Deck 6: Working Capital and the Financing Decision

Question 1

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.

Answer 1

True

Question 2

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

Answer 2

False

Question 3

Working capital management is relatively unimportant for a small business.

Answer 3

False

Question 4

Permanent current assets are not similar to fixed assets because they are fully liquidated within the year.

Question 5

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

Question 6

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

Question 7

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

Question 8

Walmart requires manufacturers to ship goods with RFID tags so it can better track inventory and reduce the need for supply chain management.

Question 9

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

Question 10

One of the primary benefits of implementing supply chain management is a reduction in inventory on hand.

Question 11

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

Question 12

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 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

Many companies such as McDonald's have embraced supply chain management using Web-based procedures.

Question 18

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

Question 19

Supply chain management has little impact on financial performance and is primarily a marketing and management concept.

Question 20

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

Question 21

According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, short-term rates are expected to rise.

Question 22

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

Question 23

According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, long-term rates are expected to decline.

Question 24

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

Question 25

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

Question 26

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 27

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

Question 28

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

Question 29

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

Question 30

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 31

If the liquidity premium theory were the only correct theory, yield curves would always be upward-sloping.

Question 32

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

Question 33

Interest rates and inflation are inversely related.

Question 34

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

Question 35

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

Question 36

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

Question 37

It is not necessary to understand interest rate movements when deciding the structure of short-term debt relative to long-term debt.

Question 38

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

Question 39

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 40

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

Question 41

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

Question 42

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

Question 43

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

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

Question 44

According to the expectations hypothesis, the expected value is the sum of the probabilities of all expected events.

Question 45

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

Question 46

If we examine the ratio of working capital to sales, we can see that for the last several decades, firms' liquidity has been increasing.

Question 47

Pressure to increase current asset buildup often results from

A)a decline in sales growth.
B)rapidly expanding sales.
C)increased demands of short-term creditors.
D)None of the options

Question 48

Expected value analysis requires taking the difference between the actual projected outcome and the historic outcome times its probability and then summing these totals.

Question 49

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

Question 50

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

Question 51

Long-term financing is usually less expensive than short-term financing because it is not as advantageous to the corporation as short-term financing.

Question 52

The more short-term financing there is relative to long-term financing, the riskier the financial structure.

Question 53

The three most important factors when selecting a financing plan are risk, asset liquidity, and timing.

Question 54

Expected value analysis involves assigning "weights" to various expected future outcomes by their respective probabilities of occurrence.

Question 55

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

Question 56

Working capital management primarily involves long-term planning.

Question 57

Heavy use of long-term financing can generate more profit for the company during a tight money period.

Question 58

Generally, a downward sloping yield curve indicates an imminent economic boom.

Question 59

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

Question 60

The aggressive financing plan involves utilizing long-term financing for permanent and temporary current assets.

Question 61

The concept of a self-liquidating asset implies that

A)the working capital associated with a product will be liquidated within a one-year period.
B)all the product will be sold, receivables collected, and bills paid over the time period specified.
C)assets associated with the production of a product will be liquidated over the depreciable life of the assets.
D)self-liquidating assets will be financed by long-term sources of capital.

Question 62

Retail companies like Target and Limited Brands are more likely to have

A)stable sales and earnings per share.
B)cyclical sales but less volatile earnings per share.
C)cyclical sales and more volatile earnings per share.
D)cyclical sales but stable accounts receivable and inventory.

Question 63

A financial executive devotes the most time to

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

Question 64

A conservatively financed firm would

A)use long-term financing for all fixed assets and short-term financing for all other assets.
B)finance a portion of permanent assets and short-term assets with short-term debt.
C)use equity to finance fixed assets, use long-term debt to finance permanent assets, and use short-term debt to finance fluctuating current assets.
D)use long-term financing for permanent current assets, fixed assets, and a portion of the short-term fluctuating assets, and use short-term financing for all other short-term assets.

Question 65

Samuelson will produce 20,000 units in January using level production. If each unit costs $500 to manufacture, what is the dollar value of ending inventory in January if beginning inventory is 10,000 units and January sales are 15,000?

A)Less than $5,000,000
B)Between $5,000,000 and $10,000,000
C)Greater than $10,000,000
D)There will be a shortage.

Question 66

Tinbergen Cans expects sales next year to be $50,000,000. Inventory and accounts receivable (combined) will increase $8,000,000 to accommodate this sales level. The company has a profit margin of 6 percent and a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing.

A)No external financing will be needed.
B)Less than $1,000,000 of external financing is needed.
C)Between $1,000,000 and $5,000,000 of external financing is needed.
D)More than $5,000,000 of external financing is needed.

Question 67

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 options

Question 68

The term "permanent current assets" implies

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

Question 69

The use of cash budgeting procedures

A)helps the firm plan its current asset levels for a given production plan.
B)makes managing inventory easier under seasonal production.
C)illustrates fluctuating levels of current assets for a given production plan.
D)All of the options are correct.

Question 70

Well-implemented Web-based supply chain management has all of the following benefits except

A)it reduces inventory on hand.
B)it speeds up the ordering and delivery process.
C)it reduces the number of suppliers bidding for a company's business.
D)it decreases overall costs.

Question 71

Publishing companies are characterized by

A)fluctuating production to match sales.
B)seasonal sales.
C)low inventories due to computer inventory management.
D)fluctuating production to match sales and seasonal sales.

Question 72

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

A)Fixed assets only
B)Fixed assets and temporary current assets
C)Fixed assets and permanent current assets
D)Temporary and permanent current assets

Question 73

RFID chips have been used to

A)track livestock.
B)track marathon runners' times.
C)track inventory at retailers.
D)All of the options

Question 74

Assuming level production throughout the year, and assuming receivables are collected in two equal installments over the two months subsequent to the sales period, developing the related areas of the cash budget requires which of the following steps?

A)Calculate beginning accounts receivable balance.
B)Calculate COGS.
C)Estimate monthly net cash flow and bank borrowing or repayments.
D)Calculate ending inventory.

Question 75

Normally, permanent current assets should be financed by

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

Question 76

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 receivables will increase.
D)as sales decline inventory and accounts receivables will increase.

Question 77

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 options are advantageous.

Question 78

Frisch Fish Corp expects net income next year to be $750,000. Inventory and accounts receivable will have to be increased by $650,000 to accommodate this sales level. Frisch will pay dividends of $300,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities?

A)No external financing is required.
B)$100,000
C)$200,000
D)$300,000

Question 79

Retail companies like Target and Limited Brands exhibit sales patterns that are most typically influenced by

A)cyclical economic indicators.
B)competitive prices.
C)seasonality.
D)sales promotions.

Question 80

Permanent current assets are not a factor in a manager's decision-making process when all current assets will be

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