Chapter 06 – Working Capital and the Financing Decision
75. Assuming level production throughout the year, and assuming receivables are collected in
two equal installments over the two months subsequent to the sales period, developing the
cash budget requires the following steps:
76. When actual sales are greater than forecasted sales
77. Normally, permanent current assets should be financed by
Chapter 06 – Working Capital and the Financing Decision
78. Ideally, which of the following type of assets should be financed with long-term
financing?
79. A conservatively financed firm would
80. Generally, more use is made of short-term financing because
Chapter 06 – Working Capital and the Financing Decision
81. The term structure of interest rates
82. The term structure of interest rates
83. The term structure of interest rates is influenced by
Chapter 06 – Working Capital and the Financing Decision
84. The term structure of interest rates or the yield curve
85. Financial managers can accurately predict future interest rates by
86. The belief that investors require a higher return to entice them into holding long-term
securities is the viewpoint of the
Chapter 06 – Working Capital and the Financing Decision
87. The term structure of interest rates
88. Yield curves change daily to reflect
89. U.S. government securities are used to construct yield curves because
Chapter 06 – Working Capital and the Financing Decision
90. As the economy moves through a business cycle, which of the following term structure of
interest rate theories dominate the shape of the yield curve.
91. 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
92. 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
Chapter 06 – Working Capital and the Financing Decision
93. A “normal” term structure of interest rates would depict
94. A firm will usually increase the ratio of short-term debt to long-term debt when
95. Which of the following yield curves would be characteristic during a period of high
economic growth?
Chapter 06 – Working Capital and the Financing Decision
96. An inverted yield curve would suggest that
97. When the term structure of interest rates is downward sloping and interest rates are
expected to decline, the
98. During tight money periods
Chapter 06 – Working Capital and the Financing Decision
99. Which of the following techniques allows explicit consideration of more than one possible
outcome?
100. Under normal conditions (60% probability), Financing Plan A will produce $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 returns?
101. Under normal conditions (70% probability), Plan A will produce $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 returns?
Chapter 06 – Working Capital and the Financing Decision
102. Which of the following is a reason for diminishing liquidity in modern corporations?
103. Kuznets Rental Center requires $500,000 in financing over the next two years. Kuznets
can borrow long-term at 8 percent interest per year for two years. Alternatively, Kuznets can
borrow short-term and pay 6 percent interest in the first year. Then, Kuznets projects paying 9
percent interest in the second year. Assuming Kuznets pays off the accrued interest at the end
of each year, which of the following statements is true?
Chapter 06 – Working Capital and the Financing Decision
104. Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to
obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a
short-term financing plan, their rate will be 7.5 percent, and with a long-term financing plan
their rate will be 9 percent. By how much will their earnings after tax change if they choose
the more conservative financing plan instead of the more aggressive plan?
105. Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to
obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a
short-term financing plan, their rate will be 7.5 percent, and with a long-term financing plan
their rate will be 9 percent. By how much will their earnings after tax change if they choose
the more aggressive financing plan instead of the more conservative?