Deck 6: Working Capital and the Financing Decision

Question 1

The financial managers generally devote little time to the management of working capital.

Answer 1

False

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 involves the financing and management of the current assets of the firm.

Answer 3

True

Question 4

Working capital management is relatively unimportant for a small business.

Question 5

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

Question 6

When a company produces more than it sells, inventory rises.

Question 7

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

Question 8

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

Question 9

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

Question 10

When a company sells more than it produces, its inventory levels increase.

Question 11

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

Question 12

A firm will generally generate more financing from internal sources if the firm is experiencing sales growth.

Question 13

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

Question 14

A business person's failure to realize the firm is carrying self-liquidating inventory can result in inadequate financing arrangements.

Question 15

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

Question 16

Liquidating current assets is like liquidating fixed assets since they have lives greater than one year.

Question 17

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

Question 18

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

Question 19

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

Question 20

One of the primary benefits of implementing supply chain management is reducing inventory on hand.

Question 21

Yield curves change very little in the short run (i.e. one year or less).

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

Industries like manufacturing, retailing and utilities are considered seasonal and may exhibit uneven or seasonal demand

Question 29

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 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

The market segmentation theory is the only theory that has any significant impact on interest rates.

Question 35

Short-term financing is risky because of the possibility of rising short-term rates and the inability to pay off debt within a short period of time.

Question 36

The term structure of interest rates will influence the ratio of long-term financing to short-term financing used at any given time.

Question 37

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 38

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

Question 39

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

Question 40

Long-term funds may be used by a financial manger to cover short-term needs and protect against the danger of not being able to provide adequate short-term financing during tight money periods.

Question 41

A 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 42

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

Question 43

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

Question 44

Interest rates and inflation are inversely related.

Question 45

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

Question 46

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

Question 47

As a general rule, the interest rate on short-term funds is higher than on long-term funds.

Question 48

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

Question 49

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

Question 50

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

Question 51

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 52

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

Question 53

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

Question 54

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 55

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

Question 56

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

Question 57

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

Question 58

Working capital management primarily involves long-term planning.

Question 59

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 60

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

Question 61

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 62

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

Question 63

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 64

Retail companies like Target and Macy's exhibit sales patterns that are most typically influenced by

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

Question 65

If a firm uses level production with seasonal sales and sales decline further than expected,

A) inventory will increase.
B) inventory will decrease.
C) accounts receivables will increase.
D) inventory and accounts receivables will increase.

Question 66

Long-term financing is usually less expensive than short-term financing because firms have longer periods of time to pay off long-term debt.

Question 67

Samuelson has a beginning inventory balance on January 1 of 12,000 units and desires an ending balance of 20% of the next month's sales. If sales are expected to be 17,000 for January and 20,000 for February, what is the ending balance as of January 31?

A) 4,000 units
B) 5,500 units
C) 3,400 units
D) 8,400 units

Question 68

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

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

Question 69

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

Question 70

RFID chips have been used to

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

Question 71

Companies that sell electricity 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

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. Its dividend payout is 30 percent of profit. 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 73

Samuelson has a beginning inventory balance on January 1 of 12,000 units and desires an ending balance of 20% of the next month's sales. If sales are expected to be 17,000 for January and 20,000 for February, what amount of units does Samuelson have to produce during the month of January?

A) 4,000 units
B) 9,000 units
C) 3,400 units
D) 8,400 units

Question 74

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 limits the number of suppliers bidding for a company's business.
D) it decreases overall costs.

Question 75

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 76

A financial executive devotes the most time to

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

Question 77

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 of inventory.

Question 78

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 are true.

Question 79

Generally, a downward sloping yield curve indicates a forthcoming economic boom.

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 will be financed by long-term sources of capital.