Working capital management

Which of the following statements is CORRECT?

wrong Temporary current assets are those current assets that are kept on hand when sales are at their low point, but this term is relevant only for firms whose sales fluctuate on a seasonal basis. Financially sound firms typically do not use any trade credit—this type of financing is typically used only by firms that are so weak that they cannot obtain financing from any other source.

Which of the following statements is CORRECT?

Short-term bank loans are riskier to borrowers than long-term loans because (1) interest rates might rise, thus pushing up the cost of a short-term loan, and (2) the firm's position might deteriorate, causing the bank to refuse to renew the loan or to do so only at a much higher interest rate.

Which of the following statements is NOT CORRECT?

wrong The risk of financing with short-term debt is usually greater than the risk of using long-term debt for two reasons: (1) the cost of short-term debt can move up, hurting earnings, whereas the cost of long-term debt is generally fixed, and (2) the firm might not be able to roll over its short-term debt. If a firm issues long-term bonds and pays off short-term debt that had been used to finance its working capital, then the firm would be moving from an aggressive to a more conservative working capital financing policy.

Which of the following statement is CORRECT?

Other things held constant, it is better to have a relatively short than a relatively long cash conversion cycle.

Which of the following statements is CORRECT?

"Gross working capital" is defined as those current assets that are used in operations, "net working capital" is current operating assets minus all current liabilities, and "net operating working capital" is current operating assets minus non-interest bearing current liabilities (accounts payable and accruals).

Which of the following statements is NOT CORRECT?

Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.

Firms often finance temporary assets with short-term debt because

Matching the maturities of assets and liabilities means, generally, that cash will be coming in at about the same time that it is needed to service the debt.

Which of the following terms is used in a cash conversion cycle analysis?

The payables deferral period