Answer Options:
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: Long-term loan agreements always contain provisions, or covenants, that constrain the firm’s future actions. Short-term credit agreements are just as restrictive in order to protect the interest of the lender.
Answer Options:
a. True
b. False
Answer:
b. False
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:
a. True
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:
a. True
Question: The longer its customers normally hold inventory, the longer the credit period supplier firms normally offer. Still, suppliers have some flexibility in the credit terms they offer. If a supplier lengthens the credit period offered, this will shorten the customer’s cash conversion cycle but lengthen the supplier firm’s own CCC.
Answer Options:
a. True
b. False
Answer:
b. False
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:
a. 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:
a. 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:
b. False
Question: The current and quick ratios both help us measure a firm’s liquidity. The current ratio measures the relationship of the firm’s current assets to its current liabilities, while the quick ratio measures the firm’s ability to pay off short-term obligations without relying on the sale of inventories. a. True b. False
Answer:
a. True
Question: The average accounts receivables balance is a function of both the volume of credit sales and the days sales outstanding.
Answer Options:
a. True
b. False
Answer:
a. True
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 Options:
a. True
b. False
Answer:
a. True
Question: If a firm sold some inventory on credit as opposed to cash, there is no reason to think that either its current or quick ratio would change. a. True b. False
Answer:
b. False
Question: If a firm’s fixed assets turnover ratio is significantly higher 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. a. True b. False
Answer:
b. False