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Multiple choice questions on working capital management.

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1.  Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $2.5 million and is financed by a bank loan with 11 percent annual interest. Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 20 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system?

  1. $500,000
  2. $ 30,000
  3. $ 60,000
  4. $ 55,000
  5. $ 40,000

2.  Ski Lifts Inc. is a highly seasonal business.  The following summary balance sheet provides data for 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

 

    $690

    $620

                     Spontaneous      

 

 

                       liabilities 

       $ 30

    $ 10

                     Short-term debt

        50   

    0

                     Long-term debt   

     300

     300

                     Common equity     

    310  

   310

 

  $690 

   $620

From this data we may conclude that

  1. Ski Lifts has a working capital financing policy of exactly matching asset and liability maturities.
  2. Ski Lifts' working capital financing policy is relatively aggres­sive; that is, the company finances some of its permanent assets with short-term discretionary debt.
  3. Ski Lifts follows a relatively conservative approach to working capital financing; that is, some of its short-term needs are met by permanent capital.
  4. Without income statement data, we cannot determine the aggressiveness or conservatism of the company's working capital financing policy.
  5. Both statements a and c are correct.

3.  Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

  1. Convenience of location.
  2. Competitive cost of services provided.
  3. Size of the bank's deposits.
  4. Experience of personnel.
  5. Loyalty and willingness to assume lending risks.

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