Exam 15: Working-Capital Management

The hedging principle implies that permanent asset investments not financed by spontaneous sources should be financed with permanent sources,and temporary investments not financed by spontaneous sources should be financed with temporary sources.

The hedging principle is used to address the issue of how much short-term financing a firm should use.

Which of the following loans provide the least amount of security to the lender?

Because only the largest and most creditworthy companies are able to use commercial paper,the interest rate on commercial paper is generally lower than the prime rate.

If a company offers a cash discount for early payment,this will most likely increase its cash conversion cycle since it will have to pay out more cash to its customers.

Trade credit is an example of which of the following sources of financing?

The effective interest rate on short-term loans from Bank A is 12.5 percent per year.Bank B claims that their interest rate is only 11 percent per year.However,Bank B charges interest on a discount basis.Which bank is charging the lowest effective rate of interest on a one-year loan?

Calculate the effective cost of the following trade credit terms if the discount is forgone and payment is made on the net due date. a.2/10 net 50 b.2/15 net 60 c.2/20 net 45

Total debt must always be equal to the sum of temporary,permanent,and spontaneous sources of financing.

Accrued taxes and salaries payable are both sources of spontaneous financing.

According to the hedging principle,which of the following assets should be financed with permanent sources of financing?

The terminal warehouse agreement differs from the field warehouse agreement in that

In general the greater a firm's reliance upon short-term debt or current liabilities

A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 days.

The prime rate of interest is

One way to improve a company's cash conversion cycle is to increase its days sales outstanding.

A revolving credit agreement is a legally binding agreement between a borrower and lender.

With regard to the hedging principle,which of the following assets should be financed with current liabilities?

Consolidated Industries borrows at prime plus 1.5% on its line of credit.The line requires a 15% compensating balance.If prime rate is 9%,what is the nominal APR of the line of credit?

Working capital refers to investment in current assets,while net working capital is the difference between current assets and current liabilities.