Question 1

A firm that follows a "relaxed strategy" towards the total capital requirement will be a:

Accepted Answer

A) Short-term borrower 
B) Short-term lender 
C) Long-term lender 
D) Long-term borrower 
A) Short-term borrower 
B) Short-term lender 
C) Long-term lender 
D) Long-term borrower B

Question 2

Company that pays $5,000 previously owed to one of its suppliers will see a $5,000 decrease in cash.

Accepted Answer

A) True 
 B)False  True

Question 3

A firm has borrowed $1 million and assigned its receivables to the lender.Because of defaults, the receivables prove insufficient to cover the debt.In this case, the:

Accepted Answer

A) Lender bears the risk of default 
B) Firm bears the risk of default 
C) Default risk is shared between lender and firm 
D) Insurance carrier will bear the risk 
A) Lender bears the risk of default 
B) Firm bears the risk of default 
C) Default risk is shared between lender and firm 
D) Insurance carrier will bear the risk B

Question 4

Some companies solve their financing problem by borrowing on the strength of their current assets; others solve it by selling their current assets.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following is not typically a characteristic of commercial paper borrowing?

Accepted Answer

A) Maturity is short-term 
B) Banks are not the lenders 
C) The loans are secured. 
D) Borrowers have high credit quality 
A) Maturity is short-term 
B) Banks are not the lenders 
C) The loans are secured. 
D) Borrowers have high credit quality

Question 6

Which of the following situations should provide managers with the most comfort if accounts receivable balances are increasing each quarter?

Accepted Answer

A) The sales level has decreased 
B) The sales level has increased 
C) The rate of collections has decreased 
D) The rate of collections has increased 
A) The sales level has decreased 
B) The sales level has increased 
C) The rate of collections has decreased 
D) The rate of collections has increased

Question 7

The principle of "matched maturities" in finance refers to:

Accepted Answer

A) Finding sources of funds with the longest maturity, in order to avoid liquidity crises 
B) Funding long-term assets with long-term sources, and vice versa 
C) Using as much short-term financing as possible due to the lower cost of interest 
D) Buying marketable securities when demand is high and borrowing short term when demand is low 
A) Finding sources of funds with the longest maturity, in order to avoid liquidity crises 
B) Funding long-term assets with long-term sources, and vice versa 
C) Using as much short-term financing as possible due to the lower cost of interest 
D) Buying marketable securities when demand is high and borrowing short term when demand is low

Question 8

The cost of issuing commercial paper is generally lower than that of a line of credit.

Accepted Answer

A) True 
 B)False

Question 9

How does long-term financing policy affect short-term financing requirements?

Accepted Answer

The nature of the firm's short-term fina

Question 10

Permanent working capital requirements can be financed using commercial paper.

Accepted Answer

A) True 
 B)False

Question 11

Calculate the simple interest on a bank loan of $200,000 for a month, with a quoted rate of 6% simple interest.At the end of the month how much would you need to repay?

Accepted Answer

Amount of loan x annual intere

Question 12

Firms are often known to pay commitment fees to banks for the privilege of receiving a line of credit.Does it make sense for a firm to pay for something that, at least at the present time, it does not know whether it will use?

Accepted Answer

It may make perfect sense for managers t

Question 13

What will be the change in net working capital if you observe the following changes in current assets and current liabilities? (I.) Current assets increase by $170,000.
(II)) Current liabilities decrease by $60,000.

Accepted Answer

A) Increase by $110,000 
B) Increase by $230,000 
C) Decrease by $110,000 
D) Decrease by $230,000 Change in net working capital = (change in current assets - change in current liabilities)
= 170,000 - (-60,000) 
A) Increase by $110,000 
B) Increase by $230,000 
C) Decrease by $110,000 
D) Decrease by $230,000 Change in net working capital = (change in current assets - change in current liabilities)
= 170,000 - (-60,000)

Question 14

Show the effect of the following transactions on cash, net working capital, and the current ratio.Assume that the current ratio exceeds 1.0 to begin.
The firm borrows $1,000 short-term and pays $500 in accounts payable.
The firm factors $1,000 in receivables at a 5% discount.
The firm issues $1,000 in long-term bonds, using the proceeds to pay $800 in payables and purchase $200 in marketable securities.

