Fin. Ch. 19
The safety margin kept by the bank on loan against liquid assets is called:
A. a haircut
A revolving line of credit would be considered:
A. an agreement to borrow up to a specific total amount on demand from a bank
When product demand is high, firms following a middle-of-the-road policy for long- versus short-term financing will:
A. borrow short term
Which one of these will decrease net working capital?
A. cash sale of inventory at a loss
When the length of the financing is directly related to the life of the asset being financed, the firm is said to follow a:
A. policy of maturity matching
Which one of the following is least likely to be correct for a firm that repeatedly stretches its payables?
A. the firm may receive more favorable status from suppliers
Which one of the following is least likely to be correct about the factoring of receivables?
A. the selling firm bears the risk of default
Although commercial paper is unsecured, the companies that issue this short-term security are:
B. Large firms with top credit quality
If the statement of sources and uses of cash shows a decrease in the cash balance, an increase in which one of the following might have eliminated that decrease?
B. accounts payable
If a firm decided to reduce the receivables period by speeding up its collections from its customers while keeping the inventory period and payables period the same, then the:
B. cash conversion cycle will decrease
A firm has borrowed $1 million and assigned its receivables to the lender. Because of defaults, the receivables prove insufficient to cover the debt. In this case, the:
B. firm bears the risk of default
The principle of matched maturities in finance refers to:
B. funding long term assets with long terms sources and short term assets with short term financing
Which one of the following would not be included as a source of short-term financing?
B. increase in the minimum operating cash balance
Which one of the following is a use of cash?
B. repayment of a bank loan
Which one of these is most associated with a disadvantage of the relaxed strategy of long- versus short-term financing?
B. short term investment income is often unattractive
A firm that follows a relaxed strategy toward the total capital requirement will be a:
B. short-term lender
Which one of the following situations should provide managers with the most comfort if accounts receivable balances are increasing each quarter?
B. the sales level has increased
A self-liquidating line of credit is best illustrated by borrowing:
B. to purchase inventory and repaying when payment for the sale of that inventory is received
Which type of inventory would a bank be most willing to accept as security for a loan?
C boats owned by a boat dealer
The goal of managing working capital, such as inventory, should be to minimize the:
C. aggregate of carrying and shortage costs
Which one of these statements correctly applies to the carrying costs of cash balances?
C. cash balances incur an opportunity cost
Managers are alerted to projected cash shortages by way of the:
C. cash budget
The time interval between paying for raw materials and collecting on sales of finished goods made from those materials is known as the:
C. cash conversion cycle
If a firm's current ratio exceeds 1.0, what happens as a result of paying cash to reduce accounts payable?
C. current ratio increases
Which one of the following would not be considered a use of cash?
C. depreciation
Which one of the following would generally reduce the carrying costs of inventory?
C. experiencing a decrease in the overall interest rate
In the preparation of cash budgets, capital expenditures are:
C. included as uses of cash and make the budget lumpy
In field warehousing the inventory is kept by the:
C. independent warehousing company
When financial managers take action to minimize the carrying costs of current assets, they:
C. may increase costs due to shortages
A firm's permanent working capital refers to the:
C. portion of net working capital that is financed from long term sources
For most corporations, net working capital is:
C. positive to provide liquidity during the cash conversion cycle
Which one of the following would not be included among the costs of carrying inventory?
C. raw material cost
When managers are continually short-term lenders, they are said to follow a:
C. relaxed financing strategy
Which one of the following is not typically a characteristic of commercial paper?
C. secured loan
Which one of the following statements best describes the total capital requirement for most profitable firms?
C. there are seasonal fluctuations around the total capital retirement trend
Customers may change firms when faced with minimal inventory selection. Sales lost in this manner illustrate the:
D. impact of shortage costs
What happens to a firm whose uses of cash exceed its sources of cash during an accounting period?
D. it experiences a decrease in its cash balance
Which one of the following is more likely for a firm practicing the relaxed strategy of long-versus short-term borrowing at the height of sales demand?
