Answer: b
Question: Changes in a firm’s collection policy can affect sales, working capital, and profits. a. True b. False
Answer: a. True
Question: Which of the following statements regarding factors that affect call option prices is CORRECT? a. The longer the time until the call option expires the smaller its value and the smaller its premium. b. An option on an extremely volatile stock is worth less than one on a very stable stock. c. The price of a call option increases as the risk-free rate increases. d. Two call options on the same stock will have the same value even if they have different strike prices. e. If you observe that a put option on a stock increases in value, then a call option on that same stock also increases in value.
Answer: c. The price of a call option increases as the risk-free rate increases.
Question: The four primary elements in a firm’s credit policy are (1) credit standards, (2) discounts offered, (3) credit period, and (4) collection policy. a. True b. False
Answer: a. True
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: True
Question: Two firms with identical capital intensity ratios are generating the same amount of sales. However, Firm A is operating at full capacity, while Firm B is operating below capacity. If the two firms expect the same growth in sales during the next period, then Firm A is likely to need more additional funds than Firm B, other things held constant.
Answer Options:
a. True
b. False
Answer: a. True
Question: The capital intensity ratio is generally defined as follows: a. Sales divided by total assets, i.e., the total assets turnover ratio. b. The percentage of liabilities that increase spontaneously as a percentage of sales. c. The ratio of sales to current assets. d. The ratio of current assets to sales. e. The amount of assets required per dollar of sales, or A0*/S0.
Answer: e. The amount of assets required per dollar of sales, or A0*/S0.
Question: Synchronization of cash flows is an important cash management technique, as proper synchronization can reduce the required cash balance and increase a firm’s profitability.
Answer Options:
a. True
b. False
Answer: True
Question: If a firm switched from taking trade credit discounts to paying on the net due date, this might cost the firm some money, but such a policy would probably have only a negligible effect on the income statement and no effect whatever on the balance sheet.
Answer Options:
a. True
b. False
Answer: False
Question: The federal government sometimes taxes dividends and capital gains at different rates. Other things held constant, if the tax rate on dividends is high relative to that on capital gains, then individuals with low taxable incomes should favor stocks with low payouts and high-income individuals should favor high-payout companies.
Answer Options:
a. True
b. False
Answer: True
Question: A firm’s peak borrowing needs will probably be overstated if it bases its monthly cash budget on the assumption that sales and sales collections are evenly distributed over the month but in reality both are concentrated in the last week.
Answer Options:
a. True
b. False
Answer: True
Question: A firm that follows an aggressive working capital financing approach uses primarily short-term credit and thus is more exposed to an unexpected increase in interest rates than is a firm that uses long-term capital and thus follows a conservative financing policy.
Answer Options:
a. True
b. False
Answer: True
Question: If one of your firm’s customers is “stretching” its accounts payable, this may be a nuisance but it does not represent a real financial cost to your firm as long as the customer periodically pays off its entire balance.
Answer Options:
a. True
b. False
Answer: False
Question: Which of the following actions would be likely to shorten the cash conversion cycle? a. Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days. b. Change the credit terms offered to customers from 3/10, net 30 to 1/10, net 50. c. Begin to take discounts on inventory purchases; we buy on terms of 2/10, net 30. d. Adopt a new manufacturing process that saves some labor costs but does not shorten the conversion of raw materials to finished goods from 10 days to 20 days. e. Change the credit terms offered to customers from 2/10, net 30 to 1/10, net 60.
Answer: a
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 Options:
a. True
b. False
Answer: False
Question: A riskless hedge can best be defined as a. A situation in which aggregate risk can be reduced by derivatives transactions between two parties. b. A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position. c. Standardized contracts that are traded on exchanges and are “marked to market” daily, but where physical delivery of the underlying asset is virtually never taken. d. Two parties agree to exchange obligations to make specified payment streams. e. Simultaneously buying and selling a call option with the same exercise price.
Answer: b. A hedge in which an investor buys a stock and simultaneously sells a call option on that stock and ends up with a riskless position.
Question: Other things held constant, if a firm “stretches” (i.e., delays paying) its accounts payable, this will lengthen its cash conversion cycle (CCC). a. True b. False
Answer: b. False
Question: Which of the following is NOT one of the steps taken in the financial planning process? a. The mission statement. b. The statement of the corporation’s scope. c. The statement of cash flows. d. The statement of corporate objectives. e. The operating plan.
Answer: c. The statement of cash flows.
Question: When developing forecasted financial statements there are some inputs that management controls such as the growth rate and operating costs/sales ratio, while other inputs such as the tax rate and interest rate are not under its control.
Answer Options:
a. True
b. False
Answer: a. True
Question: Not taking cash discounts is costly, and as a result, firms that do not take them are usually those that are performing poorly and have inadequate cash balances. a. True b. False
Answer: a. 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: a
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: False
Question: A revolving credit agreement is a formal line of credit. The firm must generally pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.
Answer Options:
a. True
b. False
Answer: True
Question: Jefferson City Computers has developed a forecasting model to estimate its AFN for the upcoming year. All else being equal, which of the following factors is most likely to lead to an increase of the additional funds needed (AFN)? a. A sharp increase in its forecasted sales. b. A sharp reduction in its forecasted sales. c. The company reduces its dividend payout ratio. d. The company switches its materials purchases to a supplier that sells on terms of 1/5, net 90, from a supplier whose terms are 3/15, net 35. e. The company discovers that it has excess capacity in its fixed assets.
Answer: a. A sharp increase in its forecasted sales.
Question: If a profitable firm finds that it simply must “stretch” its accounts payable, then this suggests that it is undercapitalized, i.e., that it needs more working capital to support its operations.
Answer Options:
a. True
b. False
Answer: True