Accepted Answer

a.Cash increases $500.
Net working capit

Question 15

Which of the following statements about total capital requirement is least likely to be correct for a profitable firm?

Accepted Answer

A) Requirements remain constant over time 
B) Seasonal variations are often experienced 
C) The trend is often upward-sloping 
D) A portion of working capital is permanent 
A) Requirements remain constant over time 
B) Seasonal variations are often experienced 
C) The trend is often upward-sloping 
D) A portion of working capital is permanent

Question 16

A reduction in inventory levels from year-end to year-end would be considered a source of cash.

Accepted Answer

A) True 
 B)False

Question 17

A firm sells its accounts receivable to a factor at a 2% discount.If the average collection period is 1 month, determine the effective annual rate of interest on the factoring.

Accepted Answer

A) 27.43% 
B) 28.53% 
C) 29.63% 
D) 30.73% 
A) 27.43% 
B) 28.53% 
C) 29.63% 
D) 30.73%

Question 18

Managers are alerted to projected cash shortages by way of the:

Accepted Answer

A) Statement of sources and uses of cash 
B) Pro forma balance sheet 
C) Cash budget 
D) Monthly bank statements 
A) Statement of sources and uses of cash 
B) Pro forma balance sheet 
C) Cash budget 
D) Monthly bank statements

Question 19

Managers who "stretch their payables" are attempting to:

Accepted Answer

A) Repay more recent charges prior to early charges 
B) Improve their current ratio prior to preparation of financial statements 
C) Offer finished goods at a discount for repayment 
D) Obtain a longer period of short-term financing 
A) Repay more recent charges prior to early charges 
B) Improve their current ratio prior to preparation of financial statements 
C) Offer finished goods at a discount for repayment 
D) Obtain a longer period of short-term financing

Question 20

What strategy regarding long- versus short-term financing is not being followed if managers resort to short-term investing during downturns in the business cycle?

Accepted Answer

A) A relaxed strategy 
B) A middle-of-the-road strategy 
C) A restrictive strategy 
D) Both b and c above 
A) A relaxed strategy 
B) A middle-of-the-road strategy 
C) A restrictive strategy 
D) Both b and c above

Exam 20: Working Capital Management

A firm that follows a "relaxed strategy" towards the total capital requirement will be a:

Company that pays $5,000 previously owed to one of its suppliers will see a $5,000 decrease in cash.

A firm has borrowed $1 million and assigned its receivables to the lender.Because of defaults, the receivables prove insufficient to cover the debt.In this case, the:

Some companies solve their financing problem by borrowing on the strength of their current assets; others solve it by selling their current assets.

Which of the following is not typically a characteristic of commercial paper borrowing?

Which of the following situations should provide managers with the most comfort if accounts receivable balances are increasing each quarter?

The principle of "matched maturities" in finance refers to:

The cost of issuing commercial paper is generally lower than that of a line of credit.

How does long-term financing policy affect short-term financing requirements?

Permanent working capital requirements can be financed using commercial paper.

Calculate the simple interest on a bank loan of $200,000 for a month, with a quoted rate of 6% simple interest.At the end of the month how much would you need to repay?

Firms are often known to pay commitment fees to banks for the privilege of receiving a line of credit.Does it make sense for a firm to pay for something that, at least at the present time, it does not know whether it will use?

What will be the change in net working capital if you observe the following changes in current assets and current liabilities? (I.) Current assets increase by $170,000. (II)) Current liabilities decrease by $60,000.

Which of the following statements about total capital requirement is least likely to be correct for a profitable firm?

A reduction in inventory levels from year-end to year-end would be considered a source of cash.

A firm sells its accounts receivable to a factor at a 2% discount.If the average collection period is 1 month, determine the effective annual rate of interest on the factoring.

Managers are alerted to projected cash shortages by way of the:

Managers who "stretch their payables" are attempting to:

What strategy regarding long- versus short-term financing is not being followed if managers resort to short-term investing during downturns in the business cycle?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash-Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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