Chapter 9
Other Topics in Working Capital Management
Problems
1. Indicate by a (+), (-), or (0) whether each of the following events would probably cause average annual inventory
holdings to rise, fall, or be affected in an indeterminate manner. Also provide an explanation for each event and
the affects. (5 pts)
a. Our suppliers switch from delivering by train to air freight. +
b. We change from producing just in time to meet seasonal sales to steady, year- round production. –
c. Competition in the markets in which we sell increases. –
d. The rate of general inflation increases. –
e. Interest rates rise; other things are constant. +
2. Assuming the firm’s sales volume remained constant, would you expect it to have a higher cash balance during a
tight-money period or during an easy-money period? Why? (2 pts)
I expect it to have a higher cash balance during a tight-money period. Because the higher borrowing related to
the cost, so higher cash balance can avoid this situation.
3. Explain how each of the following factors would probably affect a firm’s target cash balance if all other factors
were held constant. (4.5 pts)
