1) A conservative current operating asset financing approach will result in permanent
current assets and some seasonal current assets being financed using long-term
securities.
2) Portfolio A has but one security, while Portfolio B has 100 securities. Because of
diversification effects, we would expect Portfolio B to have the lower risk. However, it
is possible for Portfolio A to be less risky.
3) Suppose a firm changes its credit policy from 2/10 net 30 to 3/10 net 30. The change
is meant to meet competition, so no increase in sales is expected. The average accounts
receivable balance will probably decline as a result of this change.
4) The average accounts receivable balance is a function of both the volume of credit
sales and the days sales outstanding.
5) One key conclusion of the Capital Asset Pricing Model is that the value of an asset
should be measured by considering both the risk and the expected return of the asset,
assuming that the asset is held in a well-diversified portfolio. The risk of the asset held
in isolation is not relevant under the CAPM.
6) The inventory turnover and current ratio are related. The combination of a high
current ratio and a low inventory turnover ratio, relative to industry norms, suggests that
the firm has an above-average inventory level and/or that part of the inventory is
obsolete or damaged.