Exam 16: Working Capital Management

If a firm uses only short-term debt to finance the fluctuating level of current assets, the firm is said to be using the approach to asset financing.

Why is working capital so important to a firm's continued profitability?

Sources of debt financing are classified according to their:

Simmons Industries is considering two alternative working capital investment and financing policies.Policy A requires the firm to keep its current assets at 60% of forecasted sales and to finance 75% of its debt requirements with long-term debt (and 25% with short-term debt).Policy B, on the other hand, requires the firm to keep current assets at 40% of forecasted sales and to finance 50% of its debt requirements with long-term debt (and 50% with short-term debt).Forecasted sales for next year are $20 million.Earnings before interest and taxes are projected to be 20% of sales.The firm's corporate income tax rate is 40%.Its fixed assets total $10 million.The firm desires to maintain its existing capital structure that consists of 50% debt (both long-term and short-term) and 50% equity.Interest rates on short- and long-term debt are 8% and 10% respectively. Determine the expected rate of return on equity next year for Simmons Industries under each of the working capital policies.

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as

Historically, the yield curve has generally been , which indicates that long-term interest rates usually have been short-term interest rates.

The is the optimal working capital investment and financing policy.

The firm's inventory conversion period (measured in days) is equal to its average inventory divided by its .

Cryo-vac expects sales to increase 20% next year from the current level of $5,000,000.The firm has current assets of $1,000,000 and fixed assets of $1,500,000.Cryo-vac has current liabilities of $750,000 of which $300,000 are in notes payable.What additional financing will Cryo-vac need to support the expected sales increase if its profit margin is 8% and the firm expects to pay out $200,000 in dividends? An increase in net fixed assets of $300,000 will be required.

Firms can meet its financing needs by using a matching approach for financing.What is the matching approach?

Which of the following factors affect the firm's level of investment in working capital?

What are the classifications for short-term lenders and how do they differ?

What are accrued expenses and how are they handled as unsecured short-term credit?

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as:

Basically the overall working capital policy decision involves a of alternative policies.

Factoring accounts receivable is done:

Sherwood Packing had sales of $3.2 million and a gross profit margin of 35% last year.If Sherwood's inventory averaged $0.4 million last year, what was the length of the inventory conversion period?

All other things being equal, a policy of holding a relatively proportion of the firm's total assets in the form of current assets will tend to result in a risk of the firm encountering financial difficulties.

Crystal Oil has $9 million in accounts payable, $1.8 in salaries and taxes payable, and $10.4 in other current liabilities.If Crystal Oil had a cost of sales of $54 million and selling, general, and administrative expense of $18 million, what is the length of its payables deferral period?

An anticipated need for short-term borrowed funds is best shown in