Chapter 06 – Working Capital and the Financing Decision
1. The faster a firm’s growth in sales, the more likely it is that an increasing percentage of
financing will be internally generated.
2. Supply chain management has little impact on financial performance and is primarily a
marketing and management concept.
3. Many companies such as McDonalds have embraced supply chain management using web-
based procedures.
4. Working capital management is relatively unimportant for the small business.
Chapter 06 – Working Capital and the Financing Decision
5. The financial manager generally needs to devote little time to management of working
capital.
6. Liquidating current assets are really fixed assets since they have lives greater than one
year.
7. The key to current asset planning is the ability of management to forecast sales accurately
and then match production schedules with the sales forecast.
8. One of the big benefits of implementing supply chain management, is a reduction in
inventory on hand.
Chapter 06 – Working Capital and the Financing Decision
9. Permanent current assets are not similar to fixed assets because they are fully liquidated
within the year.
10. Wal-Mart requires manufacturers to ship goods with RFID tags so that it can better track
inventory and reduce the need for supply chain management.
11. When using level production, inventory will peak in the month where unit sales trend
above the production level.
12. Cash, accounts receivables, and inventory all move monthly in the same direction under
level production.
Chapter 06 – Working Capital and the Financing Decision
13. Level production methods smooth production schedules and utilize manpower and
equipment more efficiently than seasonal production methods.
14. The use of point-of-sale terminals has made it easier for many retail store managers to
manage their inventory.
15. The cash budget combines the cash receipts and cash payments schedules in determining
cash flow.
16. Ideally, permanent current assets should be financed with short-term borrowings.
Chapter 06 – Working Capital and the Financing Decision
17. As a general rule, it is desirable to finance the permanent assets, including “permanent
current assets”, with long-term debt and equity.
18. Increased use of long-term financing is generally a more conservative approach to current
asset financing.
19. A risky financial plan will use long-term financing for fixed assets, permanent current
assets, and a portion of temporary current assets.
20. Short-term financing is risky because of the possibility of rising short-term rates and the
inability of always being able to refund short-term debt.
Chapter 06 – Working Capital and the Financing Decision
21. Short-term interest rates are generally lower than long-term interest rates.
22. By using long-term capital to cover short-term needs, the firm is virtually assured of
becoming technically insolvent.
23. Heavy use of long-term financing generally leads to lower financing costs.
24. During an economic “boom” period, a shortage of low-cost financing alternatives exists.
Chapter 06 – Working Capital and the Financing Decision
25. The “term structure of interest rates” refers to the relationship between yields on debt and
their maturities.
26. The “term structure of interest rates” depicts the competitive cost of funds for the various
short-term sources of funds such as Treasury bills, commercial paper, and bank CDs.
27. 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.
28. Yield curves change very little in the short run (3 months).
Chapter 06 – Working Capital and the Financing Decision
29. If the liquidity premium theory was the only correct theory, yield curves would always be
upward-sloping.
30. The ratio of long-term financing to short-term financing at any given time will be greatly
influenced by the term structure of interest rates.
31. It is not necessary to understand interest rate movements when deciding the structure of
short-term debt relative to long-term debt.
32. The behavior of various kinds of financial institutions determines the shape of the yield
curve, according to the market segmentation theory.
Chapter 06 – Working Capital and the Financing Decision
33. Only the market segmentation theory has any significant impact on interest rates.
34. According to the expectations hypothesis, when long-term interest rates are higher than
short-term interest rates, long-term rates are expected to decline.
35. According to the expectations hypothesis, when long-term interest rates are higher than
short-term interest rates, short-term rates are expected to rise.
36. Short-term interest rates have historically been more volatile than long-term rates.
Chapter 06 – Working Capital and the Financing Decision
37. The 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.
38. Short-term interest rates are more dependent upon inflation than on current demand for
money.
39. Interest rates and inflation are inversely related.
40. During tight money periods, short-term financing may be difficult to find.
Chapter 06 – Working Capital and the Financing Decision
41. The expected value is the sum of the probabilities of all expected events.
42. Expected value techniques allow consideration of more than one possible outcome.
43. In periods of tight money, long-term rates are often 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
illiquid assets.
Chapter 06 – Working Capital and the Financing Decision
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.
Chapter 06 – Working Capital and the Financing Decision
50. The more short-term financing relative to long-term financing, the more risky the financial
structure.
51. Immediate access to capital markets allows greater risk-taking capability.
52. Working capital management primarily involved 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 summing these totals.
Chapter 06 – Working Capital and the Financing Decision
55. Long-term financing is usually less expensive than short-term financing because it is not
as advantageous to the corporation as short-term financing.
56. The three most important factors when selecting a financing plan are risk, asset liquidity,
and timing.
57. Generally a downward sloping yield curve indicates an eminent economic boom.
58. Pressure to increase current asset buildup often results from
Chapter 06 – Working Capital and the Financing Decision
59. Working capital management is primarily concerned with the management and financing
of
60. A financial executive devotes the most time to
61. The term “permanent current assets” implies
Chapter 06 – Working Capital and the Financing Decision
62. The concept of a self-liquidating asset implies that
63. Well implemented web-based supply chain management has all of the following benefits
except
64. Permanent current assets are not a factor in a manager’s decision making process when all
current assets will be
Chapter 06 – Working Capital and the Financing Decision
65. RFID chips have been used to
66. Frisch Fish Corp expects net income next year to be $750,000. Inventory and accounts
receivable will have to be increased by $650,000 to accommodate this sales level. Frisch will
pay dividends of $300,000. How much external financing will Frisch Fish need assuming no
organically generated increase in liabilities?
Chapter 06 – Working Capital and the Financing Decision
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 and a 30 percent dividend payout. 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?.
Chapter 06 – Working Capital and the Financing Decision
69. One advantage of level production is that
70. Publishing companies are characterized by
71. If a firm uses level production with seasonal sales
Chapter 06 – Working Capital and the Financing Decision
72. Retail companies like Target and The Limited exhibit sales patterns that are mostly
influenced by
73. Retail companies like Target and Limited Brands are more likely to have
74. The use of cash budgeting procedures