Answer Options:
a. True
b. False
Answer: False
Question: The facts that (1) no explicit interest is paid on accruals and (2) the firm can vary the level of these accounts at will makes them an attractive source of funding to meet the firm’s working capital needs.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following statements is CORRECT? a. A firm that makes 90% of its sales on credit and 10% for cash is growing at a constant rate of 10% annually. Such a firm will be able to keep its accounts receivable at the current level, since the 10% cash sales can be used to finance the 10% growth rate. b. In managing a firm’s accounts receivable, it is possible to increase credit sales per day yet still keep accounts receivable fairly steady, provided the firm can shorten the length of its collection period (its DSO) sufficiently. c. Because of the costs of granting credit, it is not possible for credit sales to be more profitable than cash sales. d. Since receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio must also have a high payables-to-sales ratio. e. Other things held constant, if a firm can shorten its DSO, this will lead to a higher current ratio.
Answer: b
Question: Which of the following events is likely to decrease the value of call options on the common stock of GCC Company? a. An increase in GCC’s stock price. b. An increase in the exercise price of the option. c. An increase in the amount of time until the option expires. d. An increase in the risk-free rate. e. GCC’s stock price becomes more risky (higher variance).
Answer: b. An increase in the exercise price of the option.
Question: A lockbox plan is a. used to protect cash, i.e., to keep it from being stolen. b. used to identify inventory safety stocks. c. used to slow down the collection of checks our firm writes. d. used to speed up the collection of checks received. e. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by firms that receive payments as checks.
Answer: d
Question: A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities. a. True b. False
Answer: a. True
Question: The optimal distribution policy strikes that balance between current dividends and capital gains that maximizes the firm’s stock price.
Answer Options:
a. True
b. False
Answer: True
Question: If a firm’s capital intensity ratio (A0*/S0) decreases as sales increase, use of the AFN formula is likely to understate the amount of additional funds required, other things held constant.
Answer Options:
a. True
b. False
Answer: b. False
Question: Which of the following statements is NOT CORRECT? a. Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate. b. Accruals are “free” in the sense that no explicit interest is paid on these funds. c. A conservative approach to working capital management will result in most if not all permanent assets being financed with long-term capital. d. The risk to a firm that borrows with short-term credit is usually greater than if it borrowed using long-term debt. This added risk stems from the greater variability of interest costs on short-term debt and possible difficulties with rolling over short-term debt. e. Bank loans generally carry a higher interest rate than commercial paper.
Answer: a
Question: It has been argued that investors prefer high-payout companies because dividends are more certain (less risky) than the capital gains that are supposed to come from retained earnings. However, Miller and Modigliani say that this argument is incorrect, and they call it the “bird-in-the-hand fallacy.” MM base their argument on the belief that most dividends are reinvested in stocks, hence are exposed to the same risks as reinvested earnings.
Answer Options:
a. True
b. False
Answer: True
Question: The cash conversion cycle (CCC) combines three factors: The inventory conversion period, the receivables collection period, and the payables deferral period, and its purpose is to show how long a firm must finance its working capital. Other things held constant, the shorter the CCC, the more effective the firm’s working capital management.
Answer Options:
a. True
b. False
Answer: True
Question: Other things held constant, which of the following will cause an increase in net working capital? a. Cash is used to buy marketable securities. b. A cash dividend is declared and paid. c. Merchandise is sold at a profit, but the sale is on credit. d. Long-term bonds are retired with the proceeds of a preferred stock issue. e. Missing inventory is written off against retained earnings.
Answer: c
Question: The relative profitability of a firm that employs an aggressive working capital financing policy will improve if the yield curve changes from upward sloping to downward sloping.
Answer Options:
a. True
b. False
Answer: False
Question: The term “spontaneously generated funds” generally refers to increases in the cash account that result from growth in sales, assuming the firm is operating with a positive profit margin.
Answer Options:
a. True
b. False
Answer: b. False
Question: The risk to the firm of borrowing using short-term credit is usually greater than if it used long-term debt. Added risk stems from (1) the greater variability of interest costs on short-term than long-term debt and (2) the fact that even if its long-term prospects are good, the firm’s lenders may not be willing to renew short-term loans if the firm is temporarily unable to repay those loans.
Answer Options:
a. True
b. False
Answer: True
Question: An increase in any current asset must be accompanied by an equal increase in some current liability. a. True b. False
Answer: b. False
Question: Halka Company is a no-growth firm. Its sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000. If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital? a. $260,642 b. $274,360 c. $288,800
Answer: a
Question: Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e., after the fact) sense even though it is possible to match maturities on an ex ante (expected) basis.
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following is NOT directly reflected in the cash budget of a firm that is in the zero tax bracket? a. Payments lags. b. Depreciation. c. Cumulative cash. d. Repurchases of common stock. e. Payment for plant construction.
Answer: b
Question: Helena Furnishings wants to reduce its cash conversion cycle. Which of the following actions should it take? a. Increases average inventory without increasing sales. b. Take steps to reduce the DSO. c. Start paying its bills sooner, which would reduce the average accounts payable but not affect sales. d. Sell common stock to retire long-term bonds. e. Sell an issue of long-term bonds and use the proceeds to buy back some of its common stock.
Answer: b