Question 1

Cash Conversion Cycle=operating Cycle-Accounts Payable Deferral Period

Accepted Answer

A) True 
 B)False

Question 2

Current assets of NorthPole.com at the end of each quarter were: 1st quarter $1.3 million, 2nd quarter $1.7 million, 3rd quarter $1.5 million and 4th quarter $2.2 million. The best estimate for North Pole's permanent current assets is

Accepted Answer

A)  $2.2 million. 
B)  $1.675 million. 
C)  $1.3 million. 
D)  $0.9 million. 
A)  $2.2 million. 
B)  $1.675 million. 
C)  $1.3 million. 
D)  $0.9 million.

Question 3

Solstice Corporation has current assets of $10 million and current liabilities of $8 million. Solstice's current ratio is ________ and its net working capital is ________.

Accepted Answer

A)  1.25, $10 million 
B)  1.25, $2 million 
C)  2, $1.25 million 
D)  .8, ($2 million) 
A)  1.25, $10 million 
B)  1.25, $2 million 
C)  2, $1.25 million 
D)  .8, ($2 million)

Question 4

Spontaneous sources of financing are sources over which the firm has no control.

Accepted Answer

A) True 
 B)False

Question 5

A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.

Accepted Answer

A) True 
 B)False

Question 6

Increasing the use of short-term debt versus long-term debt financing will increase profit.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following statements regarding a line of credit is true?

Accepted Answer

A)  The purpose for which the money is being borrowed must be stated by the borrower. 
B)  A line of credit agreement usually fixes the interest rate that will be applied to any extensions of credit. 
C)  A line of credit agreement is a legal commitment on the part of the bank to provide the stated credit. 
D)  Such agreements usually cover the bo fiscal year. 
A)  The purpose for which the money is being borrowed must be stated by the borrower. 
B)  A line of credit agreement usually fixes the interest rate that will be applied to any extensions of credit. 
C)  A line of credit agreement is a legal commitment on the part of the bank to provide the stated credit. 
D)  Such agreements usually cover the bo fiscal year.

Question 8

A firm can reduce net working capital by substituting long-term financing, such as bonds, with short-term financing, such as a one-year notes payable.

Accepted Answer

A) True 
 B)False

Question 9

Potential risks of using short-term bank loans for permanent assets include

Accepted Answer

A)  higher costs. 
B)  a loss of flexibility. 
C)  inability to renew the loans on favorable terms. 
D)  falling interest rates. 
A)  higher costs. 
B)  a loss of flexibility. 
C)  inability to renew the loans on favorable terms. 
D)  falling interest rates.

Question 10

Abbot Corporation has an average collection period of 49 days, an inventory conversion period of 83 days, and a payables deferrable period of 36 days. What is Abbott's operating cycle?

Accepted Answer

A)  96 days 
B)  70 days 
C)  85 days 
D)  132 days 
A)  96 days 
B)  70 days 
C)  85 days 
D)  132 days

Question 11

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 12

Which of the following could offset the higher risk exposure a company would face if its current ratio and net working capital were relatively low?

Accepted Answer

A)  Its current assets would need to be highly liquid. 
B)  Its accounts receivable collection policy could increase the average collection period. 
C)  It could offer no discounts for early payment by its customers. 
D)  It could buy back some of its shares in the open market in order to reduce its equity. 
A)  Its current assets would need to be highly liquid. 
B)  Its accounts receivable collection policy could increase the average collection period. 
C)  It could offer no discounts for early payment by its customers. 
D)  It could buy back some of its shares in the open market in order to reduce its equity.

Question 13

T-bills and Treasury bonds are guaranteed by the full faith and credit of the United States and are therefore default-free.

Accepted Answer

A) True 
 B)False

Question 14

Lines of credit often require that the borrower maintain a minimum balance in the bank throughout the loan period.

Accepted Answer

A) True 
 B)False

Question 15

If management expects interest rates to rise and credit to tighten in the near future, it should consider

Accepted Answer

A)  increasing its use of commercial paper and loans secured by current assets. 
B)  decreasing the use of spontaneous financing. 
C)  decreasing the level of permanent financing. 
D)  increasing the level of permanent financing. 
A)  increasing its use of commercial paper and loans secured by current assets. 
B)  decreasing the use of spontaneous financing. 
C)  decreasing the level of permanent financing. 
D)  increasing the level of permanent financing.

