Deck 6: Working Capital and the Financing Decision

Question 1

Heavy use of long-term financing generally leads to lower financing costs.

Answer 1

False

Question 2

In periods of tight money, long-term rates are often higher than short-term rates.

Answer 2

False

Question 3

Heavy risk exposure due to short-term borrowing can be compensated for by carrying illiquid assets.

Answer 3

False

Question 4

Firms with predictable cash-flow patterns should assume relatively low levels of risk.

Question 5

Heavy use of long-term debt will allow a firm to carry less liquid, more profitable assets.

Question 6

Firms with highly volatile and perishable inventory should assume relatively low levels of risk.

Question 7

Short-term interest rates are generally lower than long-term interest rates.

Question 8

Use of long-term financing and the carrying of highly liquid assets is a high-risk combination.

Question 9

The financial manager generally needs to devote little time to management of working capital.

Question 10

A risky financial plan will use long-term financing for capital assets, permanent current assets, and a portion of temporary current assets.

Question 11

As a general rule, it is desirable to finance the permanent assets, including "permanent current assets," with long-term debt and equity.

Question 12

Ideally, permanent current assets should be financed with short-term borrowings.

Question 13

Liquidating current assets are really capital assets since they have lives greater than one year.

Question 14

The "term structure of interest rates" is a schedule that tells when a company's bonds mature and shows how many dollars a firm must pay in interest payments.

Question 15

Increased use of long-term financing is generally a more conservative approach to current asset financing.

Question 16

Working capital management is relatively unimportant to the small businessperson.

Question 17

During tight money periods, short-term financing may be difficult to find.

Question 18

Immediate access to capital markets allows greater risk-taking capability.

Question 19

The "term structure of interest rates" depicts the competitive cost of funds for the various types of short-term sources of funds such as Treasury bills, commercial paper, and bankers' acceptances.

Question 20

The "term structure of interest rates" refers to the relationship between yields on debt and their maturities.

Question 21

The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales forecast.

Question 22

Yield curves change very little in the short run (3 months).

Question 23

Short-term financing is risky because of the possibility of rising short-term rates and the inability of always being able to refund short-term debt.

Question 24

Cash, accounts receivables, and inventory all move monthly in the same direction under level production.

Question 25

When using level production, inventory will peak in the month where unit sales trend above the production level.

Question 26

Expected value techniques allow consideration of more than one possible outcome.

Question 27

The more short-term financing relative to long-term financing, the more risky the financial structure.

Question 28

The use of on-line point-of-sale terminals has made it easier for many retail store managers to manage their inventory.

Question 29

Inventory remains a significant percentage of current assets for non-financial Canadian corporations.

Question 30

One reason for long-term diminishing liquidity is more efficient cash management.

Question 31

Inflation and interest rates (yields) are inversely related.

Question 32

The ratio of long-term financing to short-term financing at any point in time will be greatly influenced by the term structure of interest rates and common stock prices.

Question 33

Generally speaking, during the past two decades corporations were relying more and more on short-term borrowing to carry less liquid assets.

Question 34

Short-term interest rates are more dependent upon inflation than on current demand for money.

Question 35

A humped yield curve has lower medium-term rates than both short-term and long-term rates.

Question 36

The expected value is the sum of the probabilities of all expected events.

Question 37

Humped yield curves have higher intermediate term rates (4-7 year maturities) than either short-term or long-term rates.

Question 38

During an economic "boom" period, a shortage of low-cost financing alternatives exists.

Question 39

Over the last several decades, most business firms have increased their liquidity.

Question 40

If a firm uses a conservative financial plan, it will usually have marketable securities at the bottom of a cyclical sales swing.

Question 41

According to the expectations hypothesis, short-term rates would be expected to rise if they were far below long-term rates.

Question 42

Working capital management is primarily concerned with the management and financing of

A) cash and inventory.
B) current assets and current liabilities.
C) current assets.
D) receivables and payables.

Question 43

Hedging is matching the maturities of assets and liabilities to reduce risk.

Question 44

Pressure for current asset buildup often results from

A) decline in sales growth.
B) rapidly expanding sales.
C) increased demands of short-term creditors.
D) none of the other answers are correct.

Question 45

By using long-term capital to cover short-term needs, the firm is virtually assured of becoming technically insolvent.

Question 46

The behaviour of various kinds of financial institutions determines the shape of the yield curve, according to the segmentation theory.

Question 47

Only the segmentation theory has any significant impact on interest rates.

Question 48

The ratio of long-term financing to short-term financing at any given time will be greatly influenced by the term structure of interest rates.

Question 49

A financial executive devotes the most time to

A) long-range planning.
B) capital budgeting.
C) short-term financing.
D) working capital management.

Question 50

The cash budget combines the cash receipts and cash payments schedules in determining cash flow.

Question 51

If the liquidity premium theory was correct, yield curves would be upward-sloping.

Question 52

Ideally, all current assets will be

A) financed by short-term debt.
B) long-term in nature.
C) self-liquidating.
D) internally financed.

Question 53

The faster a firm's growth in sales, the more likely it is that an increasing percentage of financing will be internally generated.

