Practice Test 3 and 4

1. Alicia is contemplating purchasing for $280,000 a machine that she

will use to produce 50,000 units of a product per annum for five
years. These products will be sold for $10 each and unit variable
costs are expected to be $6. Incremental fixed costs will be $70,000
per annum for production costs and $25,000 per annum for selling
and administration costs. Alicia has a required return of 10% per
annum. By how many units must the estimate of production and
sales volume fall for the project to be regarded as not
worthwhile?
AAAAAA units

2. Swap Co is due to receive goods costing $2,500. The terms of trade

state that payment must be received within three months. However,
a discount of 1.5% will be given for payment within one month.
Which of the following is the annual percentage cost of ignoring
the discount and paying within three months?

A 6.23%
B 9.34%
C 6.14%
D 9.49%

3. Will Co incurs costs of $65 every time it places an order with its raw
materials supplier. It orders 300,000 units of product each year. The
cost of holding one unit of inventory for a month is $2.50. Will Co
keeps a buffer inventory at all times of 25,000 units of material.
Calculate the economic order quantity (EOQ) that will optimise
the business’s inventory costs to the nearest 10 units.
A A units

4. Which TWO of the following statements are true about cash

management models?
A The Baumol model is more suitable when cash flows are steady and
predictable
B Both models assume that cash is either held in a current account or in
long‐term investments
C In the Miller Orr model the upper limit for the current account balance is
set by management
D Both models take into account the transaction costs of switching between
current accounts and investments
E The Miller Orr model aims to keep cash balances as close to the return
point at all times
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 5. A company has erratic daily cash movements with a standard
deviation of $3,000 per day. It costs $25 to move cash between its
current account and its short‐term deposit account. The deposit
account earns an interest rate of 7.3% per annum. There are 365
days in a year. Calculate, to the nearest $000, the spread between
the upper and lower limits that should be set for the current
account using the Miller Orr cash management model.
$ rrr r

6. A company has sales revenue of $30 million and its customers take
an average of 75 days to pay. The company offers a 1% discount to
customers who pay in 30 days. Calculate, to the nearest hundred
thousand dollars, the new anticipated receivables balance if
60% of customers take up the offer of the discount and the rest
carry on paying in 75 days. Assume 360 days in a year.
$ rrr r

7. Which of the following is/are true?

(1) A conservative working capital investment policy implies a higher
proportion of permanent current assets to fluctuating current assets
(2) Long‐term finance is generally cheaper than short‐term finance
A 1 only is correct
B 2 only is correct
C 1 and 2 are correct
D 1 and 2 are incorrect

8. Which of the following statements is consistent with an

aggressive working capital funding policy?

A Most current assets are financed with long‐term funding rather than
short‐term funding, despite long‐term funding being more expensive
B Most current assets are funded with debt rather than equity, as it is
cheaper
C Most current assets are financed with short‐term funding rather than
long‐term funding, despite the higher risk involved
D Most current assets are funded by secured funding to enable the financial
manager to focus on managing the working capital balances

9. Which of the following is an advantage of implementing just‐in‐

time inventory management?
A Quality control costs will be eliminated
B Monthly finance costs incurred in holding inventory will be kept constant
C The frequency of raw material deliveries is reduced
D The amount of obsolete inventory will be minimised
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 10. Max Co is a large multinational company which expects to have a
$10m cash deficit in one month’s time. The deficit is expected to last
no more than two months. Max Co wishes to resolve its short‐term
liquidity problem by issuing an appropriate instrument on the money
market. Which of the following instruments should Max Co issue?

A Commercial paper
B Interest rate futures
C Corporate loan notes
D Treasury bills
11. Which of the following is NOT usually associated with
overtrading?
A An increase in the current ratio
B A rapid increase in revenue
C A rapid increase in the volume of current assets
D Most of the increase in current assets being financed by credit

12. Generally, increasing payables days suggests advantage is being

taken of available credit but there are risks involved. Which of the
following is unlikely to be one of the risks involved in increasing
payables days?
A Customer bargaining power increasing
B Losing supplier goodwill
C Losing prompt payment discounts
D Suppliers increasing the price to compensate

13. Which TWO of the following are aims of a Just in Time system of
inventory control?
A Reduction in capital tied up in inventory
B Creation of an inflexible production process
C Elimination of all activities performed that do not add value
D Lowering of inventory ordering costs

14. Although cash needs to be invested to earn returns, businesses need

to keep a certain amount readily available. Which TWO of the
following are reasons for holding cash?
A Movement motive
B Transactions motive
C Precautionary motive
D Asset motive

