Question 1

The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs.

Accepted Answer

The primary motivation behind outsourcing is often to reduce costs, focus on core competencies, and improve efficiency by leveraging the specialized skills or economies of scale of external suppliers, rather than just to provide an alternative source of supply.

Question 2

The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed.

Accepted Answer

The threat of expropriation, which is the government taking over a company's assets without compensation, can lead to the multinational firm minimizing inventory holdings and only bringing in goods as needed in order to reduce the value of their assets that could potentially be expropriated.

Question 3

The maturity matching or "self-liquidating" approach involves the financing of permanent current assets with combinations of long-term capital and short-term capital depending on the level of interest rates.When short-term rates are high,short-term assets will be financed with long-term debt to reduce cost and risk.

Accepted Answer

The maturity matching or "self-liquidating" approach involves financing assets with a similar maturity. Permanent current assets would typically be financed with long-term capital, not a combination depending on interest rates. The strategy described mixes elements of different financing strategies rather than strictly adhering to the maturity matching principle.

Question 4

A revolving credit agreement is a formal line of credit usually used by large firms.The firm will pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

Accepted Answer

A revolving credit agreement is a type of line of credit where a firm can borrow and repay funds repeatedly, up to a pre-approved credit limit. The firm typically pays a commitment fee on the unused portion of the credit line, which compensates the bank for holding the funds in reserve.

Question 5

Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory.

Accepted Answer

Exchange rate fluctuations can impact the valuation of inventory held by a multinational firm in a foreign currency. This can lead to potential inventory write-downs or write-offs, affecting the company's financial statements and inventory policies. As a result, multinational firms need to carefully manage their inventory levels and pricing policies to mitigate currency risk.

Question 6

If the forecasted sales or usage rate is not accurate,the EOQ model may not lead to efficient inventory management.

Accepted Answer

The EOQ model assumes accurate forecasts of demand, and if the forecasts are incorrect, the model may generate orders that do not meet the actual demand, leading to inefficient inventory management.

Question 7

Due to advanced technology and the similarity of general procedures,working capital management for multinational firms is no more complex than it is for domestic firms.

Accepted Answer

Working capital management for multinational firms is more complex than it is for domestic firms due to additional factors such as foreign exchange risk, varying tax policies, and cultural differences. Advanced technology may help streamline processes, but it does not eliminate the additional complexities.

Question 8

If a firm fails to take trade credit discounts it may cost the firm money,but generally such a policy has a negligible effect on the firm's income statement and no effect on the firm's balance sheet.

Accepted Answer

If a firm fails to take trade credit discounts, it will increase the firm's cost of goods sold and therefore decrease the firm's net income on the income statement. However, there is no impact on the balance sheet.

Question 9

Long-term loan agreements always contain provisions,or covenants,which constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

Accepted Answer

Short-term credit agreements are generally less restrictive than long-term loan agreements because they are for shorter periods and involve smaller amounts of money, thus posing less risk to the lender.

Question 10

A firm adopting an aggressive working capital approach is more sensitive to unexpected changes in the term structure of interest rates than is a firm with a conservative policy.

Accepted Answer

A firm adopting an aggressive working capital approach typically relies more heavily on short-term financing, which can be impacted more by changes in interest rates. Therefore, unexpected changes in interest rates can have a larger impact on the firm's financial position and profitability. Meanwhile, a firm with a conservative working capital policy may have more stable sources of funding and be less affected by changes in interest rates.

Question 11

A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position.

Accepted Answer

The answer of A lockbox plan is one method of...

Question 12

Multinational firms can reduce the risk of exchange rate changes between the time a sale is made and the time a receivable is collected without cost by hedging.

Accepted Answer

Hedging against exchange rate risk often involves financial instruments such as futures, options, or forwards, which come with a cost, including premiums or transaction fees.

Question 13

Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers.

Accepted Answer

Credit policy for the multinational firm is generally riskier due to the additional consideration of exchange rates and uncertainty regarding the credit worthiness of foreign customers, which increases the risk associated with credit decisions.

Question 14

An aggressive method of financing an ongoing construction program would be for a company to sell bonds and equity before it actually needs funds,and to invest the proceeds in marketable securities until they are actually needed.

Accepted Answer

An aggressive financing strategy typically involves minimizing idle funds and borrowing or raising capital just in time to meet needs, rather than raising funds in advance and holding them in marketable securities.

Question 15

The risk to the firm of borrowing using short-term credit is usually greater than with long-term debt.Added risk stems from greater variability of interest costs on short-term debt.Even if its long-term prospects are good,the firm's lender may not renew a short-term loan if the firm is even only temporarily unable to repay it.

Accepted Answer

Short-term debt carries higher risk due to variability of interest costs and potential non-renewal in case of temporary inability to repay.

Question 16

A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process.The main objective of such a system is to reduce carrying costs.

Accepted Answer

This statement is true. Just-in-time (JIT) inventory control is a system in which materials or parts are delivered to the production line exactly when they are needed, rather than being stored in a warehouse or inventory. The goal of JIT is to minimize inventory costs by reducing the amount of inventory that a company needs to purchase, store, and manage. This is achieved by coordinating production and delivery schedules with suppliers, so that materials arrive just in time for production.

Question 17

Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability.

Accepted Answer

Synchronization of cash flows ensures that inflows and outflows of cash are aligned, thereby reducing the need for expensive borrowing and improving the efficiency of cash usage, leading to increased profitability.

Question 18

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed,would want to separate the construction loan from other current liabilities associated with working capital management.

Accepted Answer

It is true that a firm would want to separate the construction loan from other current liabilities associated with working capital management, as the construction loan is a long-term financing source for a specific project, while current liabilities are usually short-term obligations. Separating them would provide a clearer picture of the company's financial position and ensure that the construction loan is used only for the intended purpose. Additionally, converting the short-term loans to bonds after the completion of the plant would help the company manage its debt and interest payments more efficiently.

Question 19

Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e.after the fact)sense even though it is possible to maturity match on an expected basis.

Accepted Answer

There is always some degree of uncertainty about the exact lives of assets, which makes it impossible to achieve precise maturity matching in an ex post sense. However, it is possible to maturity match based on expected lives of assets.

Question 20

The working capital cash flow cycle encompasses order and receipt of raw materials,conversion of raw material into inventory,and finally,conversion of inventory into sales and accounts receivable.

Accepted Answer

The answer of The working capital cash flow cycle encompasses...

Quiz 15: Working Capital Management