Answer Options:
a. True
b. False
Answer:
b. False
Question: A firm constructing a new manufacturing plant and financing it with short-term loans, which are scheduled to be converted to first mortgage bonds when the plant is completed, would want to separate the construction loan from its current liabilities associated with working capital when calculating net working capital.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is CORRECT? a. Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital. b. Changes in working capital have no effect on free cash flow. c. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 – T) + Depreciation – Capital expenditures required to sustain operations – Required changes in net operating working capital. d. Free cash flow (FCF) is defined as follows: FCF = EBIT(1 – T) + Capital expenditures. e. Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the “bottom line” and represents how much the firm can distribute to all its investors, both creditors and stockholders.
Answer Options:
a. Most rapidly growing companies have positive free cash flows because cash flows from existing operations generally exceed fixed asset purchases and changes to net operating working capital.
b. Changes in working capital have no effect on free cash flow.
c. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 – T) + Depreciation
– Capital expenditures required to sustain operations
– Required changes in net operating working capital.
d. Free cash flow (FCF) is defined as follows:
FCF = EBIT(1 – T) + Capital expenditures.
e. Managers should be less concerned with free cash flow than with accounting net income. Accounting net income is the “bottom line” and represents how much the firm can distribute to all its investors, both creditors and stockholders.
Answer:
c
Question: Setting up a lockbox arrangement is one way for a firm to speed up the collection of payments from its customers.
Answer Options:
a. True
b. False
Answer:
a. True
Question: Which of the following statements is CORRECT? a. A decline in a firm’s inventory turnover ratio suggests that it is improving both its inventory management and its liquidity position, i.e., that it is becoming more liquid. b. In general, it’s better to have a low inventory turnover ratio than a high one, as a low one indicates that the firm has an adequate stock of inventory relative to sales and thus will not lose sales as a result of running out of stock. c. If a firm’s fixed assets turnover ratio is significantly lower than its industry average, this could indicate that it uses its fixed assets very efficiently or is operating at over capacity and should probably add fixed assets. d. The more conservative a firm’s management is, the higher its total debt to total capital ratio is likely to be. e. The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.
Answer:
e. The days sales outstanding ratio tells us how long it takes, on average, to collect after a sale is made. The DSO can be compared with the firm’s credit terms to get an idea of whether customers are paying on time.
Question: If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant. a. The division’s basic earning power ratio is above the average of other firms in its industry. b. The division’s total assets turnover ratio is below the average for other firms in its industry. c. The division’s total debt to total capital ratio is above the average for other firms in the industry. d. The division’s inventory turnover is 6x, whereas the average for its competitors is 8x. e. The division’s DSO (days’ sales outstanding) is 40 days, whereas the average for its competitors is 30 days.
Answer:
a. The division’s basic earning power ratio is above the average of other firms in its industry.
Question: 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.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Although a full liquidity analysis requires the use of a cash budget, the current and quick ratios provide fast and easy-to-use estimates of a firm’s liquidity position. a. True b. False
Answer:
a. True
Question: The target cash balance is typically (and logically) set so that it does not need to be adjusted for either seasonal patterns or unanticipated random fluctuations.
Answer Options:
a. True
b. False
Answer:
b. False
Question: For a zero-growth firm, it is possible to increase the percentage of sales that are made on credit and still keep accounts receivable at their current level, provided the firm can shorten the length of its collection period sufficiently.
Answer Options:
a. True
b. False
Answer:
a. True
Question: An increase in accounts receivable represents an increase in net cash provided by operating activities because receivables will produce cash when they are collected.
Answer Options:
a. True
b. False
Answer:
b. False
Question: Shorter-term cash budgets (such as a daily cash budget for the next month) are generally used for actual cash control while longer-term cash budgets (such as a monthly cash budgets for the next year) are generally used for planning purposes.
Answer Options:
a. True
b. False
Answer:
a. True
Question: A line of credit can be either a formal or an informal agreement between a borrower and a bank regarding the maximum amount of credit the bank will extend to the borrower during some future period, assuming the borrower maintains its financial strength.
Answer Options:
a. True
b. False
Answer:
a. True
Question: In finance, we are generally more interested in cash flows than in accounting profits. Free cash flow (FCF) is calculated as after-tax operating income plus depreciation less the sum of capital expenditures and changes in net operating working capital.
Answer Options:
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. a. True b. False
Answer:
True
Question: Which of the following statements concerning the cash budget is CORRECT? a. Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax payments. b. Cash budgets do not include financial items such as interest and dividend payments. c. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds. d. Changes that affect the DSO do not affect the cash budget. e. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.
Answer Options:
a. Depreciation expense is not explicitly included, but depreciation’s effects are reflected in the estimated tax payments.
b. Cash budgets do not include financial items such as interest and dividend payments.
c. Cash budgets do not include cash inflows from long-term sources such as the issuance of bonds.
d. Changes that affect the DSO do not affect the cash budget.
e. Capital budgeting decisions have no effect on the cash budget until projects go into operation and start producing revenues.
Answer:
a
Question: If a firm sells on terms of 2/10, net 30 days, and its DSO is 28 days, then the fact that the 28-day DSO is less than the 30-day credit period tell us that the credit department is functioning efficiently and there are no past due accounts.
Answer Options:
a. True
b. False
Answer:
b. False