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 15. Andrew Co is a large listed company financed by both equity and
debt. In which of the following areas of financial management will
the impact of working capital management be smallest?
A Liquidity management
B Interest rate management
C Management of relationship with the bank
D Dividend policy
16. Which TWO of the following would be key aspects of a
company’s accounts receivable credit policy?
A Assessing creditworthiness
B Checking credit limits once a year
C Invoicing promptly and collecting overdue debts
D Delaying payments to obtain a ‘free’ source of finance

17. A company is preparing its cash flow forecast for the next financial
period. Which THREE of the following items should be included in
the calculations?
A A corporation tax payment
B A dividend receipt from a short term investment
C The loss made on the disposal of an item of machinery
D A bad debt written off
E An increase in a provision
F The receipt of funding for the purchase of a new vehicle
18. Goldstar has an accounts receivables turnover of 10.5 times, an
inventory turnover of 4 times and payables turnover of 8 times. What
is Goldstar’s cash operating cycle to the nearest day (assume 365
days in a year)?
AAA days

19. The cash operating cycle is equal to which of the following?

A Receivables days plus inventory holding period minus payables days
B Inventory holding period minus receivables days minus payables days
C Receivables days plus inventory holding period plus payables days
D Receivables days minus payables days minus inventory holding period

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 20. A company has annual credit sales of $27 million and related cost of
sales of $15 million. The company has the following targets for the
next year: Trade receivables days 50 days, Inventory days 60 days,
Trade payables 45 days. Assume there are 360 days in the year.
What is the net investment in working capital required for the
next year?
A $8,125,000
B $4,375,000
C $2,875,000
D $6,375,000
21. Which of the following might be associated with a shortening
working capital cycle?
A Lower net operating cash flow
B Increasing tax‐allowable depreciation expenditure
C Slower inventory turnover
D Taking longer to pay suppliers

22. The following information has been calculated for D Co:

Trade receivables collection period 10 weeks
Raw material inventory turnover period 6 weeks
Work in progress inventory turnover period 2 weeks
Trade payables payment period 7 weeks
Finished goods inventory turnover period 6 weeks
What is the length of the working capital cycle?
AAA weeks

23. Thrifty plc’s cash budget highlights a short‐term surplus in the near
future. Which of the following actions would be appropriate to
make use of the surplus?
A Pay suppliers earlier to take advantage of any prompt payment discounts
B Buy back the company’s shares
C Increase payables by delaying payment to suppliers
D Invest in a long term deposit bank account

24. Which THREE of the following are true, in relation to certificates

of deposit?
A They are evidence of a deposit with an issuing bank
B They are not negotiable and therefore unattractive to the depositor as
they do not ensure instant liquidity
C They provide the bank with a deposit for a fixed period at a fixed rate of
interest
D They are coupon‐bearing securities
E They are not tradable

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 25. Which of the following is least likely to be a reason for seeking a
stock market listing?
A Enhancement of the company’s image
B Transfer of capital to other users
C Improving existing owners’ control over the business
D Access to a wider pool of finance

26. Which of the following is NOT typically a principal objective of

macroeconomic policy?
A To achieve full employment of resources
B To achieve economic growth
C To achieve a balance of payments deficit
D To achieve an appropriate distribution of income and wealth
27. Which THREE of the following are advantages of having a
centralised treasury department in a large international group of
companies?
A No need for treasury skills to be duplicated throughout the group
B Necessary borrowings can be arranged in bulk, at keener interest rates
than for smaller amounts
C The group’s foreign currency risk can be managed much more effectively
since they can appreciate the total exposure situation
D Local operating units should have a better feel for local conditions than
head office and can respond more quickly to local developments
E Divisional managers will be motivated by having less responsibility for
cash management

28. Investing in a small or medium sized business (SME) is

inherently more risky than investing in a larger company due to
lack of business history and a lower level of public scrutiny over
accounts and records. What is the frequently used term to
describe the difficulty SMEs can often face when raising finance?
A Maturity gap
B Funding gap
C Duration gap
D Equity gap
29. Which of the following government actions would lead to an
increase in aggregate demand?
1 Increasing taxation and keeping government expenditure the same
2 Decreasing taxation and increasing government expenditure
3 Decreasing money supply
4 Decreasing interest rates
A 1 only
B 1 and 3
C 2 and 4 only
D 2, 3 and 4
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 30. Which TWO of the following activities are carried out by a
financial intermediary?
A Transforming interest rates
B Transforming foreign exchange
C Transforming maturity
D Transforming risk

Q. no. Answers Q. no. Answers

1 7,785 units 16 A and C
2 D 17 A, B and F
3 1,140 18 80 days
4 A and D 19 A
5 $ 28,000 20 B
6 $ 4,000,000 21 D
7 D 22 17 weeks
8 C 23 A
9 D 24 A, C and D
10 A 25 C
11 A 26 C
12 A 27 A, B and C
13 A and C 28 B
14 B and C 29 C
15 D 30 C and D

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