Question 1

The most liquid of assets and a necessity for working capital transactions is:
A)marketable securities.
B)accounts receivable.
C)current assets.
D)cash.

Accepted Answer

Cash is the most liquid asset as it can be easily used for working capital transactions, such as paying suppliers or employees. While marketable securities, accounts receivable, and current assets may also be liquid, they may not be as readily convertible to cash as cash itself.

Question 2

The theory that excessive cash balances lead managers to make bad decisions is called the:
A)agency cost of free cash flow.
B)excessive cash problem.
C)opportunity cost dilemma.
D)cash balance trap.

Accepted Answer

The theory that excessive cash balances lead managers to make bad decisions is called the agency cost of free cash flow. This is because when a company has excess cash, managers may be more likely to invest in projects that do not provide any real benefits to shareholders but serve their own personal interests. This can lead to an agency problem between managers and shareholders, and therefore the term agency cost is used to describe this phenomenon. Option B, C, and D are not the correct terms used to describe this theory.

Question 3

The traditional argument for maintaining small cash balances says that:
A)cash balances earn below market interest rates or no interest and should be kept to a minimum.
B)the interest that is lost on cash balances is more than offset by the convenience of having cash readily available.
C)cash balances should be held in multiple banks to offset the risk of any one bank failing.
D)the amount of a firm's cash balance is inversely related to the firm's sales volume.

Accepted Answer

Cash balances typically earn below-market interest rates or no interest, which is why the traditional argument suggests keeping them to a minimum to avoid losing potential income from higher-yielding investments.

Question 4

Higher opportunity costs call for:
A)higher cash balances.
B)more implicit costs.
C)less working capital.
D)lower cash balances.

Accepted Answer

Higher opportunity costs mean that the cost of not investing in the best alternative is higher. Therefore, it is not cost-effective to hold high cash balances since those funds could be invested elsewhere to generate higher returns. Lower cash balances allow for more funds to be invested in profitable opportunities.

Question 5

Higher currency risk calls for:
A)avoiding countries with volatile currencies.
B)higher implicit cash balance costs.
C)higher cash balances.
D)lower cash balances.

Accepted Answer

The answer of Higher currency risk calls for:
A)avoiding countries with...

Question 6

In the context of working capital management in MNCs,credit policy involves consideration of:
A)optimizing cash balances across countries where the MNC operates.
B)pricing and credit terms.
C)currency risk and local market conditions.
D)credit rating of customers and competition.

Accepted Answer

The answer of In the context of working capital management...

Question 7

What are opportunity costs in the context of maintaining cash balances?
A)Opportunity costs in this context are equal to the amount that a firm maintains in cash balances.
B)Opportunity costs in this context reflect the costs to a firm of monitoring its cash balances and ensuring that its cash balances are sufficient.
C)Opportunity costs in this context are the value of the lost opportunities that could not be pursued because a firm's money was being used to maintain cash balances.
D)Opportunity costs in this context are equal to the firm's working capital.

Accepted Answer

Opportunity costs in the context of maintaining cash balances refer to the value of the lost opportunities that could not be pursued because the firm's money was being used to maintain cash balances. This could include investments or projects that could have generated higher returns if the cash was invested elsewhere. Maintaining cash balances has an opportunity cost because it ties up funds that could have been used for other investments, and as such, it is important for firms to find a balance between having sufficient cash reserves while also investing surplus funds for growth and profitability. Options A, B, and D are not accurate representations of opportunity costs in this context.

Question 8

Why have opportunity costs of maintaining cash balances decreased in importance in recent years?
A)Lower interest rates have reduced the opportunity costs associated with maintaining cash balances.
B)Most banks allow firms to move cash in and out of interest-bearing accounts easily and cheaply.
C)More competition among banks has lowered the opportunity costs that arise from maintaining cash balances.
D)Firms are earning higher profits,so opportunity costs have become smaller relative to those profits.

Accepted Answer

The answer of Why have opportunity costs of maintaining cash...

Question 9

In making short-term investments,firms consider:
A)creditworthiness of the company and the interest rate.
B)maturity,liquidity,risk,and flexibility.
C)broker's recommendation and competing opportunities.
D)opportunity costs and flexibility.

Accepted Answer

When making short-term investments, firms consider various factors to ensure that they can access their funds easily when needed. The factors include maturity, which refers to the time frame within which the investment earns interest or benefits; liquidity, which relates to the ease with which the investment can be converted to cash; risk, which involves the possibility of losing part or all of the investment; and flexibility, which denotes the ability to shift funds from one investment to another to maximize returns. Therefore, firms should consider these four factors when making short-term investments.

Question 10

What sort of bad decisions do excessive cash balances lead managers to make?
A)Managers may embezzle excess cash balances.
B)Managers may lose sight of cost containment and spend cash on unrelated businesses.
C)Managers may invest excessive cash balances so that the liquidity of those funds is lost.
D)Managers may contend that the excessive cash balances are actually profits that they created.

Accepted Answer

When a company has excessive cash on hand, managers may be tempted to spend that cash on unrelated businesses or ventures that do not align with the company's core strategies or goals. This can lead to poor investments and a waste of company resources. Additionally, managers may lose sight of cost containment and overspend on expenses that do not contribute to the company's overall profitability.

Question 11

Explicit transaction costs,such as __________________________ have been reduced because of increased efficiencies in banking.
A)interest and spreads
B)account charges and spreads
C)interest and commissions on transfers of funds
D)account charges and commissions on transfers of funds

Accepted Answer

Explicit transaction costs like account charges and commissions on transfers of funds have been reduced due to increased efficiencies in banking.

