Question 1

What is the purpose of "forecasting" finances?

Accepted Answer

Financial forecasting allows a firm to e

Question 2

Under a conservative approach to working capital management, a firm tends to hold a relatively ____ proportion of its total assets in the form of current assets.

Accepted Answer

A)  small 
B)  constant 
C)  stable 
D)  large 
A)  small 
B)  constant 
C)  stable 
D)  large

Question 3

Simmons Industries is considering two alternative working capital investment and financing policies. Policy A requires the firm to keep its current assets at 60% of forecasted sales and to finance 75% of its debt requirements with long-term debt (and 25% with short-term debt). Policy B, on the other hand, requires the firm to keep current assets at 40% of forecasted sales and to finance 50% of its debt requirements with long-term debt (and 50% with short-term debt). Forecasted sales for next year are $20 million. Earnings before interest and taxes are projected to be 20% of sales. The firm's corporate income tax rate is 40%. Its fixed assets total $10 million. The firm desires to maintain its existing capital structure that consists of 50% debt (both long-term and short-term) and 50% equity. Interest rates on short- and long-term debt are 8% and 10%, respectively. ​
Determine the expected rate of return on equity next year for Simmons Industries under each of the working capital policies.

Accepted Answer

A)  26.9%; 30.4% 
B)  21%; 26.7% 
C)  8.1%; 9.1% 
D)  16.1%; 21.3% 
A)  26.9%; 30.4% 
B)  21%; 26.7% 
C)  8.1%; 9.1% 
D)  16.1%; 21.3%

Question 4

All other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ risk of the firm encountering financial difficulties.

Accepted Answer

A)  large; higher 
B)  small; higher 
C)  constant; higher 
D)  constant; lower 
A)  large; higher 
B)  small; higher 
C)  constant; higher 
D)  constant; lower

Question 5

What is the length of the cash conversion cycle for a firm with annual sales (all cash) of $280,000, an inventory conversion period of 35 days, and a payables deferral period of 25 days?

Accepted Answer

A)  0 days 
B)  25 days 
C)  10 days 
D)  None of these are correct 
A)  0 days 
B)  25 days 
C)  10 days 
D)  None of these are correct

Question 6

Which of the following is equal to the length of the operating cycle? 
I. Inventory conversion period.
II. Receivables conversion period.

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Statements I and II together. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Statements I and II together. 
D)  Neither statement I nor II is correct.

Question 7

A firm can meet its financing needs by using a matching approach for financing. What is the matching approach?

Accepted Answer

Matching approach is one in which the ma

Question 8

Basically, the overall working capital policy decision involves a ____ of alternative policies.

Accepted Answer

A)  profitability-risk trade-off 
B)  financial choice 
C)  risk decision 
D)  None of these are correct 
A)  profitability-risk trade-off 
B)  financial choice 
C)  risk decision 
D)  None of these are correct

Question 9

Net working capital is the _____.

Accepted Answer

A)  difference between the company's current assets and current liabilities 
B)  difference between the company's current assets and fixed assets 
C)  sum of the firm's current assets plus the firm's current liabilities 
D)  firm's fixed assets plus the firm's long-term liabilities 
A)  difference between the company's current assets and current liabilities 
B)  difference between the company's current assets and fixed assets 
C)  sum of the firm's current assets plus the firm's current liabilities 
D)  firm's fixed assets plus the firm's long-term liabilities

Question 10

When pledging accounts receivables, which of the following statements is/are correct? 
I. Pledging requires permission of the SEC.
II. In pledging accounts receivables, the firm loses title to the receivables and they are no longer listed on the balance sheet.

Accepted Answer

A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct. 
A)  Only statement I is correct. 
B)  Only statement II is correct. 
C)  Both statements I and II are correct. 
D)  Neither statement I nor II is correct.

