CTP Working Capital Management 4 — Questions and Answers
Question 1: Which of the following actions would INCREASE net working capital?
- Issuing a long-term bond and using proceeds to purchase inventory (Correct answer)
- Paying off accounts payable with cash
- Collecting an outstanding receivable
- Drawing on a short-term line of credit to pay a supplier
Correct answer: Issuing a long-term bond and using proceeds to purchase inventory
Issuing long-term debt (non-current liability) to buy inventory (current asset) increases current assets without increasing current liabilities, raising net working capital.
Question 2: A treasury analyst is forecasting cash flow using the direct method. Which data source is MOST relevant?
- Projected income statement net income
- Scheduled receipts from customers and planned disbursements to suppliers (Correct answer)
- Depreciation and amortization schedules
- Capital expenditure projections for fixed assets
Correct answer: Scheduled receipts from customers and planned disbursements to suppliers
The direct method builds cash flow forecasts from actual expected cash inflows (customer receipts) and outflows (supplier payments), not accrual-based accounting items.
Question 3: A company's weighted average cost of capital (WACC) is 8%. Its short-term investments yield 4%. What is the opportunity cost of holding excess cash?
- 4%
- 8%
- 12%
- The difference between WACC and the investment yield (4%) (Correct answer)
Correct answer: The difference between WACC and the investment yield (4%)
The opportunity cost of holding excess cash is the difference between WACC (the minimum return required by investors) and the yield earned on the cash investment.
Question 4: In zero-balance account (ZBA) structures, subsidiary accounts maintain a zero balance because:
- All transactions are processed in foreign currency
- Funds sweep automatically to or from a master concentration account (Correct answer)
- Subsidiaries are not permitted to make payments directly
- The bank charges a fee each time the balance is not zero
Correct answer: Funds sweep automatically to or from a master concentration account
ZBA accounts automatically sweep deficits or surpluses to a central master account, keeping subsidiary balances at zero and centralizing liquidity.
Question 5: Which ratio measures how efficiently a company converts inventory into sales?
- Current ratio
- Inventory turnover ratio (Correct answer)
- Quick ratio
- Accounts receivable turnover ratio
Correct answer: Inventory turnover ratio
Inventory turnover (COGS / average inventory) measures how many times a company sells and replaces its inventory over a period.
Question 6: A company with seasonal sales peaks should MOST likely use which type of working capital financing?
- Permanent long-term bonds sized for peak needs
- A revolving credit facility that can be drawn and repaid as needed (Correct answer)
- Equity financing for all seasonal inventory buildup
- Accounts payable stretching regardless of vendor terms
Correct answer: A revolving credit facility that can be drawn and repaid as needed
A revolving credit facility provides flexible access to short-term funds that can be drawn during peak demand and repaid when the season ends, matching financing to temporary needs.
Question 7: Under Basel III liquidity requirements, the Liquidity Coverage Ratio (LCR) requires banks to hold enough high-quality liquid assets to cover net cash outflows over:
- 30 days (Correct answer)
- 90 days
- 6 months
- 1 year
Correct answer: 30 days
The LCR requires banks to maintain sufficient high-quality liquid assets to survive a 30-day stress scenario of net cash outflows.
CTP Working Capital Management 4
Which of the following actions would INCREASE net working capital?