Question 16

If ABC must have loan proceeds of $540,000, then it must borrow

Accepted Answer

A)  $540,000 
B)  $600,000 
C)  $486,000 
D)  $660,000. 
A)  $540,000 
B)  $600,000 
C)  $486,000 
D)  $660,000.

Question 17

ViteS Equipment Company has increased its inventory turnover ratio from 12 to 18. By how many days has it reduced the operating cycle?

Accepted Answer

A)  20 days 
B)  6 days 
C)  10 days 
D)  1.5 days 
A)  20 days 
B)  6 days 
C)  10 days 
D)  1.5 days

Question 18

A quite risky working capital management policy would have a high ratio of

Accepted Answer

A)  short-term debt to bonds and equity. 
B)  short-term debt to total debt. 
C)  bonds to property, plant, and equipment. 
D)  short-term debt to equity. 
A)  short-term debt to bonds and equity. 
B)  short-term debt to total debt. 
C)  bonds to property, plant, and equipment. 
D)  short-term debt to equity.

Question 19

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 20

Trade credit is a source of spontaneous financing.

Accepted Answer

A) True 
 B)False

Cash Conversion Cycle=operating Cycle-Accounts Payable Deferral Period

Current assets of NorthPole.com at the end of each quarter were: 1st quarter $1.3 million, 2nd quarter $1.7 million, 3rd quarter $1.5 million and 4th quarter $2.2 million. The best estimate for North Pole's permanent current assets is

Solstice Corporation has current assets of $10 million and current liabilities of $8 million. Solstice's current ratio is and its net working capital is .

Spontaneous sources of financing are sources over which the firm has no control.

A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.

Increasing the use of short-term debt versus long-term debt financing will increase profit.

Which of the following statements regarding a line of credit is true?

A firm can reduce net working capital by substituting long-term financing, such as bonds, with short-term financing, such as a one-year notes payable.

Potential risks of using short-term bank loans for permanent assets include

Abbot Corporation has an average collection period of 49 days, an inventory conversion period of 83 days, and a payables deferrable period of 36 days. What is Abbott's operating cycle?

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

Which of the following could offset the higher risk exposure a company would face if its current ratio and net working capital were relatively low?

T-bills and Treasury bonds are guaranteed by the full faith and credit of the United States and are therefore default-free.

Lines of credit often require that the borrower maintain a minimum balance in the bank throughout the loan period.

If management expects interest rates to rise and credit to tighten in the near future, it should consider

If ABC must have loan proceeds of $540,000, then it must borrow

ViteS Equipment Company has increased its inventory turnover ratio from 12 to 18. By how many days has it reduced the operating cycle?

A quite risky working capital management policy would have a high ratio of

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 .

Trade credit is a source of spontaneous financing.

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

Cash Conversion Cycle=operating Cycle-Accounts Payable Deferral Period

Current assets of NorthPole.com at the end of each quarter were: 1st quarter $1.3 million, 2nd quarter $1.7 million, 3rd quarter $1.5 million and 4th quarter $2.2 million. The best estimate for North Pole's permanent current assets is

Solstice Corporation has current assets of $10 million and current liabilities of $8 million. Solstice's current ratio is ________ and its net working capital is ________.

Spontaneous sources of financing are sources over which the firm has no control.

A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.

Increasing the use of short-term debt versus long-term debt financing will increase profit.

Which of the following statements regarding a line of credit is true?

A firm can reduce net working capital by substituting long-term financing, such as bonds, with short-term financing, such as a one-year notes payable.

Potential risks of using short-term bank loans for permanent assets include

Abbot Corporation has an average collection period of 49 days, an inventory conversion period of 83 days, and a payables deferrable period of 36 days. What is Abbott's operating cycle?

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

Which of the following could offset the higher risk exposure a company would face if its current ratio and net working capital were relatively low?

T-bills and Treasury bonds are guaranteed by the full faith and credit of the United States and are therefore default-free.

Lines of credit often require that the borrower maintain a minimum balance in the bank throughout the loan period.

If management expects interest rates to rise and credit to tighten in the near future, it should consider

If ABC must have loan proceeds of $540,000, then it must borrow

ViteS Equipment Company has increased its inventory turnover ratio from 12 to 18. By how many days has it reduced the operating cycle?

A quite risky working capital management policy would have a high ratio of

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 ________.

Trade credit is a source of spontaneous financing.

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

Solstice Corporation has current assets of $10 million and current liabilities of $8 million. Solstice's current ratio is and its net working capital is .

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 .