D. it's long term financing will approximately equal its totally capital requirements
The longer the firm's accounts payable period, the:
D. less the firm must invest in net working capital
Firms that continually invest in nontrivial amounts of marketable securities may be guilty of:
D. not maximizing shareholder returns
Managers who "stretch their payables" are attempting to:
D. obtain a longer term for short- term financing
Field warehousing can be an important source of:
D. short term financing with low risk to the lender
When a firm finances long-term assets with short-term sources of funding, it:
D. violates the principle of matched maturities
An increase in long-term assets is a source of cash.
False
Currently, receivables account for the majority of the current assets of retail firms. Cash and short-term securities are more important for oil companies, and inventory makes up the bulk of the current assets of electronic companies.
False
If a firm increases its accounts payable period, other things equal, it increases the cash conversion cycle.
False
Investments in marketable securities are generally a positive NPV investment for tax-paying firms.
False
Net working capital will decrease when a firm buys raw materials on credit.
False
Permanent working capital requirements are generally financed with commercial paper.
False
The credit crisis of 2007 to 2009 largely left the market for commercial paper unaffected.
False
When a loan is secured by receivables, the firm assigns the receivables to the bank. If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt. The risk of default on the receivables is now borne by the bank.
False
When accounts payable exceed the sum of inventory and accounts receivable, net working capital must be negative.
False
A cash conversion cycle is the period between a firm's payment for materials and collection on its sales.
True
A company that borrows $1 million long term and invests the proceeds in inventory will see a $1 million increase in its net working capital.
True
A company that borrows $1 million long term and invests the proceeds in inventory will see its cash position unchanged.
True
A company that borrows $1 million short term and invests the proceeds in inventory will see its cash position unchanged.
True
A company that borrows $1 million short term and invests the proceeds in inventory will see no change in its net working capital.
True
A company that pays $5,000 previously owed to one of its suppliers will see a $5,000 decrease in cash.
True
A company that pays $5,000 previously owed to one of its suppliers will see no change in its net working capital.
True
A company that pays out a $2 million cash dividend will see a $2 million decrease in working capital.
True
A company that receives a customer's payment of $2,500 for a previous sale will see no change in its net working capital.
True
A company that sells $5 million of marketable securities for cash will see a $5 million increase in cash.
True
A company that sells $5 million of marketable securities for cash will see no change in its net working capital.
True
A firm can reduce the cash conversion cycle by selling fewer goods on credit and more for cash.
True
A firm's inventory period can be estimated by the ratio of inventory to daily output.
True
A reduction in inventory levels would be considered a source of cash.
True
An increase in accounts payable is a source of cash.
True
An increase in current liabilities is a source of cash for the firm.
True
An increase in short-term interest rates will increase the carrying costs of the firm.
True
Banks will not usually lend the full value of the assets that are used as security. The safety margin is likely to be even larger in the case of loans that are secured by inventory.
True
Biotech firms require large amounts of cash if their drugs succeed in gaining regulatory approval. Therefore, these firms often have substantial cash holdings to fund their possible investment needs.
True
Interest rates for bank loans are frequently linked to either the London Interbank Offered Rate (LIBOR) or the Treasury bill rate.
True
It is possible for a firm to collect payment on a sale prior to paying its suppliers for the items sold.
True
Once the firm has sold its receivables, the factor bears all the responsibility for collecting on the account.
True
Some companies solve their financing problem by borrowing on the strength of their current assets; others solve it by selling their current assets.
True
The cost of issuing commercial paper is generally lower than that of a revolving line of credit.
True
When a loan is secured by receivables, the firm assigns the receivables to the bank. If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt.
True
When financial managers are asked the key reason for choosing short-term rather than long-term debt, they often say that they try to match the maturities of the firm's assets and liabilities.
True
With a revolving line of credit, a firm can borrow and repay whenever it wants so long as the balance does not exceed the credit limit.
True
The factoring firm bears responsibility for default on accounts receivable purchased from a firm.
true
