Chapter 6 Smartbook Questions

working capital management

"How much inventory should be carried, and how to fund it" is part of the Blank______ decision making process. Multiple choice question. working capital management long term capital management fixed asset investment

Working capital management is the financing and management of the current assets of the firm. The financial manager determines the mix between temporary and permanent "current assets."

Explain working capital management. Multiple choice question. Working capital management is how much total work the financial manager is investing into a specific project. Working capital management is the total fixed assets the financial manager is investing into a specific project. Working capital management is the financing and management of the current assets of the firm. The financial manager determines the mix between temporary and permanent "current assets." Working capital management is the total liabilities plus total assets invested in the company.

True

Firms with predictable cash flow patterns typically can maintain lower liquidity True false question.

both increase

Generally, when a company's sales increase, the affect on temporary and permanent assets is: Multiple choice question. temporary assets increase and permanent assets decrease both increase temporary assets decrease and permanent assets increase both decrease

inventory will decrease

If sales increase while production stays level: Multiple choice question. inventory will remain the same inventory will decrease inventory will increase

True

In designing working capital policy, the astute financial manager is interested in not only the term structure of interest rates but also the relative volatility and the historical level of short-term and long-term rates. True false question.

cash receipts cash payments

Select all that apply Cash budget represent a comparison of the __ and __ schedules to determine cash flow. Multiple select question. purchases Sales cash receipts cash payments

permanent current assets

A company has floor displays of merchandise that are maintained throughout the year. The inventory that makes up the floor displays is considered Multiple choice question. permanent current assets temporary fixed assets permanent fixed assets temporary current assets

False

A higher use of long term financing is the more conservative financing approach and can lead to potentially higher profitability True false question.

a credit crunch in which funds become scarce

An aggressive firm utilizing short term financing may be vulnerable to Multiple choice question. reductions in long term interest rates reductions in short term interest rates a credit crunch in which funds become scarce

short term

As a rule, an aggressive, risk-orientated firm will use Blank______ financing. Multiple choice question. short term equity bond long term

subtracting cash payments from cash receipts.

Cash flow is determined by Multiple choice question. adding cash payments to cash receipts. subtracting cash payments from cash receipts. adding cash receipts to the sales forecast.

all types of financing

Companies use Blank______ to provide funds for operations. Multiple choice question. owner's equity all types of financing long term debt financing short term debt financing

temporary current assets

Each year your company's inventory increases by $100,000 in advance of the busy season. This inventory increase is considered to be Multiple choice question. permanent current assets temporary current assets level current assets

unit selling price by the number of units forecast to be sold.

In developing a sales forecast, total projected sales (in dollars) can be calculated by multiplying the Multiple choice question. contribution margin by the number of units forecast to be sold. unit profit margin by the number of units forecast to be sold. unit production costs by the number of units forecast to be sold. unit selling price by the number of units forecast to be sold.

increase in short term liabilities

Normally it is most appropriate to finance seasonal increases in current assets with an Multiple choice question. increase in short term liabilities increase in long term debt increase in investment by owners decrease in long term debt

False

Permanent current assets typically decline as a company moves to higher stages of growth. True false question.

if a tight money situation occurs, loans may be hard to obtain if a tight money situation occurs, interest rates may increase

Select all that apply A risk of using short term funds to finance operations is Multiple select question. if a tight money situation occurs, interest rates will decrease if a tight money situation occurs, loans may be hard to obtain if a tight money situation occurs, interest rates may increase

rates on short term loans may become very high short term funds may be difficult to find

Select all that apply As a rule, during "tight money" periods: Multiple select question. interest rates will generally decline rates on short term loans may become very high short term funds may be difficult to find availability of long term funds should not be affected.

current liabilities will increase by 10% current assets will increase by 10%

Select all that apply Assume that current assets and current liabilities change at the same rate as changes in sales. Therefore, if sales increase by 10%, then Multiple select question. current assets will remain the same current liabilities will increase by 10% current assets will increase by 10% current liabilities will decrease by 10%

When interest rates are high and expected to decline, the financial manager would generally try to borrow short-term funds. If interest rates are low, financial manager will try to lock in the lower rates with long-term borrowing.

