CFC Treasury Management & Cash Flow 2 — Questions and Answers
Question 1: A company's days sales outstanding (DSO) increased from 35 to 52 days. What is the most likely impact on the cash conversion cycle?
- The CCC decreases by 17 days
- The CCC increases by 17 days (Correct answer)
- The CCC remains unchanged if payables also increase
- The CCC decreases because receivables are rising
Correct answer: The CCC increases by 17 days
DSO is a component of the CCC; a 17-day increase in DSO directly lengthens the cash conversion cycle by 17 days.
Question 2: Which instrument is most commonly used by treasurers to protect against rising short-term borrowing costs?
- Interest rate swap receiving fixed
- Interest rate cap (Correct answer)
- Currency forward contract
- Equity collar
Correct answer: Interest rate cap
An interest rate cap sets a maximum interest rate on floating-rate debt, protecting the borrower from rising short-term rates.
Question 3: Under a zero-balance account (ZBA) structure, subsidiary accounts are swept daily to a master account. What is the primary treasury benefit?
- Eliminates foreign exchange risk across subsidiaries
- Maximizes idle cash by concentrating balances centrally (Correct answer)
- Reduces accounts payable days automatically
- Improves DSO by accelerating customer collections
Correct answer: Maximizes idle cash by concentrating balances centrally
ZBA structures concentrate cash into a master account so idle subsidiary balances earn returns or offset borrowing costs centrally.
Question 4: A treasurer is evaluating a $10M commercial paper issuance at a 5.2% discount rate for 90 days. What is the approximate dollar amount of discount?
- $130,000 (Correct answer)
- $520,000
- $130,000
- $260,000
Correct answer: $130,000
Discount = Face × Rate × (Days/360) = $10M × 0.052 × (90/360) = $130,000.
Question 5: Which cash flow forecasting method builds projections from individual transaction-level data and is most accurate for short-term (1–30 day) horizons?
- Indirect method
- Statistical/regression method
- Direct method (Correct answer)
- Receipts and disbursements method aggregated from financial statements
Correct answer: Direct method
The direct (receipts and disbursements) method uses scheduled transaction data, providing the greatest short-term accuracy.
Question 6: A company holds excess cash for 45 days before investing. Which short-term investment vehicle offers the best liquidity with minimal credit risk for this horizon?
- High-yield corporate bonds
- U.S. Treasury bills (Correct answer)
- Common stock index fund
- 10-year TIPS
Correct answer: U.S. Treasury bills
U.S. Treasury bills are backed by the federal government, highly liquid, and available in maturities matching the 45-day window.
Question 7: What does a negative free cash flow (FCF) indicate for a treasury manager planning short-term funding needs?
- The company has more cash than it needs for operations
- The company may need to draw on credit facilities or raise capital (Correct answer)
- Working capital is being reduced efficiently
- Dividend payments are likely to increase
Correct answer: The company may need to draw on credit facilities or raise capital
Negative FCF means operating and investing outflows exceed inflows, signaling potential need for external financing.
CFC Treasury Management & Cash Flow 2
A company's days sales outstanding (DSO) increased from 35 to 52 days.
What is the most likely impact on the cash conversion cycle?