Chapter 17: Working Capital

Which of the following statements about net working capital is true?

A high level of net working capital is associated with relatively low levels of short-term financing.

An aggressive working capital policy would have which of the following ratios (assuming a profitable company)?

A low current ratio and a high-average ROE

Working capital includes all but which of the following:

Accounts payable

The trade off of holding cash versus a high returning fixed asset is called:

Liquidity vs probability trade off

Which of the following best defines the maturity matching principle associated with financing working capital needs?

Match the maturity of sources of funds with that of uses of funds.

The level of net working capital is affected by all but which of the following:

Retained earnings

Which of the following statements about temporary current assets is true?

Temporary current assets reflect a seasonal increase in inventories, accounts receivables, and other current asset accounts.

A firm that uses short-term financing to finance most of its assets, all else equal, is:

Using an aggressive approach

Net working capital equals:

current assets - current liabilities

Working capital assets are generally:

short term

With respect to debt financing, which of the following statements is most accurate from the perspective of the firm seeking funds?

short-term loans are more risky and usually less expensive than long-term loans

Some level of gross working capital is "permanent" in that:

there is a minimum level of current assets at any given point in time.

The assets associated with short-term operating activities, such as cash, accounts receivables, and inventory, are also called:

working capital

An "aggressive" working capital financing policy would likely have:

a high proportion of assets financed by short-term financing.

The business should select the level of working capital or current assets that:

maximizes the value of the firm.

An optimal level of current assets is reached when:

optimal levels of cash, inventory, and accounts receivable are achieved

A base level of inventory, cash, marketable securities, prepaid expenses, and accounts receivable is best described as:

Permanent current assets

Financing permanent working capital needs with long-term financing tends to "match" financing with uses of funds and reduces the chance of illiquidity, but long-term financing has two disadvantages. They are:

Equity financing has a higher cost than debt financing and long-term debt usually has higher interest rates than short-term debt.

Working capital is the amount of

cash and near-cash assets

Which of the following financing approaches is the most aggressive financing approach?

financing temporary current assets, permanent current assets, and some long-term fixed assets with short-term debt