Question 1

Disadvantages of using current liabilities as opposed to long-term debt include:

Accepted Answer

A) greater risk of illiquidity. 
B) uncertainty of interest costs. 
C) higher cash flow exposure. 
D) both A and B. 
A) greater risk of illiquidity. 
B) uncertainty of interest costs. 
C) higher cash flow exposure. 
D) both A and B.

Question 2

Bank Two extends a $3 million line of credit to Capital Corp.The stated rate of interest is 9.5%.Bank Two requires Capital to maintain compensating balances equal to 10% of the amount of the line.Assuming that Capital would not normally carry any deposits at the bank,what is the effective annual rate of interest on the loan?

Accepted Answer

A) 9.5% 
B) 10.6% 
C) 11.6% 
D) 12.3% 
A) 9.5% 
B) 10.6% 
C) 11.6% 
D) 12.3%

Question 3

P.Noel's Inc.'s current ratio is 2.Current liabilities are $500,000.P.Noel's current assets equal ________ and net working capital is ________.

Accepted Answer

A) $500,000 and $1,000,000 
B) $500,000 and $250,000 
C) $1,000,000 and $500,000 
D) $500,000 and $500,000 
A) $500,000 and $1,000,000 
B) $500,000 and $250,000 
C) $1,000,000 and $500,000 
D) $500,000 and $500,000

Question 4

Marketable securities are near-cash assets because they can be converted into cash quickly.

Accepted Answer

A) True 
 B)False

Question 5

Which item would constitute poor collateral for an inventory loan?

Accepted Answer

A) Lumber 
B) Vegetables 
C) Copper 
D) Chemicals 
A) Lumber 
B) Vegetables 
C) Copper 
D) Chemicals

Question 6

The Stant Shoe Company established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $100,000 at an annual rate of 5%.A compensating balance of 10% of the amount borrowed is required.What is the largest amount of money Stant will actually be able to use from the line of credit?

Accepted Answer

A) $90,909 
B) $90,000 
C) $111,111 
D) $100,000 
A) $90,909 
B) $90,000 
C) $111,111 
D) $100,000

Question 7

The primary sources of collateral for short-term secured loans are accounts receivable and inventory.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following types of financing offers the firm the greatest degree of flexibility?

Accepted Answer

A) Bonds 
B) Preferred stock 
C) Short-term lines of credit 
D) Long-term notes payable 
A) Bonds 
B) Preferred stock 
C) Short-term lines of credit 
D) Long-term notes payable

Question 9

The balance sheet for Peterson Manufacturing Company is presented below.   
During 2009,the firm earned $28,000 after taxes based on net sales of $480,000.
a.Calculate Peterson's current ratio and net working capital.
b.Assume that Peterson's uses $20,000 of its cash to reduce current liabilities.Recompute the current ratio and net working capital.
c.What effect,if any,does the change proposed in question b have on Peterson's liquidity.

Accepted Answer

The answer of The balance sheet for Peterson Manufacturing Company...

Question 10

Accrued wages and taxes provide sources of financing that rise and fall spontaneously with the level of the firm's sales.

Accepted Answer

A) True 
 B)False

Question 11

Frosty's Frozen Food Inc.'s inventory balance is $1.22 million.Frosty's Cost of Good's Sold is $30.4 million.It's inventory conversion period:

Accepted Answer

A) 12 days. 
B) 24.92 days. 
C) 14.65 days. 
D) 299.2 days. 
A) 12 days. 
B) 24.92 days. 
C) 14.65 days. 
D) 299.2 days.

Question 12

Issuers of commercial paper usually maintain lines of credit with banks to back up their short-term financing needs.

Accepted Answer

A) True 
 B)False

Question 13

Net working capital provides a very useful summary measure of a firm's short-term financing decisions.

Accepted Answer

A) True 
 B)False

Question 14

Gamma,Inc.plans to sell $1 million in 270-day-maturity commercial paper on which it will pay discounted interest at an annual rate of 12%.In addition,Gamma expects to incur a cost of $1,000 in dealer placement fees and other expenses to issue the paper.What is the effective cost of the paper to Gamma?

Accepted Answer

A) 12.22% 
B) 12.78% 
C) 13.20% 
D) 13.35% 
A) 12.22% 
B) 12.78% 
C) 13.20% 
D) 13.35%

Question 15

All else equal,which of the following is the most likely to occur if actual sales are much less than forecasted sales?

Accepted Answer

A) The company will be in a better position to pay down most of its debt. 
B) The firm's actual investment in inventory will be unchanged from the amount forecasted. 
C) Accounts receivable will rise significantly above the forecast. 
D) The company might face a cash flow crunch. 
A) The company will be in a better position to pay down most of its debt. 
B) The firm's actual investment in inventory will be unchanged from the amount forecasted. 
C) Accounts receivable will rise significantly above the forecast. 
D) The company might face a cash flow crunch.

Question 16

Within the context of working capital management,the risk-return trade-off involves an increased risk of illiquidity versus increased profitability.

