FIN 312 - Ch. 16

The size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except a. how efficient the firm manages its fixed assets b. the length of the operating cycle c. the sales level d. credit policies

A

A firm's cash conversion cycle is equal to its operating cycle minus its ____. a. inventory conversion period b. receivables conversion period c. payables deferral period d. none of the above

C

A firm's net working capital position is a widely used measure of its ____. a. leverage b. profitability c. risk d. none of the above

C

A firm's operating cycle is equal to its ____. a. inventory conversion period plus receivables conversion period b. cash conversion cycle minus payables deferral period c. a and b d. none of the above

A

A firm's working capital position is important since:: a. it is a measure of risk. b. it is a measure of efficiency. c. it is much more in demand due to its scarcity. d. it reflects the amount of short-term liabilities that the firm must consider.

A

Basically the overall working capital policy decision involves a ____ of alternative policies. a. profit-risk tradeoff b. financial choice c. risk decision d. none of the above

A

Lenders normally feel that the relative risk associated with short-term debt is ____ the risk associated with long-term debt. a. lower than b. equal to c. higher than d. none of the above

A

Net working capital represents: a. the amount of current assets financed by noncurrent sources of funds. b. the difference between current assets and long-term liabilities c. the difference between current assets and fixed assets d. a and b

A

Of the accounts listed, the account(s) that is (are) NOT part of a firm's working capital is: a. plant and equipment b. marketable securities c. cash d. a and c

A

Sources of debt financing are classified according to their: a. Maturities b. Interest paid c. Par d. Yield

A

The firm's receivables conversion period (measured in days) is equal to its accounts receivable divided by its ____. a. annual credit sales/365 b. annual credit sales c. annual sales/365 d. none of the above

A

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as a. term structure of interest rates b. risk-return tradeoff function c. seniority structure of interest rates d. a and c

A

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as the a. term structure of interest rates b. investment opportunity curve c. risk-return tradeoff function d. a and b

A

Working capital policy involves day-to-day decisions that determine all of the following EXCEPT: a. firm's level of long-term assets. b. proportions of short-term and long-term debt used to finance assets. c. level of each type of current asset. d. specific sourcers and mix of short-term liabilities the firm should employ.

A

All other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ expected profitability or rate of return on the total assets of the firm. a. large, higher b. small, higher c. constant, higher d. constant, lower

B

All other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ risk of the firm encountering financial difficulties. a. large, higher b. small, higher c. constant, higher d. constant, lower

B

Computerized financial planning models may be classified as any of the following except: a. deterministic b. optimistic c. probabilistic d. none of the above

B

Fluctuating current assets are those assets that are affected by: a. the consumer's demand for the product b. the seasonal nature of the company c. management preferences d. IRS regulations

B

Net working capital is defined as: a. total current assets b. current assets minus current liabilities c. total assets minus total liabilities d. current assets plus current liabilities

B

The ____ shows the time interval over which additional non-spontaneous sources of working capital financing must be obtained to carry out the firm's activities. a. inventory conversion period b. cash conversion cycle c. payables deferral period d. receivables conversion period

B

The aggressive approach to the financing of a firm's current assets uses a ____ proportion of short-term debt and a ____ proportion of long-term debt. a. low, high b. relatively high, relatively low c. high interest, low interest d. none of the above

B

The rate of return on fixed assets is normally assumed to be ____ the rate of return on current assets (especially cash and marketable securities). a. less than b. greater than c. equal to d. none of the above

B

When the level of working capital is increased, all of the following are expected to occur except a. expected profitability decreases b. expected profitability increases c. risk decreases d. none of the above

B

Which of the following factors does not directly affect the firm's level of investment in working capital? a. the firm's inventory and credit policies b. the age of the firm's plant and equipment c. the firm's sales level d. the length of the firm's operating cycle

B

Commercial paper is: a. long-term with maturities greater than one year. b. short-term with maturities under six months. c. short-term with maturities that do not exceed nine months. d. long-term with maturities of greater than five years.

