Answer Choices:
a. True
b. False
Answer: b. False
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 Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm’s goals.
A firm’s corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
A firm’s mission statement defines its lines of business and geographic area of operations.
The corporate scope is a condensed version of the entire set of strategic plans.
Answer Choices:
a. Once a firm has defined its purpose, scope, and objectives, it must develop a strategy or strategies for achieving its goals. The statement of corporate strategies sets forth detailed plans rather than broad approaches for achieving a firm’s goals.
b. A firm’s corporate purpose states the general philosophy of the business and provides managers with specific operational objectives.
c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
d. A firm’s mission statement defines its lines of business and geographic area of operations.
e. The corporate scope is a condensed version of the entire set of strategic plans.
Answer: c. Operating plans provide management with detailed implementation guidance, consistent with the corporate strategy, to help meet the corporate objectives. These operating plans can be developed for any time horizon, but many companies use a 5-year horizon.
Question: When deciding whether or not to take a trade discount, the cost of borrowing from a bank or other source should be compared to the cost of trade credit to determine if the cash discount should be taken.
Answer Choices:
a. True
b. False
Answer: a. True
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 Choices:
a. True
b. False
Answer: b. False
Question: The ‘maturity matching,’ or ‘self-liquidating,’ approach to financing involves obtaining the funds for permanent current assets with a combination of long-term capital and short-term capital that varies depending on the level of interest rates. When short-term rates are relatively high, short-term assets will be financed with long-term debt to reduce costs.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The fact that long-term debt and common stock are raised infrequently and in large amounts lessens the need for the firm to forecast those accounts on a continual basis.
Answer Choices:
a. True
b. False
Answer: False
Question: An informal line of credit and a revolving credit agreement are similar except that the line of credit creates a legal obligation for the bank and thus is a more reliable source of funds for the borrower than the revolving credit agreement.
Answer Choices:
a. True
b. False
Answer: b. False
Question: “Stretching” accounts payable is a widely accepted, entirely ethical, and costless financing technique, which is particularly useful when suppliers’ production plants are at full capacity.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Inventory management is largely self-contained in the sense that very little coordination among the sales, purchasing, and production personnel is required for successful inventory management.
Answer Choices:
a. True
b. False
Answer: b. False
Question: The maturity of most bank loans is short term. Bank loans to businesses are frequently made as 90-day notes which are often rolled over, or renewed, rather than repaid when they mature. However, if the borrower’s financial situation deteriorates, then the bank may refuse to roll over the loan.
Answer Choices:
a. True
b. False
Answer: a. True
Question: If a firm has set up a revolving credit agreement with a bank, the risk to the firm of being unable to obtain funds when needed is lower than if it had an informal line of credit.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A company expects sales to increase during the coming year, and it is using the AFN equation to forecast the additional capital that it must raise. Which of the following conditions would cause the AFN to increase?
Answer Choices:
a. The company previously thought its fixed assets were being operated at full capacity, but now it learns that it actually has excess capacity.
b. The company increases its dividend payout ratio.
c. The company begins to pay employees monthly rather than weekly.
d. The company’s profit margin increases.
e. The company decides to stop taking discounts on purchased materials.
Answer: b. The company increases its dividend payout ratio.
Question: A rapid build-up of inventories normally requires additional financing, unless the increase is matched by an equally large decrease in some other asset.
Answer Choices:
a. True
b. False
Answer: True
Question: When we use the AFN equation to forecast the additional funds needed (AFN), we are implicitly assuming that all financial ratios are constant. If financial ratios are not constant, regression techniques can be used to improve the financial forecast.
Answer Choices:
a. True
b. False
Answer: True
Question: Which of the following statements is CORRECT?
a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
c. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management’s historical performance is evaluated.
d. The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets.
e. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy and economies of scale exist.
Answer Choices:
a. Perhaps the most important step when developing forecasted financial statements is to determine the breakdown of common equity between common stock and retained earnings.
b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
c. Forecasted financial statements, as discussed in the text, are used primarily as a part of the managerial compensation program, where management’s historical performance is evaluated.
d. The capital intensity ratio gives us an idea of the physical condition of the firm’s fixed assets.
e. The AFN equation produces more accurate forecasts than the forecasted financial statement method, especially if fixed assets are lumpy and economies of scale exist.
Answer: b. The first, and perhaps the most critical, step in forecasting financial requirements is to forecast future sales.
Question: One of the effects of ceasing to take trade credit discounts is that the firm’s accounts payable will rise, other things held constant.
Answer Choices:
a. True
b. False
Answer: a. True