Reference no: EM1316297

Objective type questions on working capital management

1.  Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $2.5 million and is financed by a bank loan with 11 percent annual interest. Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 20 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system?

1. $500,000
2. $ 30,000
3. $ 60,000
4. $ 55,000
5. $ 40,000

2.  Ski Lifts Inc. is a highly seasonal business.  The following summary balance sheet provides data for peak and off-peak seasons (in thousands of dollars):

	Peak   Off-peak
Cash	$ 50	$ 30
Marketable securities	0	20
Accounts receivable	40	20
Inventories	100	50
Net fixed assets	500	500
	$690	$620
Spontaneous
liabilities	$ 30	$ 10
Short-term debt	50	0
Long-term debt	300	300
Common equity	310	310
	$690	$620

From this data we may conclude that

1. Ski Lifts has a working capital financing policy of exactly matching asset and liability maturities.
2. Ski Lifts' working capital financing policy is relatively aggres­sive; that is, the company finances some of its permanent assets with short-term discretionary debt.
3. Ski Lifts follows a relatively conservative approach to working capital financing; that is, some of its short-term needs are met by permanent capital.
4. Without income statement data, we cannot determine the aggressiveness or conservatism of the company's working capital financing policy.
5. Both statements a and c are correct.

3.  Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

1. Convenience of location.
2. Competitive cost of services provided.
3. Size of the bank's deposits.
4. Experience of personnel.

Loyalty and willingness to assume lending risks