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标题: Corporate Finance【Reading 40】Sample [打印本页]
作者: karoliukas    时间: 2012-3-29 13:28     标题: [2012 L1] Corporate Finance【Session 11 - Reading 40】Sample

An example of a secondary source of liquidity is:
A)
negotiating debt contracts.
B)
cash flow management.
C)
trade credit and bank lines of credit.


Secondary sources of liquidity include negotiating debt contracts, liquidating assets, and filing for bankruptcy protection and reorganization. Primary sources of liquidity include ready cash balances, short-term funds (e.g., trade credit and bank lines of credit), and cash flow management
作者: karoliukas    时间: 2012-3-29 13:29

The condition that occurs when a company disburses cash too quickly, stretching the company’s cash reserves, is best described as a:
A)
pull on liquidity.
B)
drag on liquidity.
C)
liquidity premium.


When cash payments are made too quickly, the condition is known as a pull on liquidity. A drag on liquidity occurs when cash inflows lag.
作者: karoliukas    时间: 2012-3-29 13:29

Which of the following is NOT a limitation to financial ratio analysis?
A)
The need to use judgment.
B)
Differences in international accounting practices.
C)
A firm that operates in only one industry.


If a firm operates in multiple industries, this would limit the value of financial ratio analysis by making it difficult to find comparable industry ratios.
作者: karoliukas    时间: 2012-3-29 13:29

Alton Industries will have better liquidity than its peer group of companies if its:
A)
average trade payables are lower.
B)
receivables turnover is higher.
C)
quick ratio is lower.


Higher receivables turnover is an indicator of better receivables liquidity since receivables are converted to cash more rapidly. A lower quick ratio is an indication of less liquidity. Lower trade payables could be related to better liquidity, but could also be consistent with very poor liquidity and a requirement from its suppliers of cash payment.
作者: karoliukas    时间: 2012-3-29 13:30

A firm has average days of receivables outstanding of 22 compared to an industry average of 29 days. An analyst would most likely conclude that the firm:
A)
has better credit controls than its peer companies.
B)
has a lower cash conversion cycle than its peer companies.
C)
may have credit policies that are too strict.


The firm’s average days of receivables should be close to the industry average. A significantly lower average days receivables outstanding, compared to its peers, is an indication that the firm’s credit policy may be too strict and that sales are being lost to peers because of this. We can not assume that stricter credit controls than the average for the industry are “better.” We cannot conclude that credit sales are less, they may be more, but just made on stricter terms. The average days of receivables are only one component of the cash conversion cycle.
作者: karoliukas    时间: 2012-3-29 13:31

The quick ratio is considered a more conservative measure of liquidity than the current ratio because the quick ratio excludes:
A)
inventories, which are not necessarily liquid.
B)
short-term marketable securities, which may need to be sold at a significant loss.
C)
accounts receivable, which may not be collectible in the short term.


The quick ratio is usually defined as (current assets – inventory) / current liabilities. It is a more restrictive measure of liquidity than the current ratio, which equals current assets / current liabilities. The numerator of the quick ratio includes cash, receivables, and short-term marketable securities.
作者: karoliukas    时间: 2012-3-29 13:31

Which of the following is least likely an indicator of a firm’s liquidity?
A)
Inventory turnover.
B)
Amount of credit sales.
C)
Cash as a percentage of sales.


No inferences about liquidity are warranted based on this measure. A firm may have higher credit sales than another simply because it has more sales overall. Cash as a proportion of sales and inventory turnover are indicators of liquidity.
作者: karoliukas    时间: 2012-3-29 13:31

In a recent staff meeting, David Hurley, stated that analysts should understand that financial ratios mean little by themselves. He advised his colleagues to evaluate financial ratios carefully. During the discussion he made the following statements:
Statement 1: A company can be compared with others in its industry by relating its financial ratios to industry norms. However, care must be taken because many ratios are industry-specific, but not all ratios are important to all industries.
Statement 2: Comparing a company to the overall economy is useless because overall business conditions are constantly changing. Specifically, it is not the case that financial ratios tend to improve when the economy is strong and weaken during recessionary times.
Are statements 1 and 2 as made by Hurley regarding financial ratio analysis CORRECT?
Statement 1Statement 2
A)
CorrectIncorrect
B)
IncorrectCorrect
C)
CorrectCorrect


