978-0133423822 Chapter 18 Part 2

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6) A “pop-up” store wants to use vacated space at a shopping mall to sell seasonal

merchandise during the months of October, November and December. The rent is $10,000

per month, but the mall’s owners are requiring a payment of $100,000 on September 1. If

the space is vacated in good condition at the end of December, the owners will return

$70,000 to the lessees. How should the $100,000 be inanced?

A) Space is a permanent asset and should be inanced with equity or long-term debt.

B) Because the lessee may rent the same or similar space in future years, they should use

long-term debt or equity.

C) The space is a temporary asset and should be inanced with short-term loans.

D) The space is a temporary asset and should be inanced with trade credit.

Question Status: New question

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

7) With respect to working capital policy, irms most often employ

A) a cautious approach which inances short-term assets with long-term inancing.

B) the principle of self-liquidating debt.

C) an aggressive approach which inances long-term assets with short-term inancing.

D) the principle of liquidity optimization.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

8) A toy manufacturer following the self-liquidating debt. principle will generally inance

seasonal inventory build-up prior to the Holiday season with:

A) common stock.

B) selling equipment.

C) trade credit.

D) preferred stock.

Question Status: Revised

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

9) Which of the following is considered to be a spontaneous source of inancing?

A) Operating leases

B) Accounts receivable

C) Inventory

D) Accounts payable

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

10) 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

A) $2.2 million.

B) $1.675 million.

C) $1.3 million.

D) $0.9 million.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

11) Disadvantages of using current liabilities as opposed to long-term debt include

A) greater risk of illiquidity.

B) uncertainty of interest costs.

C) higher cash low exposure.

D) both A and B.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

12) According to the self-liquidating debt principle permanent assets should be inanced

with ________ liabilities.

A) permanent

B) spontaneous

C) current

D) ixed

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

13) Which of the following is most consistent with the self-liquidating debt principle in

working capital management?

A) Fixed assets should be inanced with short-term notes payable.

B) Inventory should be inanced with preferred stock.

C) Accounts receivable should be inanced with short-term lines of credit.

D) Borrow on a loating rate basis to inance investments in permanent assets.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

14) The principle of maturity matching suggests that

A) machinery with a 5 year economic life be inanced with debt that will be paid of in ive

years or less.

B) seasonal peaks in inventory be inanced with traded credit.

C) the minimum level of current assets required for the irm’s year around operations be

inanced with permanent sources.

D) all of the above.

Question Status: New question

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

15) Spontaneous sources of inancing include

A) marketable securities.

B) accruals.

C) bonds.

D) commercial paper.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

16) Which of the following is NOT a spontaneous source of inancing?

A) Accrued salaries payable

B) Loans secured by accounts receivable

C) Accrued taxes payable

D) Accounts payable

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

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

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 Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

18) Which of the following is a spontaneous source of inancing?

A) Accrued wages

B) Preferred stock

C) Trade credit

D) Both A and C

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

19) Trade credit is an example of which of the following sources of inancing?

A) Spontaneous

B) Temporary

C) Permanent

D) Both A and B

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

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

should consider

A) increasing its use of commercial paper and loans secured by current assets.

B) decreasing the use of spontaneous inancing.

C) decreasing the level of permanent inancing.

D) increasing the level of permanent inancing.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

21) All else equal, which of the following is the most likely to occur if actual sales are much

less than forecasted sales?

A) The company will be in a better position to pay down most of its debt.

B) The irm’s actual investment in inventory will be unchanged from the amount forecasted.

C) Accounts receivable will rise signiicantly above the forecast.

D) The company might face a cash low crunch.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

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

A) higher costs.

B) a loss of lexibility.

C) inability to renew the loans on favorable terms.

D) falling interest rates.

Question Status: New question

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

23) The use of short-term debt provides lexibility in inancing since the irm is only paying

interest when it is actually using the borrowed funds.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

24) Unlike spontaneous sources of inancing, discretionary inancing requires a managerial

decision.

