Which of the following actions would be likely to shorten the cash conversion cycle?
Answer
Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.
Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
2 points
Question 6
Which of the following statements is CORRECT?
Answer
Trade credit is provided only to relatively large, strong firms.
Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.
Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.
Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.
Commercial paper is typically offered at a long-term maturity of at least five years.
2 points
Question 7
Which of the following is NOT a situation that might lead a firm to increase its holdings of short-term marketable securities?
Answer
The firm must make a known future payment, such as paying for a new plant that is under construction.
The firm is going from its peak sales season to its slack season, so its receivables and inventories will experience a seasonal decline.
The firm is going from its slack season to its peak sales season, so its receivables and inventories will experience seasonal increases.
The firm has just sold long-term securities and has not yet invested the proceeds in operating assets.
The firm just won a product liability suit one of its customers had brought against it.
2 points
Question 8
