Chapter 06 Test Bank – Static Key
1. A firm will generally generate more financing from internal sources if the firm is experiencing sales
growth.
2. Supply chain management has little impact on financial performance and is primarily a marketing and
management concept.
3. Many companies such as McDonald’s have embraced supply chain management using Web-based
procedures.
4. Working capital management is relatively unimportant for a small business.
5. The financial managers generally devote little time to the management of working capital.
6. Liquidating current assets is like liquidating fixed assets since they have lives greater than one year.
7. The key to current asset planning is the ability to forecast sales accurately and then match production
schedules with the sales forecast.
8. One of the primary benefits of implementing supply chain management is reducing inventory on hand.
9. Permanent current assets are not similar to fixed assets because they are fully liquidated within the year.
10. Walmart requires manufacturers to ship goods with RFID tags so it can better track inventory and
reduce the need for supply chain management.
11. When a company sells more than it produces, its inventory levels increase.
12. When using level production, inventory will peak in the month where unit sales trend above the planned
production level.
13. Cash, accounts receivables, and inventory all move monthly in the same direction under level
production.
14. Level production methods smooth production schedules and utilize manpower and equipment more
efficiently than seasonal production methods.
15. The use of point-of-sale terminals has made it easier for many retail store managers to manage their
inventory.
16. The cash budget combines the cash receipts and cash payments schedules in determining cash flow.
17. Ideally, permanent current assets should be financed exclusively with short-term borrowings.
18. As a general rule, it is desirable to finance the permanent assets, including “permanent current assets,”
with long-term debt and equity.
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19. Increased use of long-term financing is generally a more conservative approach to current asset
financing.
20. A “risky” financial plan will use long-term financing for fixed assets, permanent current assets, and a
portion of temporary current assets.
21. Short-term financing is risky because of the possibility of rising short-term rates and the inability of
paying off debt within a short period of time.
22. Short-term interest rates are generally lower than long-term interest rates.
23. By using long-term capital to cover short-term needs, the firm is virtually assured of becoming
technically insolvent.
24. Heavy use of long-term financing generally leads to lower financing costs.
25. During an economic “boom” period, a shortage of low-cost financing alternatives exists.
26. The “term structure of interest rates” refers to the relationship between yields on debt and their
maturities.
27. The “term structure of interest rates” represents the competitive cost of funds for the various short-term
sources of funds such as Treasury bills, commercial paper, and bank CDs.
28. The “term structure of interest rates” is a schedule that tells when a company’s bonds mature and
shows how many dollars a firm must pay in interest payments.
29. Yield curves change very little in the short run (i.e. one year or less).
30. If the liquidity premium theory was the only correct theory, yield curves would always be upward-
sloping.
31. The term structure of interest rates will influence the ratio of long-term financing to short-term financing
used at any given time.
32. It is not necessary to understand interest rate movements when deciding the structure of short-term
debt relative to long-term debt.
33. The behavior of various kinds of financial institutions determines the shape of the yield curve, according
to the market segmentation theory.
34. The market segmentation theory is the only theory that has any significant impact on interest rates.
35. According to the expectations hypothesis, when long-term interest rates are higher than short-term
interest rates, long-term rates are expected to decline.
36. According to the expectations hypothesis, when long-term interest rates are higher than short-term
interest rates, short-term rates are expected to rise.
37. Short-term interest rates have historically been more volatile than long-term rates.
38. A successful financial manager is very interested in the term structure of interest rates but is not
concerned with the relative volatility or historical level of interest rates.
39. Short-term interest rates are more dependent upon inflation than on current demand for money.
40. Interest rates and inflation are inversely related.
41. During tight money periods, short-term financing may be difficult to find.
42. Expected value techniques allow consideration of more than one possible outcome.
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43. In periods of tight money, long-term rates are typically higher than short-term rates.
44. If we examine the ratio of working capital to sales, we can see that for the last several decades, firms’
liquidity has been increasing.
45. Heavy risk exposure due to short-term borrowing can be compensated for by carrying more illiquid
assets.
46. Heavy use of long-term financing can generate more profit for the company during a tight money
period.
47. Use of long-term financing and the carrying of highly liquid assets is a high-risk combination.
48. Firms with predictable cash-flow patterns should assume relatively low levels of risk.
49. Firms with highly volatile and perishable inventory should assume relatively low levels of risk.
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50. The more short-term financing there is relative to long-term financing, the riskier the financial structure.
51. Immediate access to capital markets allows greater risk-taking capability.
52. Working capital management primarily involves long-term planning.
53. The aggressive financing plan involves utilizing long-term financing for permanent and temporary
current assets.
54. Expected value analysis requires taking the difference between the actual projected outcome and the
historic outcome times its probability and then summing these totals.
55. Expected value analysis involves assigning “weights” to various expected future profit outcomes by
their respective probabilities of occurrence.
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56. Long-term financing is usually less expensive than short-term financing because firms have longer
periods of time to pay off long-term debt.
57. The three most important factors when selecting a financing plan are risk, asset liquidity, and timing.
58. Generally, a downward sloping yield curve indicates aforthcoming economic boom.
59. Pressure to increase current asset buildup often results from
60. Working capital management is primarily concerned with the management and financing of
61. A financial executive devotes the most time to
62. The term “permanent current assets” implies
63. The concept of a self-liquidating asset implies that
64. Well-implemented Web-based supply chain management has all of the following benefits except
65. Permanent current assets are not a factor in a manager’s decision-making process when all current
assets are
66. RFID chips have been used to
67. Tinbergen Cans expects sales next year to be $50,000,000. Inventory and accounts receivable
(combined) will increase $8,000,000 to accommodate this sales level. The company has a profit margin of
6 percent. Its dividend payout is 30 percent of profit. How much external financing will the firm have to
seek? Assume there is no increase in liabilities other than that which will occur with the external financing.
68. Samuelson will produce 20,000 units in January using level production. If each unit costs $500 to
manufacture, what is the dollar value of ending inventory in January if beginning inventory is 10,000 units
and January sales are 15,000?
69. Samuelson has a beginning inventory balance on January 1 of 12,000 units and desires an ending
balance of 20% of the next month’s sales. If sales are expected to be 17,000 for January and 20,000 for
February, what is the ending balance as of January 31?
70. Samuelson has a beginning inventory balance on January 1 of 12,000 units and desires an ending
balance of 20% of the next month’s sales. If sales are expected to be 17,000 for January and 20,000 for
February, what amount of units does Samuelson have to produce during the month of January?
71. One advantage of level production is that
72. Companies that sell electricity are characterized by
73. If a firm uses level production with seasonal sales and sales decline further than expected,