WORKING CAPITAL MANAGEMENT
Best Buy Successfully Manages Its Working Capital
How did the term working capital originate? Differentiate between net working capital and net operating working capital.
Define the following terms: inventory conversion period, average
collection period, and payables deferral period.
Explain how these terms are used to form the cash conversion cycle.
How would a reduction in the cash conversion cycle increase
profitability?
What are some actions a firm can take to shorten its cash conversion
cycle?
Identify and explain three alternative current asset investment policies.
Use the Du Pont equation to show how working capital policy
affects the expected ROE.
Differentiate between permanent current assets and temporary cur-
rent assets.
What does maturity matching mean, and what is the advantage of
this policy?
What are advantages and disadvantages of short-term versus long-
term debt?
How could the cash budget be used when negotiating the terms of a
bank loan?
Suppose a firm’s cash flows do not occur uniformly throughout the
month.
What effect would this have on the accuracy of the forecasted borrowing requirements based on a monthly cash budget?
How could the firm deal with this problem?
What two definitions of cash are commonly encountered?
Differentiate between marketable securities held for operating
(transactions) purposes and securities held for other reasons.
How has the development of credit and debit cards affected firms’
currency holdings?
How would the use of credit cards affect a firm’s cash conversion
cycle, assuming it previously allowed customers 30 days to pay for
their purchases?
How does a firm’s ability to borrow affect its optimal holdings of
cash and securities?
Common stocks that are traded on the NYSE are liquid in the sense
that they can be sold and converted to cash on short notice.
Are stocks a good choice for a firm’s marketable securities portfolio? Explain.
What are the three primary tasks of the financial manager regarding
inventory management?
What are credit terms?
What are the four credit policy variables?
Define days sales outstanding (DSO). What can be learned from it,
and how is it affected by seasonal sales fluctuations?
What is an aging schedule? What can be learned from it? How is it
affected by sales fluctuations?
What is credit quality, and how is it assessed?
How does collection policy influence sales, the collection period,
and the bad debt loss percentage?
How can cash discounts be used to influence sales volume and the
DSO?
How do legal considerations affect a firm’s credit policy?
What is trade credit?
What is the difference between free trade credit and costly trade
credit?
What is the formula for finding the nominal annual cost of trade
credit? What is the formula for the effective annual cost of trade
credit?
How is the cost of trade credit affected by “stretching” accounts
payable?
How does the cost of costly trade credit generally compare with the
cost of short-term bank loans?
What is a promissory note, and what are some terms that are normally included in such notes?
What is a line of credit? A revolving credit agreement?
What’s the difference between simple interest and add-on interest as
bankers use these terms?
If a firm borrowed $500,000 at a rate of 10 percent, simple interest,
with monthly interest payments and a 365-day year, what would the
required interest payment be for a 30-day month?
What would the effective annual rate be? ($4,109.59; 10.47%)
If this loan had been on a 10 percent add-on basis, payable in 12
end-of-month installments, what would the monthly payments be,
and the APR and effective rates? ($45,833.33; 17.97% 19.52%
What is commercial paper?
What types of companies can use commercial paper to meet their
short-term financing needs
What types of short-term credit are classified as accrued liabilities?
What is the cost of accrued liabilities?
If accruals have such a low cost, why don’t firms use them even more?
What are the advantages and disadvantages of securing a loan from
the borrower’s standpoint?
What are two types of current assets that are frequently used as
security for short-term loans?
How does the filed UCC-1 protect a secured lender?