Economics Chapter 6 2 Inventory Will Increase Inventory Will Decrease Accounts

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74. Retail companies like Target and Macy’s exhibit sales patterns that are most typically influenced by

75. Retail companies like Target and Macy’s are more likely to have

76. The use of cash budgeting procedures

77. In company XYZ, assume that level production happens throughout the year and that receivables are

collected in two equal installments over a two-month period subsequent to the sales period. If XYZ wants

to developacash budget, which of the following steps is required?

78. When actual sales are greater than forecasted sales

79. When actual sales are greater than production,

80. Normally, permanent current assets should be financed by

81. Ideally, which of the following type of assets should be financed with long-term financing?

82. A conservatively financed firm would

83. Generally, more use is made of short-term financing because

84. The term structure of interest rates

85. The term structure of interest rates

86. The term structure of interest rates is influenced by

87. Financial managers can accurately predict future interest rates beyond a few months by

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88. The belief that investors require a higher return to entice them into holding long-term securities is the

viewpoint of the

89. The term structure of interest rates

90. Yield curves change daily to reflect

91. U.S. government securities are used to construct yield curves because

92. As the economy moves through a business cycle, which of the following “term structure of interest

rates” theories dominates the shape of the yield curve.

93. Some analysts believe that the term structure of interest rates is determined by the behavior of various

types of financial institutions. This theory is called the

94. The theory of the term structure of interest rates, which suggests that long-term rates are determined

by the average of short-term rates expected over the time that a long-term bond is outstanding, is the

95. A “normal” term structure of interest rates would depict

96. A firm will usually increase the ratio of short-term debt to long-term debt when

97. A firm will usually increase the ratio of short-term debt to long-term debt when

98. Which of the following yield curves would be present during a period of high economic growth?

99. An inverted yield curve would suggest that

100. When the term structure of interest rates is downward sloping and interest rates are expected to

decline, the

101. During tight money periods, generally

102. Which of the following techniques allows explicit consideration of more than one possible outcome?

103. Under normal conditions (60% probability), Financing Plan A will produce a $30,000 higher return than

Plan B. Under tight money conditions (40% probability), Plan A will produce $40,000 less than Plan B.

What is the expected value of return?

104. Under normal conditions (70% probability), Plan A will produce a $20,000 higher return than Plan B.

Under tight money conditions (30% probability), Plan A will produce $100,000 less than Plan B. What is the

expected value of return?

105. Which of the following is a reason for diminishing liquidity in modern corporations?

106. Kuznets Rental Center requires $500,000 in financing over the next two years. Kuznets can borrow

long-term debt at 8 percent interest per year for two years. Alternatively, Kuznets can borrow short-term

debt at 6 percent interest in the first year and 9 percent interest in the second year. Assuming Kuznets

pays off the interest at the end of each year, which of the following statements is true?

107. Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain

financing for $1,200,000 of assets. The company’s tax bracket is 40%. If the firm uses short-term debt, its

rate will be 7.5%, and if it uses long-term debt, its rate will be 9%. By how much will earnings after taxes

change if the company chooses the more conservative financing plan instead of the more aggressive plan?

108. Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain

financing for $1,200,000 of assets. The company’s tax bracket is 40%. If the firm uses short-term debt, its

rate will be 7.5%, and if it uses long-term debt, its rate will be 9%. By how much will earnings after taxes

change if the company chooses to use short-term debt financing for the first year?

109. Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain

financing for $1,200,000 of assets. Its tax bracket is 40%. If the firm uses short-term debt, its rate will be

7.5%, and if it uses long-term debt, its rate will be 9%. By how much will their earnings after taxes change

if they choose the more aggressive financing plan instead of the more conservative plan?

110. An aggressive, risk-oriented firm will likely

111. A manager can be aggressive if the firm has all of the following EXCEPT

112. Risk exposure due to heavy short-term borrowing can be compensated for by

113. Which of the following combinations of asset structures and financing patterns is likely to create the

least volatile earnings?

114. Which of the following combinations of asset structures and financing patterns is likely to create the

most volatile earnings?

115. An aggressive working capital policy would have which of the following characteristics?

116. The following are the expected one-year T-bill rates for the next four years: 3%, 4%, 5%, and 6%.

According to the basic model of the expectations hypothesis, what would you expect the rate for three-year

securities to be?

117. Riley Co. is considering a short-term or long-term financing plan of $4,000,000 assets. It expects the

following one-year interest rates over the next three years: 6.5%, 7.75%, and 9%. The long-term interest

rate will be 7.5% during those three years. What will be the difference in interest costs over the three

years?

118. Genetech has $4,000,000 in assets. It has decided to finance 30% with long-term financing (9% rate)

and 70% with short-term financing (7%) rate. What will be its annual interest costs?

119. Genetech has $4,000,000 in assets. It has decided to finance 30% with long-term financing (9% rate)

and 70% with short-term financing (7%) rate. Assuming a 40% tax rate, what will its annual after-tax

interest costs be?

120. When the yield curve is upward sloping, generally a financial manager should

121. When the yield curve is downward sloping, generally a financial manager should

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Chapter 06 Test Bank – Static Summary