Question

Which of the following is an example of a market risk for a company that manufactures automobiles?

• a) Being suddenly unable to source a critical component of the automobile
• b) Damage to completed cars being transported to a buyer
• c) A competitor that offers a similar line of cars with comparable quality at lower prices
• d) A failure in the company's accounts receivable process

A company with a 120-day operating cycle determines its cash conversion cycle using the following data:

• Receivable days: 35
• Inventory days: 95
• Payable days: 45

What is the company's cash conversion cycle?

• a) 25
• b) 75
• c) 165
• d) 105

When performing capital budgeting, __________ incurred by a project are irrelevant to future investment decisions.

• a) sunk costs
• b) taxes
• c) opportunity costs
• d) depreciation

When managing its cash, a company should make use of float to __________.

• a) make payments before they come due
• b) increase the length of the disbursement cycle
• c) set aside cash for future payments
• d) decrease the length of time for a payment to clear the bank

Which of the following is an advantage of venture capital?

• a) Venture capital investments typically carry a small amount of risk and generate small to moderate returns.
• b) New companies can access large amounts of upfront capital that does not have to be repaid, as a loan would be.
• c) Venture capital is typically easy to secure even with the most basic of business plans.
• d) There are no upfront costs to a company seeking venture capital funding.

Which of the following is a goal of working capital management?

• a) To minimize liquidity and maximize profitability
• b) To eliminate the risk of customers defaulting on credit
• c) To make long-term capital investment decisions
• d) To balance the cash conversion cycle against maximum revenue

An auto manufacturing company is preparing a capital budget and considering four long-term investments. The net present value of each project is as follows:

• Project A: 0.25
• Project B: 0
• Project C: -0.5
• Project D: 1.5

In theory, which two projects should the company pursue?

• a) Projects B and C
• b) Projects A and D
• c) Projects B and D
• d) Projects A and B

Answer 1

1]

c) A competitor that offers a similar line of cars with comparable quality at lower prices. This is an example of market risk because it is risk arising due to changes in the market dynamics of the industry in which the company operates.

(a), (b), and (d) are incorrect. They are examples of operational risk

2]

CCC = operating cycle - days payable

CCC = 120 - 45 = 75 days

3]

(a) - sunk costs.

Sunk costs are irrelevant because they are incurred in the past, and are irrecoverable. They are not incremental to the acceptance of the project.

4]

b) increase the length of the disbursement cycle. This will increase the disbursement float, and results in higher bank balance for the company.

(a), (c), and (d) are incorrect. These decrease the disbursement float, and result in lower bank balance for the company.

5]

(b) is an advantage. New companies can raise capital, and does not have to be repaid like a loan.

(a) is incorrect. VC investments are high-risk and high-return

(c) is incorrect. It is not easy to secure even with detailed business plans

(d) is incorrect. There are upfront costs such as flotation costs and issue costs

6]

(d) - to balance CCC against revenue

7]

Projects A and D should be accepted because they have positive NPV