Question 12

What are implicit transaction costs that MNCs incur in dealing with their cash balances?
A)Implicit transaction costs are costs of dealing with a firm's cash balances that are not disclosed to the firm until after the transaction is completed.
B)Implicit transaction costs incurred in dealing with an MNC's cash balance involve costs associated with making internal decisions about the firm's cash balance.
C)Implicit transaction costs are costs of arranging the firm's cash balances that the firm will not have to pay until a later time.
D)Implicit transaction costs are costs that are charged to a firm in connection with managing its cash balances that will be deducted from the firm's cash balance rather than being billed to the firm.

Accepted Answer

Implicit transaction costs are costs that are incurred in managing a firm's cash balances but are not easily identified or measured. These costs are not explicit, meaning that they are not readily apparent and are often not reflected in financial accounting information. Examples of implicit transaction costs include costs associated with making internal decisions about the firm's cash balance, such as the opportunity cost of holding too much or too little cash, and costs associated with managing the firm's relationships with banks and other financial institutions.

Question 13

The equation for calculating working capital is:
A)quick assets - current liabilities.
B)current assets - current liabilities.
C)assets - liabilities.
D)current assets - liabilities.

Accepted Answer

Working capital is calculated by subtracting current liabilities from current assets. This is because current assets are considered the most liquid and easily convertible to cash, while current liabilities are the company's obligations that must be paid within a year. Subtracting the two gives the company's working capital, which is the amount available for day-to-day operations.

Question 14

The balance sheet accounts that day-to-day operations involve include:
A)cash,accounts receivable,liabilities and equity.
B)cash,accounts receivable,accounts payable and short-term debt.
C)assets,short-term debt and long-term debt.
D)assets,liabilities and equity.

Accepted Answer

Day-to-day operations involve transactions that affect both the assets and liabilities of a company. Cash, accounts receivable, and accounts payable are all involved in daily transactions related to sales and purchases. Short-term debt is also included as it may be used to finance day-to-day operations. Long-term debt is not typically used for daily operations.

Question 15

Cash management for MNCs includes considerations of:
A)currency,interest rate,and transaction risk.
B)interest rates,inflation rates,and default rates.
C)risk,agency cost,and real options.
D)asset and liability levels.

Accepted Answer

The answer of Cash management for MNCs includes considerations of:
A)currency,interest...

Question 16

The money that a firm uses on a day-to-day basis to carry out transactions with its customers and suppliers is referred to as:
A)short-term financing.
B)accounts receivable and payable.
C)cash and equivalents.
D)working capital.

Accepted Answer

Working capital refers to the funds a business needs to operate on a day-to-day basis, including cash, accounts receivable and payable, and inventory. It is the difference between a company's current assets (cash and equivalents) and current liabilities (accounts payable and short-term debt). Therefore, working capital is the most suitable answer.

Question 17

Short-term government obligations,generally known as T-bills,offer investors:
A)some liquidity and medium risk.
B)high liquidity and low risk.
C)flexible interest rates and low risk.
D)low liquidity and great flexibility.

Accepted Answer

T-bills are known for high liquidity and low risk. They are short-term government obligations that mature in one year or less, making them a stable and secure investment option. T-bills are also backed by the U.S. government, reducing the risk of default.

Question 18

In traditional working capital analysis,holding a large cash balance is:
A)a positive strategy because it reduces the transaction costs involved in liquidating assets to raise cash.
B)a positive strategy because it relieves the firm from having to obtain short-term financing.
C)a negative strategy because it means that the cash is not earning a return.
D)a negative strategy because it imposes additional currency risk on the firm.

Accepted Answer

The answer of In traditional working capital analysis,holding a large...

Question 19

Why might an MNC's working capital situation be more complex than a domestic firm's working capital situation?
A)An MNC's current assets and current liabilities are consolidated across its subsidiaries,which means that there are a variety of risks involved in those assets and liabilities.
B)An MNC is usually much larger than domestic firms,so MNCs have more assets and more liabilities and more need for working capital.
C)An MNC has more complex financing arrangements than domestic firms.
D)MNCs are subject to more regulation than domestic firms.

Accepted Answer

An MNC's working capital situation is more complex because it involves consolidating current assets and liabilities across various subsidiaries in different countries, each with its own set of risks, such as currency fluctuations and differing economic conditions.

Question 20

The default risk involved in money market instruments is:
A)usually higher than most MNCs are willing to accept.
B)usually lower than any other short-term investment.
C)essentially the same for all issuers.
D)determined by the maturity date of the instrument.

Accepted Answer

The answer of The default risk involved in money market...

Quiz 11: Optimizing and Financing Working Capital

The most liquid of assets and a necessity for working capital transactions is:

The theory that excessive cash balances lead managers to make bad decisions is called the:

The traditional argument for maintaining small cash balances says that:

Higher opportunity costs call for:

Higher currency risk calls for:

In the context of working capital management in MNCs,credit policy involves consideration of:

What are opportunity costs in the context of maintaining cash balances?

Why have opportunity costs of maintaining cash balances decreased in importance in recent years?

In making short-term investments,firms consider:

What sort of bad decisions do excessive cash balances lead managers to make?

Explicit transaction costs,such as __________________________ have been reduced because of increased efficiencies in banking.

What are implicit transaction costs that MNCs incur in dealing with their cash balances?

The equation for calculating working capital is:

The balance sheet accounts that day-to-day operations involve include:

Cash management for MNCs includes considerations of:

The money that a firm uses on a day-to-day basis to carry out transactions with its customers and suppliers is referred to as:

Short-term government obligations,generally known as T-bills,offer investors:

In traditional working capital analysis,holding a large cash balance is:

Why might an MNC's working capital situation be more complex than a domestic firm's working capital situation?

The default risk involved in money market instruments is: