Answer: d. Additional funds needed (AFN) are typically raised using a combination of notes payable, long-term debt, and common stock. Such funds are non-spontaneous in the sense that they require explicit financing decisions to obtain them.
Question: A lockbox plan is most beneficial to firms that a. have suppliers who operate in many different parts of the country. b. have widely dispersed manufacturing facilities. c. have a large marketable securities portfolio, and cash, to protect. d. receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks.
Answer: a
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 Options:
a. True
b. False
Answer: a. True
Question: The three alternative current asset investment policies discussed in the text differ regarding the size of current asset holdings. a. True b. False
Answer: a. True
Question: Which of the following statements is CORRECT? a. Any forecast of financial requirements involves determining how much money the firm will need, and this need is determined by adding together increases in assets and spontaneous liabilities and then subtracting operating income. b. The AFN equation for forecasting funds requirements requires only a forecast of the firm’s balance sheet. Although a forecasted income statement may help clarify the results, income statement data are not essential because funds needed relate only to the balance sheet. c. Dividends are paid with cash taken from the accumulated retained earnings account, hence dividend policy does not affect the AFN forecast. d. A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed. e. If assets and spontaneously generated liabilities are not projected to grow at the same rate as sales, then the AFN method will provide more accurate forecasts than the projected financial statement method.
Answer: d. A negative AFN indicates that retained earnings and spontaneous capital are far more than sufficient to finance the additional assets needed.
Question: Warnes Motors’ stock is trading at $20 a share. Three-month call options with an exercise price of $20 have a price of $1.50. Which of the following will occur if the stock price increases 10% to $22 a share? a. The price of the call option will increase by $2. b. The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%. c. The price of the call option will increase by less than $2, and the percentage increase in price will be less than 10%. d. The price of the call option will increase by more than $2. e. The price of the call option will increase by more than $2, but the percentage increase in price will be less than 10%.
Answer: b. The price of the call option will increase by less than $2, but the percentage increase in price will be more than 10%.
Question: Which of the following statements is CORRECT? a. Under normal conditions, a firm’s expected ROE would probably be higher if it financed with short-term securities.
Answer: a
Question: Which of the following statements is NOT CORRECT? a. A company may hold a relatively large amount of cash and marketable securities if uncertain about its volume of sales, profits, and cash flows during the coming year. b. Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected. c. The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans. d. If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10, net 30 to net 60. e. Managing working capital is important because it influences financing decisions and the firm’s profitability.
Answer: d
Question: If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a low payout ratio.
Answer Options:
a. True
b. False
Answer: True
Question: Which of the following statements is CORRECT? a. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any increase in the current ratio automatically indicates that net working capital has increased. b. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. c. If a company follows a policy of “matching maturities,” this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. d. Net working capital is defined as current assets minus the difference between current liabilities and notes payable, and any decrease in the current ratio automatically indicates that net working capital has decreased. e. If a company follows a policy of “matching maturities,” this means that it matches its use of short-term debt with its use of long-term debt.
Answer: b
Question: Which of the following statements is CORRECT? a. When we use the AFN equation, we assume that the ratios of assets and liabilities to sales (A0*/S0 and L0*/S0) vary from year to year in a stable, predictable manner. b. When fixed assets are added in large, discrete units as a company grows, the assumption of constant ratios is more appropriate than if assets are relatively small and can be added in small increments as sales grow. c. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in the financial forecasting process. d. For a firm that uses lumpy assets, it is impossible to have small increases in sales without expanding fixed assets. e. Regression techniques cannot be used in situations where excess capacity or economies of scale exist.
Answer: c. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be accounted for in the financial forecasting process.
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: False
Question: Other things held constant, the higher a firm’s target payout ratio, the higher its expected growth rate should be.
Answer Options:
a. True
b. False
Answer: False
Question: If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC) and cause a deterioration in its cash position. a. True b. False
Answer: b. False
Question: Other things held constant, which of the following would tend to reduce the cash conversion cycle? a. Carry a constant amount of receivables as sales decline.
Answer: a