Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
1. When financial managers are asked the key reason for choosing short-term rather than
long-term debt, they often say that they try to match the maturities of the firm's assets and
liabilities.
2. Biotech firms require large amounts of cash if their drugs succeed in gaining regulatory
approval. Therefore, these firms often have substantial cash holdings to fund their possible
investment needs.
3. A company that pays out a $2 million cash dividend will see a $2 million decrease in
working capital.
4. Currently, receivables account for the majority of the current assets of retail firms. Cash
and short-term securities are more important for oil companies, and inventory makes up the bulk
of the current assets of electronic companies.
5. A company that receives a customer's payment of $2,500 for a previous sale will see no
change in its net working capital.
6. A company that pays $5,000 previously owed to one of its suppliers will see a $5,000
decrease in cash.
7. A company that pays $5,000 previously owed to one of its suppliers will see no change in
its net working capital.
8. A company that borrows $1 million long term and invests the proceeds in inventory will
see its cash position unchanged.
9. A company that borrows $1 million long term and invests the proceeds in inventory will
see a $1 million increase in its net working capital.
10. A company that borrows $1 million short term and invests the proceeds in inventory will
see its cash position unchanged.
11. A company that borrows $1 million short term and invests the proceeds in inventory will
see no change in its net working capital.
12. A company that sells $5 million of marketable securities for cash will see a $5 million
increase in cash.
13. A company that sells $5 million of marketable securities for cash will see no change in its
net working capital.
14. When accounts payable exceed the sum of inventory and accounts receivable, net working
capital must be negative.
15. A cash conversion cycle is the period between a firm's payment for materials and
collection on its sales.
16. If a firm increases its accounts payable period, other things equal, it increases the cash
conversion cycle.
17. A firm's inventory period can be estimated by the ratio of inventory to daily output.
18. It is possible for a firm to collect payment on a sale prior to paying its suppliers for the
items sold.
19. A reduction in inventory levels would be considered a source of cash.
20. Net working capital will decrease when a firm buys raw materials on credit.
21. The factoring firm bears responsibility for default on accounts receivable purchased from a
firm.
22. Banks will not usually lend the full value of the assets that are used as security. The
safety margin is likely to be even larger in the case of loans that are secured by inventory.
23. A firm can reduce the cash conversion cycle by selling fewer goods on credit and more for
cash.
24. Interest rates for bank loans are frequently linked to either the London Interbank Offered
Rate (LIBOR) or the Treasury bill rate.
25. An increase in current liabilities is a source of cash for the firm.
26. With a revolving line of credit, a firm can borrow and repay whenever it wants so long as
the balance does not exceed the credit limit.
27. The cost of issuing commercial paper is generally lower than that of a revolving line of
credit.
28. An increase in short-term interest rates will increase the carrying costs of the firm.
29. Permanent working capital requirements are generally financed with commercial paper.
30. Investments in marketable securities are generally a positive NPV investment for tax-
paying firms.
31. An increase in long-term assets is a source of cash.
32. An increase in accounts payable is a source of cash.
33. The credit crisis of 2007 to 2009 largely left the market for commercial paper unaffected.
34. When a loan is secured by receivables, the firm assigns the receivables to the bank. If the
firm fails to repay the loan, the bank can collect the receivables from the firm's customers and
use the cash to pay off the debt.
35. When a loan is secured by receivables, the firm assigns the receivables to the bank. If the
firm fails to repay the loan, the bank can collect the receivables from the firm's customers and
use the cash to pay off the debt. The risk of default on the receivables is now borne by the bank.
36. Once the firm has sold its receivables, the factor bears all the responsibility for collecting
on the account.
37. Some companies solve their financing problem by borrowing on the strength of their
current assets; others solve it by selling their current assets.
38. The time interval between paying for raw materials and collecting on sales of finished
goods made from those materials is known as the:
39. In field warehousing the inventory is kept by the:
40. What is the cash conversion cycle for a firm with a receivables period of 40 days, a
payables period of 30 days, and an inventory period of 60 days?
41. What is the cash conversion cycle for a firm with $3 million average inventories, $1.5
million average accounts payable, a receivables period of 40 days, and an annual cost of goods
sold of $18 million?
42. The safety margin kept by the bank on loan against liquid assets is called:
43. Which one of the following would
not
be included among the costs of carrying inventory?
44. When financial managers take action to minimize the carrying costs of current assets,
they:
45. Which one of the following would generally
reduce
the carrying costs of inventory?
46. Which one of the following statements best describes the total capital requirement for
most profitable firms?
47. When a firm finances long-term assets with short-term sources of funding, it:
48. The principle of matched maturities in finance refers to:
49. Which one of the following is more likely for a firm practicing the relaxed strategy of long-
versus short-term borrowing at the height of sales demand?
50. When product demand is high, firms following a middle-of-the-road policy for long-
versus short-term financing will:
