Question 1

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 2

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...

Question 3

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 4

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 helps in efficiently managing cash inflows and outflows, reducing the need for borrowing and minimizing the cost of capital. This can ultimately increase a firm's profitability.

Question 5

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

This statement accurately describes a revolving credit agreement.

Question 6

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 is true. Just-in-time inventory control aims to minimize the amount of inventory a company holds, which in turn reduces the carrying costs associated with holding that inventory. By coordinating production with suppliers, companies can ensure that they receive raw materials and components exactly when they need them, minimizing inventory levels and associated costs.

Question 7

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 multinational firms involves additional risk because of the fluctuating exchange rates and uncertainty about the creditworthiness of foreign customers. This is due to differences in legal systems, economic conditions, and political stability across borders.

Question 8

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. Multinational firms need to consider currency exchange rates, local market conditions, and cultural differences, among other factors, when managing their working capital. This makes the process more complex and challenging than it is for domestic firms.

Question 9

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

While it is possible to maturity match based on expected asset lives, there is always uncertainty about the actual duration of assets, which means that a precise ex post maturity matching is not possible.

Question 10

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, or the potential for a foreign government to seize a multinational firm's assets or operations, creates uncertainty and risk for the firm. In response, the firm may try to minimize its exposure by keeping inventory levels low and only importing goods on an as-needed basis. This allows the firm to limit its potential losses in case of expropriation, since it will have fewer assets for the government to seize.

Question 11

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 more risk due to the variability of interest costs and the potential for lenders to not renew loans if the firm has temporary repayment difficulties.

Question 12

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 13

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 common practice for firms to separate long-term financing, such as construction loans, from short-term financing used for working capital management. This helps to manage the different types of debt and ensure that the construction loan is not mistakenly repaid with funds intended for working capital.

Question 14

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

An aggressive working capital approach typically involves taking on more short-term debt to finance current operations, which means the firm must continually access the capital markets. Any unexpected changes in interest rates can have a significant impact on the cost of this debt and the firm's ability to refinance it. In contrast, a conservative working capital approach typically involves more reliance on internal funding sources, which makes the firm less vulnerable to interest rate shocks.

Question 15

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

Accepted Answer

The Economic Order Quantity (EOQ) model assumes that the forecasted demand or usage rate is accurate. If the forecast is incorrect, either too high or too low, it may lead to overstocking or stockouts, respectively. As a result, the EOQ model may not lead to efficient inventory management.

Question 16

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 17

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

The answer of Long-term loan agreements always contain provisions, or...

Question 18

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

Accepted Answer

When exchange rates fluctuate, the value of inventory held by a multinational firm in different currencies may fluctuate. This can impact the firm's financial statements, and may also impact the firm's decision-making with regards to inventory management. For example, if a firm expects a currency to depreciate in value, it may choose to reduce the amount of inventory it holds in that currency, in order to avoid potential losses.

Question 19

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

The answer of An aggressive method of financing an ongoing...

Question 20

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

Failing to take trade credit discounts will increase the cost of goods sold and decrease net income, thus affecting the firm's income statement. However, it does not affect the firm's balance sheet.

Quiz 15: Working Capital Management