accounts payable earlier in order to take advantage of discounts.

c.         A company offers discounts to their customers and therefore gets paid earlier.

d.         Long-term bonds are retired from the proceeds of a preferred stock issue.

18.       Which of the following is NOT true regarding a revolving credit agreement?

            a.         the interest rate is usually a fixed rate

            b.         the borrower must pay a commitment fee on any unborrowed funds

            c.         the bank is legally committed to lend the funds

            d.         None of the above (All of the above are true)

19. Which of the following statements is correct?

a.         Suppose a firm changes its credit terms from net 30 days (no discounts) to 3/10, net 40, and this change leads to a 5% increase in total sales. We can be virtually certain that the firm

Explanation / Answer

17. c. A company offers discounts to their customers and therefore gets paid earlier.
18. d. None of the above (All of the above are true)
19. b. If a firm offers lenient credit terms to financially weak customers, this might enable it to report high sales and profits. However, some customers might not pay their bills, end up as bad debts, and thus cause the firm to report lower profits in subsequent periods.
20. c. 1370
CCC = Inventory conversion period + receivables conversion period - payables conversion period

thus, 30 days = 40 days + receivables conversion - 15 days
receivables conversion period = 5days

Account receivable balance = 5/365 * 100,000 = 1370
21. d.18.4%
Total amount to be paid = 500,000 + 500000*0.10 * 6/12 = 525000
EMI = 525000/6 = 87,500
N=6, PV = -500,000 PMT = 87500 and FV = 0
Solving we get interest = (1+1.412)^12 - 1 = 18.32%

22. 4. Commercial Paper
23. 1. Cash   
The five Cs of credit are:
-Character
-Capacity
-Capital
-Collateral
-Conditions

24. 3. Warehouse Financing

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