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Swim Suits Unlimited is in a highly seasonal business,
and the following summary balance sheet data show its assets and
liabilities at 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
Total assets $690 $620
Payables and accruals $ 30 $ 10
Short-term bank debt 50 0
Long-term debt 300 300
Common equity 310 310
Total claims $690 $620
From this data we may conclude that
a. Swim Suits’ current asset financing policy calls for exactly
matching asset and liability maturities.
b. Swim Suits’ current asset financing policy is relatively
aggressive; that is, the company finances some of its permanent
assets with short-term discretionary debt.
c. Swim Suits follows a relatively conservative approach to current
asset financing; that is, some of its short-term needs are met by
permanent capital.
d. Without income statement data, we cannot determine the
aggressiveness or conservatism of the company’s current asset
financing policy.
e. Without cash flow data, we cannot determine the aggressiveness
or conservatism of the company’s current asset financing
policy.
2. Which of the following statements is CORRECT?
a. A firm that makes 90% of its sales on credit and 10% for cash is
growing at a constant rate of 10% annually. Such a firm will be
able to keep its accounts receivable at the current level, since
the 10% cash sales can be used to finance the 10% growth rate.
b. In managing a firm’s accounts receivable, it is possible to
increase credit sales per day yet still keep accounts receivable
fairly steady, provided the firm can shorten the length of its
collection period (its DSO) sufficiently.
c. Because of the costs of granting credit, it is not possible for
credit sales to be more profitable than cash sales.
d. Since receivables and payables both result from sales
transactions, a firm with a high receivables-to-sales ratio must
also have a high payables-to-sales ratio.
e. Other things held constant, if a firm can shorten its DSO, this
will lead to a higher current ratio.
3. Halka Company is a no-growth firm. Its sales fluctuate
seasonally, causing total assets to vary from $320,000 to $410,000,
but fixed assets remain constant at $260,000. If the firm follows a
maturity matching (or moderate) working capital financing policy,
what is the most likely total of long-term debt plus equity
capital?
a. $260,642
b. $274,360
c. $288,800
d. $304,000
e. $320,000
4. Your consulting firm was recently hired to improve the
performance of Shin-Soenen Inc, which is highly profitable but has
been experiencing cash shortages due to its high growth rate. As
one part of your analysis, you want to determine the firm’s cash
conversion cycle. Using the following information and a 365-day
year, what is the firm’s present cash conversion cycle?
Average inventory = $75,000
Annual sales = $600,000
Annual cost of goods sold = $360,000
Average accounts receivable = $160,000
Average accounts payable = $25,000
a. 120.6 days
b. 126.9 days
c. 133.6 days
d. 140.6 days
e. 148.0 days
5. Affleck Inc.’s business is booming, and it needs to raise more
capital. The company purchases supplies on terms of 1/10 net 20,
and it currently takes the discount. One way of getting the needed
funds would be to forgo the discount, and the firm’s owner believes
she could delay payment to 40 days without adverse effects. What
would be the effective annual percentage cost of funds raised by
this action? (Assume a 365-day year.)
a. 10.59%
b. 11.15%
c. 11.74%
d. 12.36%
e. 13.01%
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