Accepted Answer

A) True 
 B)False

Question 17

The December 31,1995 balance sheet for Spitco,Inc.is presented below.   
a.Calculate Spitco's current ratio,and net working capital.
b.Spitco feels that its current ratio is too far below the industry average of 2.40.To improve their liquidity,the treasurer of Spitco has devised a plan to issue $12,000 in long-term debt at 12% and pay off its notes payable.The funds would be invested in marketable securities at 7% interest when not needed to finance the firm's seasonal asset needs.The notes payable would remain outstanding through the year.Assume this plan had been implemented for 2010.Calculate what the firm's current ratio,and net working capital would have been.
c.Did Spitco improve their liquidity? What do you think happened to Spitco's return on investment?

Accepted Answer

The answer of The December 31,1995 balance sheet for Spitco,Inc.is...

Question 18

Currier & Ive's Lithography has a Cost of Goods Sold of $60.8 million.The company's accounts payable balance is $7.5 million.It's accounts payable deferral period is:

Accepted Answer

A) 81 days. 
B) 45 days. 
C) 8.11 days. 
D) 48.7 days. 
A) 81 days. 
B) 45 days. 
C) 8.11 days. 
D) 48.7 days.

Question 19

When a commercial bank extends short-term credit to a firm,it can provide a line of credit that involves:

Accepted Answer

A) a legal obligation on the part of the bank to provide the stated credit. 
B) no legal obligation on the part of the bank to provide the stated credit. 
C) the requirement that the borrower maintain a compensating balance with the bank throughout the loan period. 
D) a fixed rate of interest. 
A) a legal obligation on the part of the bank to provide the stated credit. 
B) no legal obligation on the part of the bank to provide the stated credit. 
C) the requirement that the borrower maintain a compensating balance with the bank throughout the loan period. 
D) a fixed rate of interest.

Question 20

Discuss the advantages of using commercial paper.

Accepted Answer

There are four advantages of using comme

Disadvantages of using current liabilities as opposed to long-term debt include:

P.Noel's Inc.'s current ratio is 2.Current liabilities are $500,000.P.Noel's current assets equal and net working capital is .

Marketable securities are near-cash assets because they can be converted into cash quickly.

Which item would constitute poor collateral for an inventory loan?

The primary sources of collateral for short-term secured loans are accounts receivable and inventory.

Which of the following types of financing offers the firm the greatest degree of flexibility?

Accrued wages and taxes provide sources of financing that rise and fall spontaneously with the level of the firm's sales.

Frosty's Frozen Food Inc.'s inventory balance is $1.22 million.Frosty's Cost of Good's Sold is $30.4 million.It's inventory conversion period:

Issuers of commercial paper usually maintain lines of credit with banks to back up their short-term financing needs.

Net working capital provides a very useful summary measure of a firm's short-term financing decisions.

All else equal,which of the following is the most likely to occur if actual sales are much less than forecasted sales?

Within the context of working capital management,the risk-return trade-off involves an increased risk of illiquidity versus increased profitability.

Currier & Ive's Lithography has a Cost of Goods Sold of $60.8 million.The company's accounts payable balance is $7.5 million.It's accounts payable deferral period is:

When a commercial bank extends short-term credit to a firm,it can provide a line of credit that involves:

Discuss the advantages of using commercial paper.

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

International Business Finance

Corporate Risk Management

Filters

Exam 18: Working Capital Management

Disadvantages of using current liabilities as opposed to long-term debt include:

P.Noel's Inc.'s current ratio is 2.Current liabilities are $500,000.P.Noel's current assets equal ________ and net working capital is ________.

Marketable securities are near-cash assets because they can be converted into cash quickly.

Which item would constitute poor collateral for an inventory loan?

The primary sources of collateral for short-term secured loans are accounts receivable and inventory.

Which of the following types of financing offers the firm the greatest degree of flexibility?

Accrued wages and taxes provide sources of financing that rise and fall spontaneously with the level of the firm's sales.

Frosty's Frozen Food Inc.'s inventory balance is $1.22 million.Frosty's Cost of Good's Sold is $30.4 million.It's inventory conversion period:

Issuers of commercial paper usually maintain lines of credit with banks to back up their short-term financing needs.

Net working capital provides a very useful summary measure of a firm's short-term financing decisions.

All else equal,which of the following is the most likely to occur if actual sales are much less than forecasted sales?

Within the context of working capital management,the risk-return trade-off involves an increased risk of illiquidity versus increased profitability.

Currier & Ive's Lithography has a Cost of Goods Sold of $60.8 million.The company's accounts payable balance is $7.5 million.It's accounts payable deferral period is:

When a commercial bank extends short-term credit to a firm,it can provide a line of credit that involves:

Discuss the advantages of using commercial paper.

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements, taxes, and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Analyzing Project Cash Flows

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

International Business Finance

Corporate Risk Management

Filters

P.Noel's Inc.'s current ratio is 2.Current liabilities are $500,000.P.Noel's current assets equal and net working capital is .