FIN 390 EXAM 3 – RAMSEY QUESTIONS WITH
VERIFIED ACCURATE ANSWERS
Working Capital - Answers - allows firms to operate, serve customers, and address
variation in the timing of cash flows
Net Working Capital - Answers - Current Assets - Current Liabilities
Current Assets - Answers - - cash
- short term investments
- accounts receivables
- inventories
Current Liabilities - Answers - - Accounts payable
- Accruals
- Short term debt
Managers determine: - Answers - - the optimal level of working capital
- How current assets are financed
Restricted (aggressive) policy - Answers - maintains a low ratio of current assets to
sales
Relaxed (conservative) policy - Answers - maintains a high ratio of current assets to
sales
Moderate policy - Answers - between relaxed and restricted policy
Moderate: - Answers - match the maturity of the assets with the maturity of the financing
Conservative: - Answers - use long term debt for permanent assets and temporary
assets
Aggressive: - Answers - use short term financing to finance permanent assets
Short term debt: - Answers - +: interest rates lower
-: refinance risk if interest rates increase
Long term debt: - Answers - +: stability/known/predictable payment
-: fees to issue
-: time to issue
-: interest rates increase
, Payables Deferral Period or Days of Payables Outstanding (DPO) - Answers - time
between receiving material and cash payments made for materials
Cash Conversion Cycle (CCC) - Answers - time between cash payments made for
materials (and labor) and cash payments received from sales
Inventory Conversion Period (ICP) or Days of Inventory Outstanding (DIO) - Answers -
time between receiving material and selling the finished goods
Average Collection Period (ACP) or Days of Sales Outstanding (DSO) - Answers - time
between selling the finished goods and cash payments received from sales
To minimize CCC, firms can: - Answers - - Reduce inventory conversion period or
average collection period
- increase payables deferral period
Elements of a firm's credit policy: - Answers - 1. Cash discounts
2. Credit period
3. Credit standards
4. Collection policy
How can the elements of a firm's credit policy affect DSO?
Cash Discounts: - Answers - - Lowers price
- Attracts new customers and reduce DSO
How can the elements of a firm's credit policy affect DSO?
Credit period: - Answers - How long to pay? Shorter period reduces DSO and average
AR, but may discourage sales
How can the elements of a firm's credit policy affect DSO?
Credit standards: - Answers - - Tighter standards reduce bad debt losses, but may
reduce sales
- Fewer bad debts reduces DSO
How can the elements of a firm's credit policy affect DSO?
Collection policy: - Answers - Tougher policy will reduce DSO, but may damage
customer relationships
Cash Discounts: - Answers - discounts given for early payment
Credit period: - Answers - length of time buyers are given to pay for purchases
Credit standards: - Answers - required financial strength of acceptable credit customers
Collection policy: - Answers - firm's toughness or laxity in attempting to collect on slow
paying customers
VERIFIED ACCURATE ANSWERS
Working Capital - Answers - allows firms to operate, serve customers, and address
variation in the timing of cash flows
Net Working Capital - Answers - Current Assets - Current Liabilities
Current Assets - Answers - - cash
- short term investments
- accounts receivables
- inventories
Current Liabilities - Answers - - Accounts payable
- Accruals
- Short term debt
Managers determine: - Answers - - the optimal level of working capital
- How current assets are financed
Restricted (aggressive) policy - Answers - maintains a low ratio of current assets to
sales
Relaxed (conservative) policy - Answers - maintains a high ratio of current assets to
sales
Moderate policy - Answers - between relaxed and restricted policy
Moderate: - Answers - match the maturity of the assets with the maturity of the financing
Conservative: - Answers - use long term debt for permanent assets and temporary
assets
Aggressive: - Answers - use short term financing to finance permanent assets
Short term debt: - Answers - +: interest rates lower
-: refinance risk if interest rates increase
Long term debt: - Answers - +: stability/known/predictable payment
-: fees to issue
-: time to issue
-: interest rates increase
, Payables Deferral Period or Days of Payables Outstanding (DPO) - Answers - time
between receiving material and cash payments made for materials
Cash Conversion Cycle (CCC) - Answers - time between cash payments made for
materials (and labor) and cash payments received from sales
Inventory Conversion Period (ICP) or Days of Inventory Outstanding (DIO) - Answers -
time between receiving material and selling the finished goods
Average Collection Period (ACP) or Days of Sales Outstanding (DSO) - Answers - time
between selling the finished goods and cash payments received from sales
To minimize CCC, firms can: - Answers - - Reduce inventory conversion period or
average collection period
- increase payables deferral period
Elements of a firm's credit policy: - Answers - 1. Cash discounts
2. Credit period
3. Credit standards
4. Collection policy
How can the elements of a firm's credit policy affect DSO?
Cash Discounts: - Answers - - Lowers price
- Attracts new customers and reduce DSO
How can the elements of a firm's credit policy affect DSO?
Credit period: - Answers - How long to pay? Shorter period reduces DSO and average
AR, but may discourage sales
How can the elements of a firm's credit policy affect DSO?
Credit standards: - Answers - - Tighter standards reduce bad debt losses, but may
reduce sales
- Fewer bad debts reduces DSO
How can the elements of a firm's credit policy affect DSO?
Collection policy: - Answers - Tougher policy will reduce DSO, but may damage
customer relationships
Cash Discounts: - Answers - discounts given for early payment
Credit period: - Answers - length of time buyers are given to pay for purchases
Credit standards: - Answers - required financial strength of acceptable credit customers
Collection policy: - Answers - firm's toughness or laxity in attempting to collect on slow
paying customers
