Corporate Finance, 3e (Berk/DeMarzo)
Chapter 27 Short-Term Financial Planning
27.1 Forecasting Short-Term Financing Needs
1) Occasionally, a company will encounter circumstances in which cash flows are temporarily
negative for an unexpected reason. We refer to such a situation as:
A) a liquidity shock.
B) a negative cash flow shock.
C) a negative liquidity shock.
D) a cash crunch.
2) When a company analyzes its short-term financing needs, it typically examines cash flows at
A) monthly intervals.
B) yearly intervals.
C) quarterly intervals.
D) weekly intervals.
3) Which of the following firms is likely to have the highest short-term financing needs?
A) A pharmaceutical manufacturer
B) A grocery store
C) An electric utility
D) A toy store
4) Which of the following statements is FALSE?
A) If a company anticipates an ongoing surplus of cash, it may choose to increase its dividend
payout.
B) Seasonal sales can create large short-term cash flow deficits and surpluses.
C) The first step in short-term financial planning is to forecast the company’s future net working
capital.
D) Deficits resulting from investments in long-term projects are often financed using long-term
sources of capital, such as equity or long-term bonds.
5) Which of the following statements is FALSE?
A) Firms with seasonal cash flows may find themselves with a surplus of cash during some
months that is sufficient to compensate for a shortfall during other months. However, because of
timing differences, such firms often have short-term financing needs.
B) A company forecasts its cash flows to determine whether it will have surplus cash or a cash
deficit for each period.
C) Like seasonalities, positive cash flow shocks can create short-term financing needs.
D) When sales are concentrated during a few months, sources and uses of cash are also likely to
be seasonal.
Use the table for the question(s) below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $
millions):
Quarter
1
2
3
4
Cash
605
625
175
1,000
Accounts Receivable
585
745
1,260
760
Inventory
410
540
725
375
Accounts Payable
835
910
1,055
1,145
6) In which quarter are Hasbeen’s seasonal working capital needs the greatest?
A) 4
B) 2
C) 3
D) 1
Quarter
1
2
3
4
Cash
605
625
175
1,000
Accounts Receivable
585
745
1,260
760
Inventory
410
540
725
375
Accounts Payable
835
910
1,055
1,145
Working capital
765
1,000
1,105
990
27.2 The Matching Principle
1) Which of the following is NOT a specific financing option for temporary working capital?
A) Secured financing
B) Commercial paper
C) Bank loans
D) Treasury bills
2) Which of the following statements is FALSE?
A) The matching principle indicates that the firm should finance permanent working capital with
short-term sources of funds.
B) Following the matching principle should, in the long run, help minimize a firm’s transaction
costs.
C) In a perfect capital market, the choice of financing is irrelevant; thus how the firm chooses to
finance its short-term cash needs cannot affect value.
D) A portion of a firm’s investment in its accounts receivable and inventory is temporary and
results from seasonal fluctuations in the firm’s business or unanticipated shocks.
3) Which of the following statements is FALSE?
A) Because investment in permanent working capital is required so long as the firm remains in
business, it constitutes a long-term investment.
B) Because temporary working capital represents a short-term need, the firm should finance this
portion of its investment with short-term financing.
C) Temporary working capital is the difference between the lowest level of investment in short-
term assets and the permanent working capital investment.
D) The matching principle states that short-term needs should be financed with short-term debt
and long-term needs should be financed with long-term sources of funds.
4) Which of the following statements is FALSE?
A) With a discount loan, the borrower is required to pay the interest at the end of the loan period.
B) Bridge loans are often quoted as discount loans with fixed interest rates.
C) A bridge loan is another type of short-term bank loan that is often used to “bridge the gap”
until a firm can arrange for long-term financing.
D) After a natural disaster, lenders may provide businesses with short-term loans to serve as
bridges until they receive insurance payments or long-term disaster relief.
5) Which of the following statements is FALSE?