C

Efficient current assets management refers to the firm's ability to economize on which of the following? I. Inventory II. Marketable securities a. I only b. II only c. Both I and II d. Neither I nor II

C

Historically, the yield curve has generally been ____, which indicates that long-term interest rates usually have been ____ short-term interest rates. a. upward sloping, lower than b. downward sloping, higher than c. upward sloping, higher than d. level, about equal to

C

If a firm uses only short-term debt to finance the fluctuating level of current assets, the firm is said to be using the ____ approach to asset financing. a. aggressive b. moderate c. matching d. conservative

C

In considering factoring accounts receivable, which of the following statements is/are correct? I. Maturity factoring occurs when the firm receives payment at the normal collection or due date of the factored accounts. II. Advance factoring occurs when the firm receives payment in prior to the normal collection or due date of the factored accounts. a. I only b. II only c. Both I and II d. Neither I nor II

C

In examining the term structure of interest rates, the interest rates of ______________ have exceeded short-term rates. a. Commercial paper b. Notes payable c. Corporate bonds d. Marketable securities

C

Many ____ contain provisions requiring firms to maintain a minimum net working capital provision. a. loan agreements with commercial banks b. bond indentures c. a and b d. none of the above

C

Negotiated short-term credit sources are all of the following EXCEPT: a. commerical paper b. inventory loans c. trade credit d. bank credit

C

The ____ assets are those that are affected by the seasonal or cyclical nature of company sales. a. current b. permanent current c. fluctuating current d. none of the above

C

The firm's inventory conversion period (measured in days) is equal to its average inventory divided by its ____. a. cost of sales b. sales c. cost of sales/365 d. none of the above

C

The operating cycle begins with the ____ and ends with the ____. a. purchase of resources, selling of the product on credit b. payment for purchases, liquidation of receivables c. purchases of resources, receipt of cash d. payment for purchases, receipt of cash

C

The optimal level of working capital investment is the level that is expected to a. maximize return on total assets b. maximize earnings per share c. maximize shareholder wealth d. minimize interest expenses

C

When factoring accounts receivables, the factor is the: a. negotiated accounts receivable account. b. the percent deduction in payment to the firm. c. the financial institution that buys the accounts receivable. d. the method of determining how much money is lent to the firm.

C

Which of the following working capital financing policies subjects the firm to the greatest risk? a. financing fluctuating current assets with long-term debt b. financing permanent current assets with long-term debt c. financing permanent current assets with short-term debt d. financing fluctuating current assets with short-term debt

C

A firm's working capital position is important from an internal and external standpoint. Which of the following apply: a. It measures a firm's risk. b. Provisions for a minimum working capital position are often included in restrictive covenants. c. A firm's policy often affects its ability to obtain debt. d. A working capital position determines its level of common stock sales.

D

All other things being equal, a policy of financing its assets with a relatively ____ proportion of short-term debt will tend to ____ the variability (or risk) of the after-tax earnings of the firm. a. large, decrease b. small, increase c. constant, lower d. large, increase

D

All other things being equal, a policy of financing its assets with a relatively ____ proportion of short-term debt will tend to result in ____ expected after-tax earnings for the firm. a. large, lower b. constant, higher c. constant, lower d. large, higher

D

An anticipated need for short-term borrowed funds is best shown in a. an operating budget b. a capital budget c. a production budget d. a cash budget

D

Borrowers (e.g., business firms) feel that there is more risk associated with short-term debt (as compared with long-term debt) because of the a. uncertainty arising from interest rate fluctuations b. risk of being unable to refund the debt c. relatively high cost of short-term debt d. a and b

D

Factoring accounts receivable is done: a. on a default basis b. on a consignment basis c. on an interest only basis d. on a non-recourse basis

D

If a firm shows a profit on the quarterly income statement, then a. there will be no need for additional financing b. the firm may need additional financing c. the firm will increase its cash balance d. all the above may be correct

D

The ____ is the optimal working capital investment and financing policy. a. aggressive policy b. moderate policy c. conservative policy d. none of the above

D

The length of the operating cycle for a firm is equal to the length of the a. payables deferral period b. cash conversion cycle c. receivables conversion period d. a plus b

D

The length of the operating cycle is equal to the length of the a. inventory conversion period b. receivables conversion period c. cash conversion period d. a plus b

D

The size of a firm's investment in current assets is a function of all of the following factors except a. sales level b. inventory policies c. credit policies d. stockholders equity

D

Under a conservative approach to working capital management, a firm tends to hold a relatively ____ proportion of its total assets in the form of current assets. a. small b. constant c. stable d. large

D

When pledging accounts receivables, which of the following statements is/are correct? I. Pledging requires permission of the SEC. II. In pledging accounts receivables, the firm loses title to the receivables and they are no longer listed on the balance sheet. a. I only b. II only c. Both I and II d. Neither I nor II

D

Which of the following assets (if any) are not part of a firm's working capital investment? a. cash b. accounts receivable c. inventory d. none of the above

D

Which of the following factors affect the firm's level of investment in working capital? a. the length of the firm's operating cycle b. the firm's sales level c. the firm's inventory and credit policies d. all of the above

D

With the matching approach to meeting the financing needs of the firm, fixed and permanent current assets are financed with a. long-term debt b. short-term debt c. equity funds d. a and c

D