Question 1

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as the

Accepted Answer

A)   term structure of interest rates
B)   investment opportunity curve
C)   risk-return tradeoff function
D)   a and b A

Question 2

Name some factors that affect the firm's investment decision to invest in current assets.

Accepted Answer

The firm must consider:
1. the type of products manufactured.
2. the length of the operating cycle.
3. the sales level (higher sales require more investment in inventories and receivables).
4. inventory policies (amount of inventory required to meet higher than expected demand or unanticipated delays in obtaining new inventories).
5. credit policies
6. how efficiently the firm manages current assets.

Question 3

When factoring accounts receivables, the factor is the:

Accepted Answer

A)   negotiated accounts receivable account.
B)   the percent deduction in payment to the firm.
C)   the financial institution that buys the accounts receivable.
D)   the method of determining how much money is lent to the firm. C

Question 4

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)   purchases of resources, receipt of cash
D)   payment for purchases, receipt of cash

Question 5

A firm's cash conversion cycle is equal to its operating cycle minus its ____.

Accepted Answer

A)   inventory conversion period
B)   receivables conversion period
C)   payables deferral period
D)   none of the above

Question 6

A firm's operating cycle is equal to its ____.

Accepted Answer

A)   inventory conversion period plus receivables conversion period
B)   cash conversion cycle minus payables deferral period
C)   a and b
D)   none of the above

Question 7

The firm's receivables conversion period (measured in days) is equal to its accounts receivable divided by its ____.

Accepted Answer

A)   annual credit sales/365
B)   annual credit sales
C)   annual sales/365
D)   none of the above

Question 8

What is the inventory conversion period for O'Brian's if it has sales of $320,000, an average inventory of $5,333, and a cash conversion cycle of 20 days? Assume that the cost of sales is 55 percent of sales.

Accepted Answer

A)   6 days
B)   11 days
C)   13.5 days
D)   15 days

Question 9

Commercial paper is:

Accepted Answer

A)   long-term with maturities greater than one year.
B)   short-term with maturities under six months.
C)   short-term with maturities that do not exceed nine months.
D)   long-term with maturities of greater than five years.

Question 10

The relationship between the maturity of debt and its associated cost (interest rate) is referred to as

Accepted Answer

A)   term structure of interest rates
B)   risk-return tradeoff function
C)   seniority structure of interest rates
D)   a and c

Question 11

What are the classifications for short-term lenders and how do they differ?

Accepted Answer

The answer of What are the classifications for short-term lenders...

Question 12

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

Question 13

Working capital policy involves day-to-day decisions that determine all of the following EXCEPT:

Accepted Answer

A)   firm's level of long-term assets.
B)   proportions of short-term and long-term debt used to finance assets.
C)   level of each type of current asset.
D)   specific sourcers and mix of short-term liabilities the firm should employ.

Question 14

Negotiated short-term credit sources are all of the following EXCEPT:

Accepted Answer

A)   commerical paper
B)   inventory loans
C)   trade credit
D)   bank credit

Question 15

In examining the term structure of interest rates, the interest rates of ______________ have exceeded short-term rates.

Accepted Answer

A)   Commercial paper
B)   Notes payable
C)   Corporate bonds
D)   Marketable securities

Question 16

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

Accepted Answer

The answer of Why is working capital so important to...

Question 17

Of the accounts listed, the account(s) that is (are) NOT part of a firm's working capital is:

Accepted Answer

A)   plant and equipment
B)   marketable securities
C)   cash
D)   a and c

Question 18

In considering factoring accounts receivable, which of the following statements is/are correct?
I. Maturity factoring occurs when the firm receives payment at the normal collection or due date of the factored accounts.
II. Advance factoring occurs when the firm receives payment in prior to the normal collection or due date of the factored accounts.

Accepted Answer

A)   I only
B)   II only
C)   Both I and II
D)   Neither I nor II

Question 19

If Swatch's inventory conversion period is 45 days, its payables deferral period is 35 days, and its receivables conversion period is 50 days, then its cash conversion cycle must be ____ days.

Accepted Answer

A)   60
B)   90
C)   30
D)   cannot be determined from information given

Question 20

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

Exam 16: Working Capital Policy and Short-term Financing