Question Status: New question

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

25) Within the context of working capital management, the risk-return trade-of involves an

increased risk of illiquidity versus increased proitability.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

26) Accrued wages are considered an unsecured, non-spontaneous source of inancing.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

27) The primary sources of collateral for short-term secured loans are accounts receivable

and inventory.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

28) Trade credit appears on a company‘s balance sheet as accounts payable.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

29) A irm can reduce net working capital by substituting long-term inancing, such as

bonds, with short-term inancing, such as a one-year notes payable.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

30) Increasing the use of short-term debt versus long-term debt inancing will increase

proit.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

31) Spontaneous sources of inancing may be either short-term or long-term.

Question Status: New question

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

32) Short-term debt is frequently less expensive because it provides the borrower more

security.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

33) Trade credit is a source of spontaneous inancing.

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

34) Summary data from the quarterly balance sheets of ACH Air Conditioners are shown

below.

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Current

Assets $50,000 $90,000 $75,000 $30,000

Fixed Assets $60,000 $60,000 $60,000 $60,000

Liabilities $70,000 $110,00 $95,000 $50,000

Equity $40,000 $40,000 $40,000 $40,000

a. If ACH follows the self liquidating debt principle, how much long-term debt will be used

to inance current assets? Explain your answer briely.

b. What would be the highest and lowest levels of temporary debt?

Question Status: Previous edition

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

35) L. Stevens Inc. uses permanent sources of inancing to cover its peak level of current

assets. When it does not need the money to inance inventories and accounts receivable, it

invests the excess funds in short-term certiicates of deposit. What are the advantages and

disadvantages of this policy?

Question Status: Revised

Objective: 18.2 Explain the principle of self-liquidating debt as a tool for managing irm liquidity.

Keywords: self-liquidating debt

Principles: Principle 2: There Is a Risk-Return Tradeof

18.3 Operating and Cash Conversion Cycles

1) King Co.’s inventory turnover ratio is 12. Its inventory conversion period is

A) 12 days.

B) 30.4 days.

C) 2.5 days.

D) There is not enough information.

Question Status: Previous edition

Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages

its working capital.

Keywords: cash conversion cycle

Principles: Principle 3: Cash Flows Are the Source of Value

2) Prince Co.’s inventory turnover ratio is 30.4. Its inventory conversion period is

A) 12 days.

B) 30.4 days.

C) 2.5 days.

D) There is not enough information.

Question Status: Previous edition

Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages

its working capital.

Keywords: cash conversion cycle

Principles: Principle 3: Cash Flows Are the Source of Value

3) Queen Co.’s balance in accounts receivable is $240,000. Annual credit sales are

$2,880,000. Queen’s average collection period is

A) 12 days.

B) 30.4 days.

C) 2.5 days.

D) There is not enough information.

Question Status: Previous edition

Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages

its working capital.

Keywords: cash conversion cycle

Principles: Principle 3: Cash Flows Are the Source of Value

4) Frosty’s Frozen Food Inc.’s inventory balance is $1.22 million. Frosty’s Cost of Good’s

Sold is $30.4 million. Its inventory conversion period is

A) 12 days.

B) 24.92 days.

C) 14.65 days.

D) 299.2 days.

Question Status: Previous edition

Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages

its working capital.

Keywords: cash conversion cycle

Principles: Principle 3: Cash Flows Are the Source of Value

5) Currier & Ive’s Lithography has a Cost of Goods Sold of $60.8 million. The company’s

accounts payable balance is $7.5 million. Its accounts payable deferral period is

A) 81 days.

B) 45 days.

C) 8.11 days.

D) 48.7 days.

Question Status: Previous edition

Objective: 18.3 Use the cash conversion cycle to measure the eiciency with which a irm manages

its working capital.

Keywords: cash conversion cycle

Principles: Principle 3: Cash Flows Are the Source of Value