A) Financing part or all of the permanent working capital with short-term debt is known as an
aggressive financing policy.
B) When the yield curve is downward sloping, the interest rate on short-term debt is lower than
the rate on long-term debt. In that case, short-term debt may appear cheaper than long-term debt.
C) The value of short-term debt is less sensitive to the firm’s credit quality than long-term debt;
therefore, its value will be less affected by management’s actions or information.
D) Permanent working capital is the amount that a firm must keep invested in its short-term
assets to support its continuing operations.
6) Which of the following statements is FALSE?
A) On the other hand, by relying on short-term debt the firm exposes itself to funding risk, which
is the risk of incurring financial distress costs should the firm not be able to refinance its debt in
a timely manner or at a reasonable rate.
B) An ultra-conservative policy would involve financing even some of the plant, property, and
equipment with short-term sources of funds.
C) With a conservative financing policy, the firm would use short-term debt very sparingly to
meet its peak seasonal needs.
D) Short-term debt can have lower agency and lemons costs than long-term debt, and an
aggressive financing policy can benefit shareholders.
7) Which of the following statements is FALSE?
A) When following a conservative financing policy, a firm would use long-term sources of funds
to finance its fixed assets, permanent working capital, and some of its seasonal needs.
B) An aggressive financing policy also increases the possibility that managers of the firm will
use excess cash nonproductively—for example, on perquisites for themselves.
C) A firm could finance its short-term needs with long-term debt, a practice known as a
conservative financing policy.
D) To implement a conservative financing policy effectively, there will necessarily be periods
when excess cash is available—those periods when the firm requires little or no investment in
temporary working capital.
Use the table for the question(s) below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $
millions):
Quarter
1
2
3
4
Cash
605
625
175
1,000
Accounts Receivable
585
745
1,260
760
Inventory
410
540
725
375
Accounts Payable
835
910
1,055
1,145
8) The permanent working capital needs for Hasbeen Toys is closest to:
A) $1,100 million
B) $2,435 million
C) $1,275 million
D) $770 million
Quarter
1
2
3
4
Cash
605
625
175
1,000
Accounts Receivable
585
745
1,260
760
Inventory
410
540
725
375
Accounts Payable
835
910
1,055
1,145
Working capital
765
1,000
1,105
990
9) The temporary working capital needs for Hasbeen Toys in quarter 1 is closest to:
A) $0 million
B) $340 million
C) $770 million
D) $845 million
10) The temporary working capital needs for Hasbeen Toys in quarter 3 is closest to:
A) $845 million
B) $0 million
C) $770 million
D) $ 340 million
11) Calculate the temporary working capital needs for each of the four quarters for Hasbeen
Toys.
27.3 Short-Term Financing with Bank Loans
Use the following information to answer the question(s) below.
Taggart Transcontinental needs a $100,000 loan for the next 30 days. Taggart has three
alternatives available:
Alternative #1: Forgo the discount on its trade credit agreement that offers terms of 2/5 net 35.
Alternative #2: Borrow the money from Bank A, which has offered to lead the firm $100,000 for
one month at
an APR of 9%. The bank will require a (no-interest) compensating balance of 10% of the face-
value of the loan and will charge a $200 loan origination fee, which means that Taggart must
morrow even more than the $100,000 they need.
Alternative #3: Borrow the money from Bank B, which has offered to lend the firm $100,000 for
one month at an APR of 12%. The loan has a 1% origination fee.
1) The effective annual rate for Taggart if they choose alternative #1 is closest to:
A) 13.9%
B) 18.8%
C) 27.0%
D) 27.9%
2) The effective annual rate for Taggart if they choose alternative #2 is closest to:
A) 13.0%
B) 13.9%
C) 18.8%
D) 27.0%
3) The effective annual rate for Taggart if they choose alternative #3 is closest to:
A) 13.9%
B) 18.8%
C) 27.0%
D) 27.9%