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CHAPTER 18 SHORT-TERM FINANCE AND PLANNING Answers to Concepts Review and Critical Thinking Questions 1. These are firms with relatively long inventory periods and/or relatively long receivables periods. Thus, such firms tend to keep inventory on hand, and they allow customers to purchase on credit and take a relatively long time to pay. 2. These are firms that have a relatively long time between the time purchased inventory is paid for and the time that inventory is sold and payment received. Thus, these are firms that have relatively short payables periods and/or relatively long receivable cycles. 3. a. Use: The cash balance declined by $200 to pay the dividend. b. Source: The cash balance increased by $500, assuming the goods bought on payables credit were sold for cash. c. Use: The cash balance declined by $900 to pay for the fixed assets. d. Use: The cash balance declined by $625 to pay for the higher level of inventory. e. Use: The cash balance declined by $1,200 to pay for the redemption of debt. 4. It shortened its inventory period, thereby shortening its cash cycle. 5. Their inventory period increased, thereby increasing their operating and cash cycles. 6. It is sometimes argued that large firms “take advantage of” smaller firms by threatening to take their business elsewhere. However, considering a move to another supplier to get better terms is the nature of competitive free enterprise. 7. Chapters will need less financing because it is essentially borrowing more from its suppliers. Among other things, Chapters will likely need less short-term borrowing from other sources, so it will save on interest expense. Solutions to Questions and Problems NOTE: All end of chapter problems were solved using a spreadsheet. Many problems require multiple steps. Due to space and readability constraints, when these intermediate steps are included in this solutions manual, rounding may appear to have occurred. However, the final answer for each problem is found without rounding during any step in the problem. Basic 1. a. No change. A dividend paid for by the sale of debt will not change cash since the cash raised from the debt offer goes immediately to shareholders. b. No change. The real estate is paid for by the cash raised from the debt, so this will not change the cash balance. c. No change. Inventory and accounts payable will increase, but neither will impact the cash account. d. Decrease. The short-term bank loan is repaid with cash, which will reduce the cash balance. e . Decrease. The payment of taxes is a cash transaction. 147
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f . Decrease. The preferred stock will be repurchased with cash. g. No change. Accounts receivable will increase, but cash will not increase until the sales are paid off. h
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This note was uploaded on 06/01/2010 for the course FINANCE FNCE3P93 taught by Professor Onemozocak during the Spring '10 term at Brock University.

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