Intermediate Financial management Quiz 2

The Harvester collects 25 percent of sales in the month of sale, 60 percent of sales in the month following the month of sale, and 15 percent of sales in the second month following the month of sale. During the month of April, the firm will collect:

60 percent of March sales

Which of these affects the length of the cash cycle but not the operating cycle?

A Accounts payable period

Which one of these will increase the cash cycle, all else held constant?

A Decreasing the accounts receviable turnover rate

A firm with a flexible short-term financial policy will:

A Invest heavily in inventory

Which one of the following statements is correct concerning the cash balance of a firm?

A cumulative cash deficit indicates a borrowing need.

All of the following will increase the value of an American call except:

A decrease in the risk-free rate of return

Which one of these statements is correct? Assume all else held constant

A negative cash cycle is preferable to a position cash cycle

Which one of the following increases cash?

Accepting credit from a supplier

The length of time between the sale of inventory and the collection of the payment for that sale is called the

Accounts receivable period

Brustle's Pottery either factors or assigns all of its receivables to other firms. This is known as

Accounts receivables financing

Murray's can borrow money at a fixed rate of 10.5 percent or a variable rate set at prime plus 2.25 percent. Fred's can borrow money at a variable rate of prime plus 1.5 percent or a fixed rate of 12 percent. Murray's prefers a variable rate and Fred's prefers a fixed rate. Given this information, which one of the following statements is correct?

After swapping interest rates with Fred's, Murray's may be able to pay prime plus 2 percent.

Which one of the following actions will tend to increase the accounts receivable period from its current 34 days?

B Eliminating the discount for early payment by credit customers.

Which one of the following actions will tend to increase the inventory period?

B Increasing inventory selection to attract more customers.

If a firm creates an interest rate collar on a variable rate loan, then the rate the firm pays will always:

Be higher than, or equal to, the floor and cap rates

Dog's can borrow money at either a fixed rate of 8.25 percent or a variable rate set at prime plus .5 percent. Cat's can borrow money at a variable rate of prime plus 1 percent or a fixed rate of 8 percent. Dog's prefers a fixed rate and Cat's prefers a variable rate. Given this information, which one of the following statements is correct?

Both firms will profit if they swap at 8.15 percent fixed rate for a prime plus .75 percent variable rate

You own shares of a stock and believe the stock price will increase in the future. However, you realize the stock price could decline and want to hedge that risk. Which one of the following option positions should you take to create the desired hedge?

Buy a put

A firm with a variable-rate loan wants to protect itself solely from increases in interest rates. Which one of the following would be of most interest to this firm?

Buy a put option on a bond

You believe the price of an asset is going to decline within the next three months. Which one of the following payoff profiles for an option on that asset will reflect a profit if your belief is correct?

Buying a put

An increase in which one of the following is an indicator that an accounts receivable policy is becoming more restrictive?

C Accounts recievable turnover rate

Assume all else held constant. If you pay your suppliers five days sooner, then

C You may require additional funds from other sourcess to fund the cash cycle

Option contracts:

Can be exercised on any day up to including the expiration date if they are American

Interest rate swaps:

Can involve exchanging one floating-rate loan for another floating-rate loan

Steve has estimated the cash inflows and outflows for his hardware store for next year. The report that he has prepared recapping these cash flows is called a

Cash budget

Central supply purchased a toboggan for inventory this morning and paid cash for it. The time period between today and the day Central Supply will receive cash from the sale of this toboggan is called the

Cash cycle

Company A can borrow money at a fixed rate of 7.5 percent or a variable rate set at prime plus 1 percent. Company B can borrow money at a variable rate of prime plus +.5 percent or a fixed rate of 8 percent. Company A prefers a variable rate and company B prefers a fixed rate. Which one of the following statements depicts the most favorable outcome of a swap between Companies A and B?

Company A could pay the variable prime rate+.75 percent

money deposited by a borrower with the bank in a low or non-interest-bearing account as a condition of a loan agreement is called a

Compensating balance

) Which one of the following statements is correct concerning the cash cycle?

D The longer the cash cycle, the more likely a firm will need external financing

Which one of these is a source of cash?

DEcreasing inventory

Which one of these actions will increase the operating cycle? Assume all else held constant

Decreasing the recievables turnover rate.

Metal Designs, Inc., historically produced products for inventory. Now, the firm only produces a product when it receives an actual order from a customer. All else equal, this change will:

E Decreases the cash cycle

A flexible short-term financial policy:

E Incurs more carrying cost than a restrictive policy

An increase in which one of the following will decrease the cash cycle, all else held constant?

E Inventory turnover rate

If a firm adheres to a restrictive short-term financial policy, then the firm will generally have:

E Little if any, investment in marketable securities

The operating cycle describes how a product:

E Moves through the current asset accounts

Which one of the following will increase the accounts payable period, all else held constant?

E an increase in the ending accounts payable balance

Elizabeth owns a call option on 100 shares of Microsoft stock. She has decided to buy those shares. This purchase is commonly referred to as:

Exercising the option

What is the final day on which an option can b exercised called

Expiration date

Assume each month has 30 days and a firm has a 60-day accounts receivable period. During the second calendar quarter of the year, that firm will collect payment for the sales it made during which of the following months?

