1. Summary balance sheet data for Greener Gardens Co. is shown below (in thousands of dollars).
The company is in a highly seasonal business, and the data show its assets a nd liabilities at peak
and off-peak seasons:
Peak
Off-Peak
$ 50
$ 30
Marketable securities
0
20
Accounts receivable
40
20
Inventories
100
50
Net fixed assets
500
500
Total assets
$690
$620
$ 30
$ 10
50
0
Long-term debt
300
300
Common equity
310
310
Total claims
$690
$620
Cash
Payables and accruals
Short-term bank debt
From this data we may conclude that
a. Greener Gardens’ current asset financing policy is relatively aggressive; that is, the
company finances some of its permanent assets with short-term discretionary debt.
b. Greener Gardens follows a relatively conservative approach to current asset financing;
that is, some of its short-term needs are met by permanent capital.
c. W ithout income statement data, we cannot determine the aggressiveness or
conservatism of the company’s current asset financing policy.
d. W ithout cash flow data, we cannot determine the aggressiveness or conservatism of the
company’s current asset financing policy.
e. Greener Gardens’ current asset financing policy calls for exactly matching asset and
liability maturities.
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FIN 534 Homework Chapter 16
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FIN 534 – Homework Chapter 16
2. W hich of the following statements is CORRECT?
a. Although short-term interest rates have historically averaged less than long-term rates,
the heavy use of short-term debt is considered to be an aggressive strategy because of
the inherent risks associated with using short-term financing.
b. If a company follows a policy of “matching maturities,” this means that it matches its use
of common stock with its use of long-term debt as opposed to short-term debt.
c. Net working capital is defined as current assets minus the sum of payables and accruals,
and any decrease in the current ratio automatically indicates that net working capital has
decreased.
d. If a company follows a policy of “matching maturities,” this means that it matches its use
of short-term debt with its use of long-term debt.
e. Net working capital is defined as current assets minus the sum of payables and accruals,
and any increase in the current ratio automatically indicates that net working capi tal has
increased.
3. Other things held constant, which of the following would tend to reduce the cash conversion
cycle?
a. Place larger orders for raw materials to take advantage of price breaks.
b. Take all discounts that are offered.
c. Continue to take all discounts that are offered and pay on the net date.
d. Offer longer payment terms to customers.
e. Carry a constant amount of receivables as sales decline.
4. W hich of the following actions would be likely to shorten the cash conversion cycle?
a. Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.
b. Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.
c. Adopt a new manufacturing process that saves some labor costs but slows down the
conversion of raw materials to finished goo ds from 10 days to 20 days.
d. Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.
e. Adopt a new manufacturing process that speeds up the conversion of raw materials to
finished goods from 20 days to 10 days.
5. W hich of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax
bracket?
a. Depreciation.
b. Cumulative cash.
c. Repurchases of common stock.
d. Payment for plant construction.
e. Payments lags.
