karoliukas

Which of the following most accurately represents the cash conversion cycle?

A) average days of receivables + average days of inventory – average days of payables.

B) average days of receivables + average days of inventory + average days of payables.

C) average days of payables + average days of inventory – average days of receivables.

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The cash conversion cycle, also called the net operating cycle is:

The cash conversion cycle measures the length of time required to convert a firm’s cash investment in inventory back into cash resulting from the sale of the inventory. A short cash conversion cycle is good because it indicates a relatively low investment in working capital.

karoliukas

An analyst who is evaluating a firm’s working capital management would be least likely to be concerned if the firm’s:

A) number of days of inventory is higher than that of its peers.

B) total asset turnover is lower than its industry average.

C) operating cycle is shorter than that of its peers.

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A shorter operating cycle will lead to a shorter cash conversion cycle, other things equal, which is an indication of better working capital management. Higher days inventory on hand, compared to peer company averages, will lengthen the cash conversion cycle, an indication of poorer working capital management. Good working capital management would tend to increase a firm’s total asset turnover since a given amount of sales can be supported with less working capital (less current assets).

karoliukas

The least appropriate security for investing short-term excess cash balances would be:

A) preferred stock.

B) bank certificates of deposit.

C) time deposits.

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While adjustable-rate preferred is an appropriate security for short-term investment of excess cash balances, other preferred shares are not. Bank certificates of deposit and time deposits can be for appropriately short periods.

karoliukas

An appropriate cash management strategy for a company that has a seasonally high need for cash prior to the holiday shopping season would least likely include:

A) allowing short-term securities to mature without reinvestment.

B) investing in U.S. Treasury notes at other times of the year because they are highly liquid.

C) borrowing funds though a bank line of credit.

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Treasury notes have maturities between 2 and 10 years and, thus, have maturities longer than those of securities suitable for cash management. Allowing short-term securities to mature without reinvesting the cash generated would be one way to meet seasonal cash needs. Short-term bank borrowing or issuing commercial paper that can be paid off when holiday sales generate cash would be appropriate strategies for dealing with a predictable short-term need for cash.

karoliukas

Which yield measure is the most appropriate for comparing a company’s investments in short-term securities?

A) Bond equivalent yield.

B) Money market yield.

C) Discount basis yield.

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When evaluating the performance of its short-term securities investments, a company should compare them on a bond equivalent yield basis.

karoliukas

A 30-day bank certificate of deposit has a holding period yield of 1%. What is the annual yield of this CD on a bond-equivalent basis?

A) 11.83%.

B) 12.17%.

C) 12.00%.

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The bond-equivalent yield is calculated as the holding period yield times (365 / number of days in the holding period). BEY = 1% × (365/30) = 12.17%.

karoliukas

A 91-day Treasury bill has a holding period yield of 1.5%. What is the annual yield of this T-bill on a bond-equivalent basis?

A) 6.02%.

B) 6.65%.

C) 6.24%.

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BEY = 1.5% × (365/91) = 6.02%.

karoliukas

An investment policy statement for a firm’s short-term cash management function would least appropriately include:

A) a list of permissible securities.

B) information on who is allowed to invest corporate cash.

C) procedures to follow if the investment guidelines are violated.

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An investment policy statement typically begins with a statement of the purpose and objective of the investment portfolio, some general guidelines about the strategy to be employed to achieve those objectives, and the types of securities that will be used. A list of permitted securities for investment would be limited and likely too restrictive. A list of permitted security types is appropriate and can provide the necessary flexibility to increase yield within the safety and liquidity constraints appropriate for the firm.

karoliukas

Assume that a 30-day commercial paper security has a holding period yield of 0.80%. The bond equivalent yield of this security is:

A) 9.60%.

B) 9.73%.

C) 10.12%.

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BEY = HPY × (365/days)
BEY = 0.80% × (365/30) = 9.73%

karoliukas

A banker’s acceptance that is priced at $99,145 and matures in 72 days at $100,000 has a(n):

A) discount yield greater than its bond equivalent yield.

B) bond equivalent yield greater than its effective annual yield.

C) money market yield greater than its discount yield.

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The money market yield is the holding period yield times 360/72 and is always greater than the discount yield which is the actual discount from face value times 360/72, since the holding period yield is always greater than the percentage discount from face value. A security’s discount yield and its money market yield are always less than its bond equivalent yield, and its effective annual yield is always greater than its bond equivalent yield.