Deck 6: Working Capital and the Financing Decision

Question 1

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

Answer 1

True

Question 2

Working capital management is relatively unimportant for the small business.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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 17

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

Question 18

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

Question 19

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

Question 20

Many companies such as McDonalds have embraced supply chain management using web-based procedures.

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

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

Question 23

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 24

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 25

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 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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 31

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

Question 32

Interest rates and inflation are inversely related.

Question 33

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

Question 34

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

Question 35

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

Question 36

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 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 more dependent upon inflation than on current demand for money.

Question 39

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

Question 40

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

Question 41

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

Question 42

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

Question 43

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 44

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

Question 45

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

Question 46

Generally a downward sloping yield curve indicates an eminent economic boom.

Question 47

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 48

Pressure to increase 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 these.

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

Working capital management primarily involved long-term planning.

Question 51

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

Question 52

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

Question 53

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 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

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 62

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 63

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 64

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 these are advantageous.

Question 65

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 these are correct.

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 these.

Question 67

Publishing companies are characterized by

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

Question 68

RFID chips have been used to

A) track livestock.
B) track marathon runner's time.
C) track inventory at retailers.
D) all of these.

Question 69

Normally, permanent current assets should be financed by

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

Question 70

Retail companies like Target and The Limited exhibit sales patterns that are mostly influenced by

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

Question 71

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.

Question 72

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

Question 73

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 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 cash budget requires 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

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) a and c are correct.

Question 76

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 Basic access to the capital markets.
C) short-term financing is usually more predictable than long-term financing.
D) a and b above.

Question 77

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 78

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 79

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

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

Question 80

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 be financed by long-term sources of capital.