Select all that apply How should the financial manager respond to fluctuating interest rates and changing term structures? Multiple select question. When interest rates are high and expected to decline, the financial manager would generally try to borrow short-term funds. If interest rates are low, financial manager will try to lock in the lower rates with long-term borrowing. If interest rates are very high, the financial manager would generally try to borrow long-term. If interest rates are low, the financial manager will try to avoid long-term borrowing at lower rates.

more interest will be paid on debt the company will have adequate capital

Select all that apply If a company uses long term debt to finance part of short term needs, it is likely Multiple select question. more interest will be paid on debt the company will have adequate capital less interest will be paid on debt more short term financing will be needed

it will incur increased risk in that if short term loans cannot be renewed default may occur its interest costs are likely to be somewhat lower compared to long term debt financing

Select all that apply If a company uses short term debt to finance permanent current assets and fixed assets Multiple select question. it will incur increased risk in that if short term loans cannot be renewed default may occur its interest costs are likely to be somewhat lower compared to long term debt financing its interest costs are likely to be somewhat higher compared to long term debt financing it will not incur any additional default risk

inventory will change with changes in sales if sales decrease inventory will increase if sales increase inventory will decrease

Select all that apply If a company utilizes level production: Multiple select question. inventory will change with changes in sales if sales decrease inventory will increase inventory will remain the same with changes in sales if sales increase inventory will decrease

if sales increase inventory will decrease if sales decrease inventory will increase inventory will change with changes in sales

Select all that apply If a company utilizes level production: Multiple select question. inventory will remain the same with changes in sales if sales increase inventory will decrease if sales decrease inventory will increase inventory will change with changes in sales

retention of retained earnings increase in long term debt increase in stock

Select all that apply Normally it is most appropriate to finance permanent current assets with Multiple select question. increase in current liabilities retention of retained earnings increase in long term debt increase in stock

production schedules may be smoother equipment may be used more efficiently overtime may be avoided for production workers

Select all that apply Some advantages of using level production are: Multiple select question. production schedules may be smoother inventory levels will change at the same rate as sales equipment may be used more efficiently overtime may be avoided for production workers production will match sales

the total cost of carrying inventory may be higher if sales slow down inventory levels will vary with sales inventory levels may build up during periods of slow sales

Select all that apply Some disadvantages of level production are Multiple select question. overtime for production workers may be higher the total cost of carrying inventory may be higher if sales slow down inventory levels will vary with sales inventory levels may build up during periods of slow sales

expectations hypothesis theory market segmentation theory liquidity premium theory

Select all that apply Three basic theories describe the shape of the yield curve are Blank______. Multiple select question. efficient market hypothesis expectations hypothesis theory market segmentation theory liquidity premium theory

preferred stock. common stock. long term bonds.

Select all that apply When a firm is in an extended rapid sales growth period, some external funding can be sourced from the sale of Multiple select question. preferred stock. common stock. long term bonds. quick liquidation of fixed assets.

True

Short-term interest rate volatility is what makes a short-term financing strategy risky. True false question.

retained earnings

Some of the growth in current assets, due to sales growth, can be sourced from the firms________ ________ .

the last month production exceeds sales

The high point in the amount of inventory for a seasonal business using level production would usually be Multiple choice question. the last month production exceeds sales the first month sales exceeds production the inventory will remain the same all year the first month production exceeds sales

time to maturity

The term structure of interest rates plots interest rates against Blank______. Multiple choice question. exchange rates coupon rates time to maturity the inflation rate

the yield curve

The term structure of interest rates refers to Multiple choice question. the yield curve long term interest rates short term interest rates

True

True or false: Under level production, a simple way to determine the number of units to be produced per month would be to divide the annual production amount (in units) by 12.

divide the annual production amount (in units) by 12

Under level production, a simple way to determine the number of units to be produced per month would be to Multiple choice question. divide the annual production amount (in units) by 12 divide projected annual sales (in dollars) by 12 take the average of the units produced over the past three months

True

When interest rates are low, the financial manager can borrow long-term funds to be used to reduce short-term debt, and be available for future expansion of plant and equipment. True false question.

permanent current assets

Your company's inventory valuation reaches a high of $100,000 before its busy season and a low of $30,000 during its slow season. The $30,000 level of inventory is considered to be: Multiple choice question. permanent current assets long term assets fixed assets