Question 11

Barnes Company has highly seasonal sales and financing requirements. Barnes has made the following projections of its asset needs and net additions to retained earnings over the next year (in $ million). $\begin{array}{llll}& \text { Fixed } & \text { Current } & \text { Net Additions } \
\text { Quarter } & \text { Assets } & \text { Assets } & \text { to Retained Earnings }\
\hline 1 & \$ 60 & \$ 30 & \$ 1 \
2 & \$ 60 & \$ 35 & \$ 2 \
3 & \$ 65 & \$ 40 & \$ 4 \
4 & \$ 65 & \$ 35 & \$ 2
\end{array}$ ? Net worth (equity) at the beginning of the year is $50 million. The company does not plan to sell any new equity during the coming year. Assume Barnes follows a matching approach to finance its assets (i.e., long-term debt and equity are used to finance fixed and permanent current assets and short-term debt is used to finance fluctuating current assets). Determine the amount of long-term and short-term debt, respectively, outstanding at the end of the third quarter ($ million).

Accepted Answer

A)  $39; $2 
B)  $48; $0 
C)  $41; $7 
D)  None of these are correct or it cannot be computed from the information given 
A)  $39; $2 
B)  $48; $0 
C)  $41; $7 
D)  None of these are correct or it cannot be computed from the information given

Question 12

Gates Industries' balance sheet and income statement for the year ending December 31, 2014 are as follows: $\text { Balance Sheet ( } \$ \text { million) }$
$\begin{array}{lrlr}
\text { Cash } & \$ 10.0 & \text { Accounts payable } & \$ 15.0 \
\text { Accounts receivable } & 15.0 & \text { Salaries, benefits, \& payroll taxes payable } & 3.0 \
\text { Inventories* } & 12.0 & \text { Long-term debt } & 15.0 \
\text { Fixed assets (net) } & 30.0 & \text { Stockholders' equity } & 34.0\
\text { Total assets }&\$67.0&\text { Total liab. \& stock equity }&\$67.0
\end{array}$ ? $\begin{array}{ll}
\text {Income Statement ( $ \$ $ million) }& \\
\text {Net sales (all credit) }&\$125.0 \
\text {Cost of sales }&75.0 \
\text {Selling general, \& admin. expenses }& 30.0\
\text {Other expenses }&13.0\
\text {Earnings after tax }&\$7.0 \
\end{array}$
 ? *Note: Average inventories also equal $12.0 million.
Determine the length of the firm's cash conversion cycle.

Accepted Answer

A)  102.2 days 
B)  29.2 days 
C)  39.6 days 
D)  None of these are correct or it cannot be computed from the information given 
A)  102.2 days 
B)  29.2 days 
C)  39.6 days 
D)  None of these are correct or it cannot be computed from the information given

Question 13

Cisco Systems wishes to analyze the joint impact of its working capital investment and financing policies on shareholder return. The company has $24 million in fixed assets. Cisco wishes to maintain a debt ratio of 40%. The company's tax rate is also 40%. The following information was developed for the two policies under consideration (dollars in millions): $$\begin{array} { l l l } 
& \text { Aggressive } & \text { Conservative } \
\text { Investment in current assets } & \$ 28 & \$ 34 \
\text { Amount of short term debt } & \$ 16 & \$ 10 \
\text { EBIT } & \$ 5.4 & \$ 5.8 \
\text { Interest rate-LTD } ( \% ) & 12.0 & 11.0 \
\text { Interest rate-STD } ( \% ) & 7.5 & 7.0
\end{array}$$ ? For the aggressive approach, Cisco's ROE is ____ and for the conservative approach the ROE is ____.

Accepted Answer

A)  4.18%; 3.77% 
B)  11.62%; 10.48% 
C)  6.97%; 6.29% 
D)  None of these are correct 
A)  4.18%; 3.77% 
B)  11.62%; 10.48% 
C)  6.97%; 6.29% 
D)  None of these are correct

Question 14

A firm's working capital position is important from an internal and external standpoint. Which of the following is not true?

