The term permanent current assets implies

FIN 534 Quiz 9 week 10

Rating A

1. Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

Answer

consist mainly of long-term securities because they pay higher rates.

consist mainly of short-term securities because they pay higher rates.

consist mainly of U.S. Treasury securities to minimize interest rate risk.

consist mainly of short-term securities to minimize interest rate risk.

be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.

2 points

Question 2

A lockbox plan is most beneficial to firms that

have suppliers who operate in many different parts of the country.

have widely dispersed manufacturing facilities.

have a large marketable securities portfolio and cash to protect.

receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.

have customers who operate in many different parts of the country.

2 points

Question 3

Which of the following actions would be likely to shorten the cash conversion cycle?

Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.

Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50.

Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30.

Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days.

Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60.

2 points

Question 4

Which of the following statements is CORRECT?

Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department.

If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm's DSO will probably increase.

If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts.

If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July.

If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.

2 points

Question 5

Which of the following statements is NOT CORRECT?

A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.

Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.

The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.

If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60.

Managing working capital is important because it influences financing decisions and the firm's profitability.

2 points

Question 6

Which of the following statements is CORRECT?

Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased.

Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing.

If a company follows a policy of "matching maturities," this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt.

Net working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates that net working capital has decreased.

If a company follows a policy of "matching maturities," this means that it matches its use of short-term debt with its use of long-term debt.

2 points

Question 7

Other things held constant, which of the following will cause an increase in net working capital?

Cash is used to buy marketable securities.

A cash dividend is declared and paid.

Merchandise is sold at a profit, but the sale is on credit.

Long-term bonds are retired with the proceeds of a preferred stock issue.

Missing inventory is written off against retained earnings.

2 points

Question 8

Which of the following statements is CORRECT?

Accruals are an expensive but commonly used way to finance working capital.

A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.

If a company receives trade credit under terms of 2/10 net 30, this implies that the company has 10 days of free trade credit.

One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget.

If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high.

2 points

Question 9

Which of the following statements is CORRECT?

Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk.

Conservative firms generally use no short-term debt and thus have zero current liabilities.

A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt.

If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.

If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.

2 points

Question 10

Which of the following statements is NOT CORRECT?

Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.

Accruals are "free" in the sense that no explicit interest is paid on these funds.

A conservative approach to working capital management will result in most if not all permanent current operating assets being financed with long-term capital.

The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt.

Bank loans generally carry a higher interest rate than commercial paper.

2 points

Question 11

Firms generally choose to finance temporary current operating assets with short-term debt because

Answer

matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less expensive than long-term capital.

short-term interest rates have traditionally been more stable than long-term interest rates.

a firm that borrows heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term.

the yield curve is normally downward sloping.

short-term debt has a higher cost than equity capital.

2 points

Question 12

Which of the following statements is CORRECT?

Depreciation is included in the estimate of cash flows (Cash flow = Net income + Depreciation), hence depreciation is set forth on a separate line in the cash budget.

If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading. The problem can be corrected by using a daily cash budget.

Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales.

If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60.

If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August.

2 points

Question 13

A lockbox plan is

used to protect cash, i.e., to keep it from being stolen.

used to identify inventory safety stocks.

used to slow down the collection of checks our firm writes.

used to speed up the collection of checks received.

used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.

2 points

Question 14

Which of the following statements is most consistent with efficient inventory management? The firm has a

below average inventory turnover ratio.

low incidence of production schedule disruptions.

below average total assets turnover ratio.

relatively high current ratio.

relatively low DSO.

2 points

Question 15

Other things held constant, which of the following would tend to reduce the cash conversion cycle?

Carry a constant amount of receivables as sales decline.

Place larger orders for raw materials to take advantage of price breaks.

Take all discounts that are offered.

Continue to take all discounts that are offered and pay on the net date.

Offer longer payment terms to customers.