Quick Quiz 2

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1		Law'N'Order Industries recently changed the terms it offers its customers from 2/10 net 30 to 3/20 net 40. By its action, the firm has __________.
			A)	shortened its customers' payables period
			B)	lengthened its customers' receivables period
			C)	lengthened its customers' cash cycle
			D)	shortened its customers' cash cycle
			E)	shortened its customers' credit period
2		JJJ, Inc. recently extended its credit period from net 30 days to net 40 days. This represents a change in the firm's __________.
			A)	collection policy
			B)	loan policy
			C)	receivables policy
			D)	credit-granting policy
			E)	terms of sale
3		A seller who extends credit for a longer period than the purchaser's inventory cycle:
			A)	Will not end up financing other aspects of the purchaser's business beyond the immediate purchase and sale of the inventory.
			B)	Will force the purchaser to pay for inventory before that inventory is resold.
			C)	Will be assured that the purchaser will be able to convert the inventory into cash before payment is due.
			D)	Will end up financing a portion of the purchaser's receivables period as well.
			E)	Will have no need to offer a discount period and a net credit period.
4		Suppose your firm is offered terms of 2/10 net 30 on its purchases. Assuming that your firm intends to buy on credit, good cash management practice suggests that a rational purchaser should pay only on which of the following days? I. Day 2 II. Day 9 III. Day 10 IV. Day 20 V. Day 30
			A)	III or V only
			B)	I, II, or V only
			C)	II only
			D)	V only
			E)	I or II only
5		All else the same, __________ costs are greatest when the firm holds a small quantity of inventory, and __________ costs are greatest when there is a large quantity of inventory on hand.
			A)	carrying; interest
			B)	opportunity; restocking
			C)	interest; carrying
			D)	carrying; restocking
			E)	restocking; carrying
6		Karloff Medical Supply maintains an average inventory of 2,000 human skulls for sale to medical schools and filmmakers. The carrying cost per skull per year is estimated to be $5. Boris places an order for 10,000 skulls on the first of each month and the order cost is $75. What are the total restocking costs under the current system?
			A)	$450
			B)	$225
			C)	$950
			D)	$900
			E)	$1,500
7		Your company is considering granting credit to a new customer. The price per unit is $165 and the variable cost per unit is $150. The monthly interest rate is 0.8%. The customer will pay in 30 days if they do not default. If the customer does not default, they will buy one unit every month forever. What is the breakeven default percent?
			A)	3.7%
			B)	6.1%
			C)	61.5%
			D)	88.0%
			E)	92.0%

Use the following information to answer the next three questions.

	Current Credit Policy	Proposed Credit Policy
Price	$50	$50
Variable Cost	$35	$35
Quantity	850	885
Monthly Return	1.0%	1.0%

8		What is the incremental cash flow per year from switching credit policies?
			A)	$415
			B)	$525
			C)	$475
			D)	$1,750
			E)	$1,225
9		What is the cost of switching?
			A)	$35,125
			B)	$43,725
			C)	$41,125
			D)	$38,225
			E)	$53,000
10		What is the NPV of switching?
			A)	-$5,000
			B)	-$4,750
			C)	$12,143
			D)	$9,515
			E)	$8,775