Working Capital Management Quiz

Kwam must sell the entire real estate property because the two primary sources (marketable securities and bonds) will not raise the needed €120 million.

(Sell €60 million of the marketable securities, €30 million of the bonds, and €34.3 million of the real estate property) is incorrect because it assumes a fractional real estate sale.

The real estate sale will raise a net of €63 million (€70 million minus 10% liquidation expenses). To raise the rest of the funds needed (€120 million – €63 million = €57 million), Kwam can sell €57 million of marketable securities, which have minimal liquidation/brokerage costs.

Company S’s cash conversion cycle nearly doubled over recent years, while the cash conversion cycles for Companies H and J are nearly unchanged. The days of inventory on hand and days of receivables both increased substantially for Company S, and its days of payables outstanding decreased very slightly. The net effect was the large increase in the cash conversion cycle. Although changes occurred in the components of the cash conversion cycles for Companies H and J, the net effect on their cash conversion cycles was small.

he higher the current ratio, the more liquid the company. Thus, with a current ratio of 2.6 (1,800/700), the company is less liquid than the industry, which has a current ratio of 3.2.

Current ratio = Current assets/Current liabilities.

(higher) is incorrect. Failing to include the taxes payable or the loan (or the A/P) gives 1,800/400 = 4.5, which is above the industry average.

(equivalent) is incorrect. The firm’s current ratio is 2.6, which is below the industry average.

In a moderate approach, XY1 would attempt to match the duration of the assets with the liabilities. This would allow the company to use long-term financing for permanent working capital needs while at the same time looking to minimize interest expense through the use of more flexible short-term financing on an as-needed basis.

Although accounts payable do not charge an explicit interest rate, the cost of accounts payable is reflected in the costs of the services or products purchased and in the costs of any discounts not taken. Accounts payable can have a very high implicit cost. Similarly, equity financing is not free. A required return is expected on shareholder financing just as on any other form of financing .

Accounts payable and accruals are internal and a source of cash as they are payments not yet made to suppliers, employees, or other related parties. Lines of credit are external sources of financing. Accounts receivable and inventory are internal uses of cash since a company must access financing to purchase inventory and lend to its customers .

Reducing the average collection period would speed up receipts and improve the firm’s liquidity position. The other two suggestions would worsen the firm’s liquidity position.

A longer average collection period will certainly occur. Higher cash balances and a lower level of uncollectible accounts will not occur .

Liquidating long-term assets is a secondary source of liquidity.

(Centralized cash management system) is incorrect. Centralized cash management system is considered as a primary source of liquidity.

(Trade credit) is incorrect. Trade credit (part of short-term funds) is considered as a primary source of liquidity.

Relative to peers, Company H has the highest set of ratios. Relative to historical average ratios, Company H’s recent ratios show the greatest increases. The cash ratio is the most relevant for judging liquidity, and Company H’s cash ratio is quite high.

A revolver is a short-term borrowing facility in which a bank allows the firm to borrow and repay loans during the life of the line of credit .

SOA must issue 19 million of bonds

The firm requires 75 million of financing in local currency terms. Given that the planned sources (before bond financing or repurchases) total 56 million, SOA will need to issue 19 million of new bonds (75-56=19).

Liquidating inventory is a secondary source of liquidity.

Trade credit and a bank line of credit are considered primary sources of liquidity.

(Bank line of credit ) is incorrect because it is a primary source of liquidity.

(Trade credit ) is incorrect because it is a primary source of liquidity