Feburary, March, and April

By hedging financial risk, a firm can:

Gain time to adapt to changing market conditions

Long-run financial risk:

Generally results from changes in the underlying economics of a business

A call option contract:

Grants rights to the buyer and obligates the seller

A $20 put option on Wildwood stock expires today. The current price of the stock is $18.50. Which one of the following best describes this option?

In-the-money

Which one of the following will decrease the operating cycle?

Increasing the accounts recievable turnover rate

The length of time that elapses between the day a firm purchases an inventory item and the day that item sells is called the

Inventory period

The operating cycle is equal to the:

Inventory period plus the accounts recievable period

A forward contract:

Is a binding agreement on both the buyer and the seller and nets out as a zero sum game

A swap dealer in the U.S.:

Is frequently a commercial bank

The seller of a forward contract:

Is obligated to make delivery and accept the forward price

Taylor Supply has made an agreement with its bank that it can borrow up to $10,000 at any time over the next year. This arrangement is called an

Line of credit

Which one of the following describes the maximum value of a call option?

Market price of the underlying stock

Shortage costs are least associated with

Opportunity costs related to high levels of working capital

Costs that increase as a firm acquires additional current assets are called___ cost

Order

You own a July $15 call on ABC stock. Assume today is April 20 and the call has zero intrinsic value. Which one of the following best describes this option?

Out-of-the-money

Which of the following will decrease the net working capital of a firm? Assume the current ratio is greater than 1.0

Paying a payment on a long-term debt.

Which one of these is a use of cash?

Paying employee wages

The buyer of an option contract:

Pays an option premium in exchange for a right to buy or sell an underlying asset during a specified period of time.

The cost to purchase an option contract is called the:

Premium

Which one of the following actions will provide you with the right, but not the obligation, to sell the underlying asset at a specified price during a specified period of time?

Purchase of a put option

which one of the following will increase net working capital? Assume the current ratio is greater than 1.0

Selling inventory at a profit

Cost that decreases as a firm acquires additional current assets are called___ costs

Shortage

Which one of the following describes the lower bound of a call's value?

Stock price minus the exercise price or zero, whichever is greater

Marti owns an option that allows him to purchase ABC stock at $50 a share. The $50 price is referred to as the

Strike Price

When a futures call option on a commodity is exercised the option owner receives a futures contract on the commodity plus a cash payment equal to the difference between the:

Strike price and the current options price

Which one of these statements related to forward contracts is correct?

The buyer of a forward contract on corn benefits if the price increases during the contract period

Which one of the following is true regarding forward contracts?

The payoff profile for the buyer of a forward contract is an upward sloping linear function

) The optimal investment in current assets for an operating firm occurs at the point where:

The total costs of holding current assets is minimized

What is a key difference between an option contract and a forward contract?

Use as a risk-reduction tool

Which one of the following statements correctly describes your situation as the holder of a European call option?

You have a right to buy but only on the expiration date

This morning a national bakery agreed to pay a farmer $7.10 a bushel for 5,000 bushels of wheat that the farmer will ship to the factory four months from now. What is this legally binding agreement called?

a Forward contract

Which one of the following statements is correct in relation to a firm's short-run financial risk?

a financially sound firm can become financially distressed as the result of its short-run exposure to financial risk

A hedge between which two of the following firms is most apt to reduce each firm's financial risk exposure?

a wheat farmer and bakery

The length of time between the day a firm purchases an item from its supplier until the day that supplier is paid for the purchase is called

accounts payable period

Futures contracts:

b Are marked to the market on a daily ba

Farmer Jones raises several hundred acres of corn and would suffer a significant loss should the price of corn decline at harvest time. Which one of the following would he be doing if he purchased financial securities to offset this price risk?

b Hedging

Assume you are looking at a payoff profile for a forward contract on oil. Which one of these statements correctly describes what you are seeing?

b from the seller's perspective, the payoff profile is downward sloping

Browning Enterprises currently has all fixed-rate debt. The firm would like to convert part of this to floating-rate debt. Which one of the following will accomplish this for the firm?

c Interest rate swap

An agreement that grants its owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time is called a(n) ________ contract.

c Option

Sue has a contract that grants her a right that she may or may not decide to exercise. This right increases in value as the value of the asset underlying her contract declines. Which one of these did she do to create this situation?

d Purchased a put option

Which one of the following can a firm do if it effectively manages its financial risks?

d Reduce the price volatility the firm faces

Farmer Ted planted 200 acres in wheat this year. The weather has been perfect and he expects to harvest a record crop within the next two weeks. At present, he has no storage facilities and therefore must sell his crop as soon as it is harvested. Which one of the following risks is he facing because he must sell his crop at whatever the market price is at harvest time?

d Transactions exposure

The value of a stock option is dependent upon the value of the underlying stock. Thus, a stock option is a:

e Derivative security

By definition, which one of the following contracts is marked to the market on a daily basis?

e future contracts

Steve has an option with a payoff profile that depicts a line that is constant at zero up until some point after which the line slopes downward. What type of action did Steve take to obtain this profile?

e sold a call option

A U.S. bank has an agreement with a German bank to exchange $500,000 for €397,000 on the first day of each of the next three calendar quarters. This agreement is best described as a:

e swap contracts

Which one of the following statements related to swaps is correct?

swaps can be custom tailored to a firm's needs