Foundations of Financial Management, 17e (Block)
Chapter 6 Working Capital and the Financing Decision
1) A firm will generally generate more financing from internal sources if the firm is experiencing
sales growth.
2) Supply chain management has little impact on financial performance and is primarily a
marketing and management concept.
3) Many companies such as McDonald’s have embraced supply chain management using Web-
based procedures.
4) Working capital management is relatively unimportant for a small business.
5) Working capital management involves the financing and management of the current assets of
the firm.
6) The financial managers generally devote little time to the management of working capital.
7) A business person’s failure to realize the firm is carrying self-liquidating inventory can result
in inadequate financing arrangements.
8) Liquidating current assets is like liquidating fixed assets since they have lives greater than one
year.
9) The key to current asset planning is the ability to forecast sales accurately and then match
production schedules with the sales forecast.
10) One of the primary benefits of implementing supply chain management is reducing inventory
on hand.
11) Permanent current assets are not similar to fixed assets because they are fully liquidated
within the year.
12) Walmart requires manufacturers to ship goods with RFID tags so it can better track inventory
and reduce the need for supply chain management.
13) When a company produces more than it sells, inventory rises.
14) When a company sells more than it produces, its inventory levels increase.
15) When using level production, inventory will peak in the month where unit sales trend above
the planned production level.
16) Cash, accounts receivables, and inventory all move monthly in the same direction under level
production.
17) Level production methods smooth production schedules and utilize manpower and
equipment more efficiently than seasonal production methods.
18) The use of point-of-sale terminals has made it easier for many retail store managers to
manage their inventory.
19) The cash budget combines the cash receipts and cash payments schedules in determining
cash flow.
20) Ideally, permanent current assets should be financed exclusively with short-term borrowings.
21) Industries like manufacturing, retailing and utilities are considered seasonal and may exhibit
uneven or seasonal demand
22) As a general rule, it is desirable to finance the permanent assets, including “permanent
current assets,” with long-term debt and equity.
23) Increased use of long-term financing is generally a more conservative approach to current
asset financing.
24) A “risky” financial plan will use long-term financing for fixed assets, permanent current
assets, and a portion of temporary current assets.
25) Short-term financing is risky because of the possibility of rising short-term rates and the
inability to pay off debt within a short period of time.
26) Short-term interest rates are generally lower than long-term interest rates.
27) By using long-term capital to cover short-term needs, the firm is virtually assured of
becoming technically insolvent.
28) Heavy use of long-term financing generally leads to lower financing costs.
29) During an economic “boom” period, a shortage of low-cost financing alternatives exists.
30) The “term structure of interest rates” refers to the relationship between yields on debt and
their maturities.
31) The “term structure of interest rates” represents the competitive cost of funds for the various
short-term sources of funds such as Treasury bills, commercial paper, and bank CDs.
32) 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.
33) Yield curves change very little in the short run (i.e. one year or less).
34) If the liquidity premium theory was the only correct theory, yield curves would always be
upward-sloping.
35) Long-term funds may be used by a financial manger to cover short-term needs and protect
against the danger of not being able to provide adequate short-term financing during tight money
periods.
36) The term structure of interest rates will influence the ratio of long-term financing to short-
term financing used at any given time.
37) It is not necessary to understand interest rate movements when deciding the structure of
short-term debt relative to long-term debt.
38) The behavior of various kinds of financial institutions determines the shape of the yield
curve, according to the market segmentation theory.
39) The market segmentation theory is the only theory that has any significant impact on interest
rates.
40) According to the expectations hypothesis, when long-term interest rates are higher than
short-term interest rates, long-term rates are expected to decline.
41) According to the expectations hypothesis, when long-term interest rates are higher than
short-term interest rates, short-term rates are expected to rise.
42) As a general rule, the interest rate on short-term funds is higher than on long-term funds.
43) Short-term interest rates have historically been more volatile than long-term rates.
44) A 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.
45) Short-term interest rates are more dependent upon inflation than on current demand for
money.
46) Interest rates and inflation are inversely related.
47) During tight money periods, short-term financing may be difficult to find.
48) Expected value techniques allow consideration of more than one possible outcome.
49) In periods of tight money, long-term rates are typically higher than short-term rates.
50) If we examine the ratio of working capital to sales, we can see that for the last several
decades, firms’ liquidity has been increasing.
51) Heavy risk exposure due to short-term borrowing can be compensated for by carrying more
illiquid assets.
52) Heavy use of long-term financing can generate more profit for the company during a tight
money period.
53) Use of long-term financing and the carrying of highly liquid assets is a high-risk
combination.
54) Firms with predictable cash-flow patterns should assume relatively low levels of risk.
55) Firms with highly volatile and perishable inventory should assume relatively low levels of
risk.
56) The more short-term financing there is relative to long-term financing, the riskier the
financial structure.
57) Immediate access to capital markets allows greater risk-taking capability.
58) Working capital management primarily involves long-term planning.
59) The aggressive financing plan involves utilizing long-term financing for permanent and
temporary current assets.
60) Expected value analysis requires taking the difference between the actual projected outcome
and the historic outcome times its probability and then summing these totals.
61) Expected value analysis involves assigning “weights” to various expected future profit
outcomes by their respective probabilities of occurrence.
62) Long-term financing is usually less expensive than short-term financing because firms have
longer periods of time to pay off long-term debt.
63) The three most important factors when selecting a financing plan are risk, asset liquidity, and
timing.
64) Generally, a downward sloping yield curve indicates a forthcoming economic boom.
65) Pressure to increase current asset buildup often results from
A) a decline in sales growth.
B) rapidly expanding sales.
C) increased demands of short-term creditors.
D) None of the options are true.
66) Working capital management is primarily concerned with the management and financing of
A) cash and inventory only.
B) current assets and current liabilities.
C) current assets.
D) receivables and payables.
67) A financial executive devotes the most time to
A) long-range planning.
B) capital budgeting.
C) short-term financing.
D) working capital management.
68) The term “permanent current assets” implies
A) the same thing as fixed assets.
B) nonmarketable assets.
C) some minimum level of current assets that are not self-liquidating.
D) inventory.
69) The concept of a self-liquidating asset implies that
A) the working capital associated with a product will be liquidated within a one-year period.
B) all the product will be sold, receivables collected, and bills paid over the time period
specified.
C) assets associated with the production of a product will be liquidated over the depreciable life
of the assets.
D) self-liquidating assets will be financed by long-term sources of capital.
70) Well-implemented Web-based supply chain management has all of the following benefits
except
A) it reduces inventory on hand.
B) it speeds up the ordering and delivery process.
C) it limits the number of suppliers bidding for a company’s business.
D) it decreases overall costs.
71) Permanent current assets are not a factor in a manager’s decision-making process when all
current assets are
A) financed by short-term debt.
B) long-term in nature.
C) self-liquidating.
D) internally financed.
72) RFID chips have been used to
A) track livestock.
B) track marathon runners’ times.
C) track inventory at retailers.
D) All of the options are true.