karoliukas

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.

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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%

karoliukas

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

A) .

B) .

C) .

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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.

karoliukas

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.

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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.

karoliukas

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.

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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.

karoliukas

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.

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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.

karoliukas

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%.

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"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 =