Accepted Answer

A)  It measures a firm's risk. 
B)  Provisions for a minimum working capital position are often included in restrictive covenants. 
C)  A firm's policy often affects its ability to obtain debt. 
D)  A working capital position determines its level of common stock sales. 
A)  It measures a firm's risk. 
B)  Provisions for a minimum working capital position are often included in restrictive covenants. 
C)  A firm's policy often affects its ability to obtain debt. 
D)  A working capital position determines its level of common stock sales.

Question 15

Why is working capital so important to a firm's continued profitability?

Accepted Answer

A firm must have working capital to oper

Question 16

All other things being equal, a policy of financing its assets with a relatively ____ proportion of short-term debt will tend to ____ the variability (or risk) of the after-tax earnings of the firm.

Accepted Answer

A)  large; decrease 
B)  small; increase 
C)  constant; lower 
D)  large; increase 
A)  large; decrease 
B)  small; increase 
C)  constant; lower 
D)  large; increase

Question 17

Net working capital is defined as _____.

Accepted Answer

A)  total current assets 
B)  current assets minus current liabilities 
C)  total assets minus total liabilities 
D)  current assets plus current liabilities 
A)  total current assets 
B)  current assets minus current liabilities 
C)  total assets minus total liabilities 
D)  current assets plus current liabilities

Question 18

The optimal level of working capital investment is the level that is expected to _____.

Accepted Answer

A)  maximize return on total assets 
B)  maximize earnings per share 
C)  maximize shareholder wealth 
D)  minimize interest expenses 
A)  maximize return on total assets 
B)  maximize earnings per share 
C)  maximize shareholder wealth 
D)  minimize interest expenses

Question 19

The operating cycle begins with the ____ and ends with the ____.

Accepted Answer

A)  purchase of resources; selling of the product on credit 
B)  payment for purchases; liquidation of receivables 
C)  purchase of resources; receipt of cash 
D)  payment for purchases; receipt of cash 
A)  purchase of resources; selling of the product on credit 
B)  payment for purchases; liquidation of receivables 
C)  purchase of resources; receipt of cash 
D)  payment for purchases; receipt of cash

Exam 19: Working Capital Policy and Short-Term Financing

What is the purpose of "forecasting" finances?

Under a conservative approach to working capital management, a firm tends to hold a relatively ____ proportion of its total assets in the form of current assets.

All other things being equal, a policy of holding a relatively ____ proportion of the firm's total assets in the form of current assets will tend to result in a ____ risk of the firm encountering financial difficulties.

What is the length of the cash conversion cycle for a firm with annual sales (all cash) of $280,000, an inventory conversion period of 35 days, and a payables deferral period of 25 days?

Which of the following is equal to the length of the operating cycle? I. Inventory conversion period. II. Receivables conversion period.

A firm can meet its financing needs by using a matching approach for financing. What is the matching approach?

Basically, the overall working capital policy decision involves a ____ of alternative policies.

Net working capital is the _____.

When pledging accounts receivables, which of the following statements is/are correct? I. Pledging requires permission of the SEC. II. In pledging accounts receivables, the firm loses title to the receivables and they are no longer listed on the balance sheet.

A firm's working capital position is important from an internal and external standpoint. Which of the following is not true?

Why is working capital so important to a firm's continued profitability?

All other things being equal, a policy of financing its assets with a relatively ____ proportion of short-term debt will tend to ____ the variability (or risk) of the after-tax earnings of the firm.

Net working capital is defined as _____.

The optimal level of working capital investment is the level that is expected to _____.

The operating cycle begins with the ____ and ends with the ____.

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Continuous Compounding and Discounting

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Mutually Exclusive Investments Having Unequal Lives

Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Breakeven Analysis

Capital Structure Management in Practice

Dividend Policy

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate Term Financing

Financing With Derivatives

Bond Refunding Analysis

Risk Management

International Financial Management

Corporate Restructuring

Filters

All other things being equal, a policy of holding a relatively proportion of the firm's total assets in the form of current assets will tend to result in a risk of the firm encountering financial difficulties.

All other things being equal, a policy of financing its assets with a relatively proportion of short-term debt will tend to the variability (or risk) of the after-tax earnings of the firm.

The operating cycle begins with the and ends with the .