Question 54

The term "permanent current assets" implies

A) the same thing as capital assets.
B) nonmarketable assets.
C) some minimum level of current assets that is not self-liquidating.
D) inventory.

Question 55

The current ratio for non-financial corporations reveals a steady increase in liquidity over time.

Question 56

Short-term interest rates have historically been more volatile than long-term rates.

Question 57

Level production methods smooth production schedules and utilize manpower and equipment more efficiently than seasonal production methods.

Question 58

The successful financial manager is very interested in the term structure of interest rates but is not concerned with the relative volatility or historical level of interest rates.

Question 59

It is not necessary to understand interest rate movements thoroughly when deciding upon short and long-term debt structure.

Question 60

The cash conversion cycle is the time that is taken to collect accounts receivable.

Question 61

Generally, more use is made of short-term financing because

A) short-term interest rates are generally lower than long-term interest rates.
B) most firms do not have easy access to the capital markets.
C) short-term financing is usually more predictable than long-term financing.
D) two of the answers are correct.

Question 62

The term structure of interest rates

A) is an indication of investors' expectations about inflation and future interest rates.
B) will be downward sloping if short-term interest rates are higher than long-term rates.
C) will be upward sloping under normal conditions.
D) all of the other answers are correct

Question 63

Risk exposure due to heavy short-term borrowing can be compensated for by

A) carrying highly liquid assets.
B) carrying illiquid assets.
C) carrying longer term, more profitable current assets.
D) carrying more receivables to increase cash flow.

Question 64

Ideally, which of the following types of assets should be financed with long-term financing?

A) capital assets only
B) capital assets and temporary current assets
C) capital assets and permanent current assets
D) temporary and permanent current assets

Question 65

One advantage of level production is that

A) manpower and equipment are used efficiently at lower cost.
B) current assets fluctuate more than with seasonal production.
C) seasonal bulges and sharp declines in current assets occur.
D) none of the choices are advantageous

Question 66

When actual sales are greater than forecasted sales

A) inventory will decline.
B) production schedules might have to be revised upward.
C) accounts receivable will rise.
D) all of the other answers are correct

Question 67

Which of the following is not a condition under which a prudent manager would accept some risk in financing?

A) predictable cash-flow patterns
B) inventory is highly perishable
C) price of inventory is stable
D) easy access to capital markets

Question 68

The term structure of interest rates

A) changes daily to reflect current competitive conditions in the money and capital markets.
B) plots returns for securities of different risk.
C) shows the relative interest spread between bonds with different risk ratings such as AAA, AA, A, BBB, etc.
D) depicts interest rates for T-bills over the last year.

Question 69

An aggressive, risk-oriented firm will likely

A) borrow long-term and carry low levels of liquidity.
B) borrow short-term and carry low levels of liquidity.
C) borrow long-term and carry high levels of liquidity.
D) borrow short-term and carry high levels of liquidity.

Question 70

A firm will usually increase the ratio of short-term debt to long-term debt when

A) short-term debt has a lower cost than long-term equity.
B) the term structure is inverted and expected to shift down.
C) the term structure is upward sloping and expected to shift up.
D) the firm is undertaking a large capital budgeting project.

Question 71

If a firm uses level production with seasonal sales

A) as sales decline inventory will increase.
B) as sales decline inventory will decrease.
C) as sales decline accounts receivable will increase.
D) a and c are correct

Question 72

Normally, permanent current assets should be financed by

A) long-term funds.
B) short-term funds.
C) borrowed funds.
D) internally generated funds.

Question 73

Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?

A) illiquid assets and heavy short-term borrowing
B) illiquid assets and heavy long-term borrowing
C) liquid assets and heavy long-term borrowing
D) liquid assets and heavy short-term borrowing

Question 74

Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings?

A) illiquid assets and heavy short-term borrowing
B) illiquid assets and heavy long-term borrowing
C) liquid assets and heavy long-term borrowing
D) liquid assets and no debt

Question 75

Which of the following is a reason for diminishing liquidity in modern corporations?

A) high interest rates
B) better utilization of cash via computers
C) inflation pushes more cash into inventory
D) all of the choices are reasons for diminishing liquidity

Question 76

The term structure of interest rates is influenced by

A) inflation.
B) money supply.
C) Bank of Canada activities.
D) all of the other answers are correct

Question 77

An aggressive working capital policy would have which of the following characteristics?

A) a high ratio of long-term debt to capital assets
B) a low ratio of short-term debt to total debt
C) a high ratio of short-term debt to long-term sources of funds
D) a short average collection period

Question 78

Which of the following techniques allows explicit consideration of more than one possible outcome?

A) operating leverage
B) present value
C) least-squares regression
D) expected value

Question 79

A "normal" term structure of interest rates would depict

A) short-term rates higher than long-term rates.
B) long-term rates higher than short-term rates.
C) no general relationship between short- and long-term rates.
D) medium rates (1-5 years) lower than both short-term and long-term rates.

Question 80

During tight money periods

A) long-term rates are higher than short-term rates.
B) short-term rates are higher than long-term rates.
C) short-term rates are equal to long-term rates.
D) the relationship between short and long-term rates remains unchanged.