Financial ratios are meaningless by themselves. To have meaning an analyst must use them with other information. An analyst should evaluate financial ratios based on industry norms and economic conditions. Statement 1 is correct. However, statement 2 is not because financial ratios tend to improve when the economy is strong and weaken when the economy is in a recession. So, financial ratios should be reviewed in light of the current stage of the business cycle.
作者: karoliukas    时间: 2012-3-29 13:32

Compared to the prior year, Chart Industries has reported that its operating cycle has remained relatively stable while its cash conversion cycle has decreased. The most likely explanation for this is that the firm:
A)
is relying more on its suppliers for short-term liquidity.
B)
has improved its inventory turnover.
C)
is paying its bills for raw materials more rapidly.


The cash conversion cycle is its operating cycle minus its average days payables outstanding. Therefore, the firm’s average days payables must have increased, a clear indication that the firm is relying more heavily on credit from its suppliers. Improved inventory turnover would tend to increase both the operating and cash conversion cycles. Relaxed credit policies would tend to increase the firm’s operating cycle as receivables turnover would tend to decrease.
作者: karoliukas    时间: 2012-3-29 13:32

Compared to the prior period, a firm has greater days of receivables. The effect on the firm’s cash conversion cycle and operating cycle are most likely a(n):
Cash conversion cycle Operating cycle
A)
Increase Decrease
B)
Decrease Increase
C)
Increase Increase


Greater days of receivables will increase both the cash conversion cycle and operating cycle, other things equal.
作者: karoliukas    时间: 2012-3-29 13:33

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.


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.
作者: karoliukas    时间: 2012-3-29 13:33

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.


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).
作者: karoliukas    时间: 2012-3-29 13:34

The least appropriate security for investing short-term excess cash balances would be:
A)
preferred stock.
B)
bank certificates of deposit.
C)
time deposits.


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.
作者: karoliukas    时间: 2012-3-29 13:34

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.


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.
作者: karoliukas    时间: 2012-3-29 13:35

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.


When evaluating the performance of its short-term securities investments, a company should compare them on a bond equivalent yield basis.
作者: karoliukas    时间: 2012-3-29 13:35

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%.


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%.
作者: karoliukas    时间: 2012-3-29 13:36

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%.


BEY = 1.5% × (365/91) = 6.02%.
作者: karoliukas    时间: 2012-3-29 13:36

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.


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.
作者: karoliukas    时间: 2012-3-29 13:36

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%.

BEY = HPY × (365/days)
BEY = 0.80% × (365/30) = 9.73%
作者: karoliukas    时间: 2012-3-29 13:37

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.


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.
作者: karoliukas    时间: 2012-3-29 13:37

A firm is choosing among three short-term investment securities:

Security 1: A 30-day U.S. Treasury bill with a discount yield of 3.6%.
Security 2: A 30-day banker’s acceptance selling at 99.65% of face value.
Security 3: A 30-day time deposit with a bond equivalent yield of 3.65%.
Based only on these securities’ yields, the firm would:
A)
prefer the banker’s acceptance.
B)
prefer the U.S. Treasury bill.
C)
prefer the time deposit.


We can compare the yields of these securities on any single basis. The preferred basis is the bond equivalent yield.
Security 1 = discount is 3.6%(30 / 360) = 0.3%
BEY = (0.3 / 99.7) (365 / 30) = 3.661% BEY of Security 2 = (0.35 / 99.65) × (365 / 30) = 4.273%
BEY of Security 3 = 3.65%
作者: karoliukas    时间: 2012-3-29 13:37

Yields on firms’ investments in short-term securities for comparison purposes are best stated as:
A)

.
B)

.
C)

.


The yields on investments in short-term securities should be stated as bond equivalent yields (BEYs), and returns on portfolios of these securities should be stated as a weighted average of BEYs. The BEY, which is holding period yield × , allows fixed-income securities whose payments are not annual to be compared with securities with annual yields.
作者: karoliukas    时间: 2012-3-29 13:38

Which of the following strategies is most likely to be considered good payables management?
A)
Paying invoices on the last possible day to still get the supplier’s discount for early payment.
B)
Taking trade discounts only if the firm’s annual return on short-term investments is less than the discount percentage.
C)
Paying trade invoices on the day they arrive.


Paying invoices on the last day to get a discount (for early payment) is often the most advantageous strategy for a firm. If the annualized percentage cost of not taking advantage of the discount is less than the firm’s short-term cost of funds, it would be advantageous to pay on the due date. However, the discount percentage is not an annualized rate, so it cannot be compared directly to the firm's annual return on short-term investments. Paying prior to the discount cut-off date or prior to the due date sacrifices interest income for no advantage.
作者: karoliukas    时间: 2012-3-29 13:38

With respect to inventory management,:
A)
a firm with inventory turnover higher than the industry average can be expected to have better profitability as a result.
B)
a decrease in a firm’s days of inventory on hand indicates better inventory management and can lead to increased profits.
C)
an increase in days of inventory on hand can be the result of either good or poor inventory management.


An increase in inventory could indicate poor sales and an accumulation of obsolete items or could be the result of a conscious effort to have adequate supplies to avoid losses from not having items to satisfy customer orders (stock outs). Higher-than-average inventory turnover could indicate better inventory management or could indicate that a less than optimal inventory is being maintained by the company.
作者: karoliukas    时间: 2012-3-29 13:38

A result that is most likely to give a financial manager concern that his firm’s credit policy may have become too lenient is:
A)
receivables turnover has increased significantly.
B)
weighted average collection period has increased.
C)
inventory turnover has decreased considerably.


The weighted average collection period is the average number of days it takes to collect a dollar of receivables. A decreased percentage of sales made on credit or an increase in the receivables turnover ratio might result from more strict credit terms. Inventory turnover is not directly affected by credit terms, only though the effect of credit terms on overall sales.
作者: karoliukas    时间: 2012-3-29 13:39

Pfluger Company’s accounts payable department receives an invoice from a vendor with terms of 2/10 net 30. If Pfluger pays the invoice on its due date, the cost of trade credit is closest to:
A)
44.6%.
B)
27.9%.
C)
43.5%.


"2/10 net 30" is a discount of 2% of the invoice amount for payment within 10 days, with full payment due in 30 days. Cost of trade credit on day 30 =
作者: Kingpin804    时间: 2012-3-29 13:45

A large, creditworthy manufacturing firm would most likely get short-term financing by:
A)
factoring its receivables.
B)
entering into an agreement for a committed line of credit.
C)
issuing commercial paper.


Large, creditworthy firms can get the lowest cost of financing by issuing commercial paper. Selling receivables to a factor is a higher cost source of funds used by firms with poor credit quality. A committed line of credit requires payment of a fee and represents bank borrowing, which would be attractive to a firm that did not have the size or creditworthiness to issue commercial paper.
作者: Kingpin804    时间: 2012-3-29 13:46

Which of the following sources of credit would an analyst most likely associate with a borrower of the lowest credit quality?
A)
Uncommitted line of credit.
B)
Committed line of credit.
C)
Revolving line of credit.


Committed lines and revolving lines of credit all contain a commitment by a lender to lend up to a maximum amount, at the borrower’s option for some period of time. A firm with lower credit quality may have an uncommitted line of credit which offers no guarantee from the lender to provide any specific amount of funds in the future.
作者: Kingpin804    时间: 2012-3-29 13:47

Which of the following sources of short-term liquidity is considered reliable enough that it can be listed in the footnotes to a firm’s financial statements as a source of liquidity?
A)
Factoring agreement.
B)
Uncommitted line of credit.
C)
Revolving line of credit.


With an uncommitted line of credit, the lender is not committed to make loans in any amount. A revolving line of credit is typically for a longer period and involves an agreement to lend funds in the future up to some maximum amount. Factoring does not typically involve an agreement for future receivables purchases.
作者: Kingpin804    时间: 2012-3-29 13:47

Which of the following sources of liquidity is the most reliable?
A)
Committed line of credit.
B)
Uncommitted line of credit.
C)
Revolving line of credit.


A revolving line of credit is typically for a longer term than an uncommitted or committed line of credit and thus is considered a more reliable source of liquidity. With an uncommitted line of credit, the issuing bank may refuse to lend if conditions of the firm change. An overdraft line of credit is similar to a committed line of credit agreement between banks and firms outside of the U.S. Both committed and revolving lines of credit can be verified and can be listed in the footnotes to a firm’s financial statements as sources of liquidity.



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