Test Bank FIN 220 Chap006 PDF

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Chapter 06 - Working Capital and the Financing Decision

Chapter 06 Working Capital and the Financing Decision

Multiple Choice Questions 1. Working capital management is primarily concerned with the management and financing of: A. cash and inventory. B. current assets and current liabilities. C. current assets. D. receivables and payables.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-01 Define working capital management. Topic: 06-01 The short term

2. A financial executive devotes the most time to: A. long-range planning. B. capital budgeting. C. short-term financing. D. working capital management.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-01 Define working capital management. Topic: 06-01 The short term

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Chapter 06 - Working Capital and the Financing Decision

3. Pressure for current asset buildup often results from: A. decline in sales growth. B. rapidly expanding sales. C. increased demands of short-term creditors. D. decreased demands of short-term creditors.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-02 The Nature of Asset Growth

4. Ideally, all current assets will be: A. financed by short-term debt. B. long-term in nature. C. self-liquidating. D. internally financed.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-02 The Nature of Asset Growth

5. The term "permanent current assets" implies: A. the same thing as capital assets. B. nonmarketable assets. C. some minimum level of current assets that is not self-liquidating. D. inventory.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-02 The Nature of Asset Growth

6. Normally, permanent current assets should be financed by: A. long-term funds. B. short-term funds. C. borrowed funds. D. internally generated funds.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-06 Patterns of Financing

7. Ideally, which of the following types of assets should be financed with long-term financing? A. Capital assets only B. Capital assets and temporary current assets C. Capital assets and permanent current assets D. Temporary and permanent current assets

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-06 Patterns of Financing

8. Generally, more use is made of short-term financing because: A. short-term financing is usually more predictable than long-term financing. B. most firms do have easy access to the capital markets. C. short-term interest rates are generally higher than long-term interest rates. D. short-term interest rates are generally lower than long-term interest rates.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-09 Short-Term Financing (Risky)

9. During tight money periods: A. long-term rates are higher than short-term rates. B. short-term rates are higher than long-term rates. C. short-term rates are equal to long-term rates. D. the relationship between short and long-term rates remains unchanged.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-14 A Decision Process

10. A "normal" term structure of interest rates would depict: A. short-term rates higher than long-term rates. B. long-term rates higher than short-term rates. C. no general relationship between short-and long-term rates. D. medium rates (1-5 years) lower than both short-term and long-term rates.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure of Interest Rates

11. Which of the following is a reason for diminishing liquidity in modern corporations? A. Low interest rates. B. Lower utilization of cash via computers. C. Greater utilization of cash via information systems. D. Inflation pushes more cash into inventory.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-17 Shifts in Asset Structure

12. An aggressive, risk-oriented firm will likely: A. borrow long-term and carry low levels of liquidity. B. borrow short-term and carry low levels of liquidity. C. borrow long-term and carry high levels of liquidity. D. borrow short-term and carry high levels of liquidity.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-18 Toward An Optimal Policy

13. Which of the following is not a condition under which a prudent manager would accept some risk in financing? A. Predictable cash-flow patterns B. Inventory is highly perishable C. Price of inventory is stable D. Easy access to capital markets

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-06 Patterns of Financing

14. Risk exposure due to heavy short-term borrowing can be compensated for by: A. carrying highly liquid assets. B. carrying illiquid assets. C. carrying longer term, more profitable current assets. D. carrying more receivables to increase cash flow.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-17 Shifts in Asset Structure

15. Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings? A. Illiquid assets and heavy short-term borrowing B. Illiquid assets and heavy long-term borrowing C. Liquid assets and heavy long-term borrowing D. Liquid assets and no debt

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-18 Toward An Optimal Policy

16. Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings? A. Illiquid assets and heavy short-term borrowing B. Illiquid assets and heavy long-term borrowing C. Liquid assets and heavy long-term borrowing D. Liquid assets and heavy short-term borrowing

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-18 Toward An Optimal Policy

17. An aggressive working capital policy would have which of the following characteristics? A. A high ratio of long-term debt to capital assets B. A low ratio of short-term debt to total debt C. A high ratio of short-term debt to long-term sources of funds D. A short average collection period

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-18 Toward An Optimal Policy

18. Which of the following techniques allows explicit consideration of more than one possible outcome? A. Operating leverage B. Present value C. Least-squares regression D. Expected value

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-16 An Expected Value Approach

19. Under normal conditions (70% probability), Financing Plan A will produce $24,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of return for Plan A over Plan B? A. $28,800 B. $4,000 C. $4,800 D. $35,200

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-16 An Expected Value Approach

20. The term structure of interest rates is not: A. an indication of investors' expectations about inflation and future interest rates. B. downward sloping if short-term interest rates are higher than long-term rates. C. upward sloping under normal conditions. D. upward sloping if long-term interest rates are lower than short-term rates.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure of Interest Rates

21. The term structure of interest rates: A. changes daily to reflect current competitive conditions in the money and capital markets. B. plots returns for securities of different risk. C. shows the relative interest spread between bonds with different risk ratings such as AAA, AA, A, BBB, etc. D. depicts interest rates for T-bills over the last year.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure of Interest Rates

22. The term structure of interest rates is not influenced by: A. inflation. B. money supply. C. Bank of Canada activities. D. the normal yield curve.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure of Interest Rates

23. A firm will usually increase the ratio of short-term debt to long-term debt when: A. short-term debt has a lower cost than long-term equity. B. the term structure is inverted and expected to shift down. C. the term structure is upward sloping and expected to shift up. D. the firm is undertaking a large capital budgeting project.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-12 Term Structure Shapes

24. When actual sales are greater than forecasted sales: A. inventory will increase. B. production schedules might have to be revised downward. C. accounts receivable will decrease. D. inventory will decrease and accounts receivable will increase.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-02 Describe the effect asset growth has on working capital positions. Topic: 06-02 The Nature of Asset Growth

25. If a firm uses level production with seasonal sales: A. as sales decline inventory will increase. B. as sales decline inventory will decrease. C. as sales decline accounts receivable will increase. D. as sales decline accounts receivable will remain unchanged.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-03 Controlling Assets—Matching Sales and Production

26. One advantage of level production is that: A. manpower and equipment are used efficiently at lower cost. B. current assets fluctuate more than with seasonal production. C. seasonal bulges and sharp declines in current assets occur. D. the risk of obsolete inventory increases.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-03 Controlling Assets—Matching Sales and Production

27. The use of cash budgeting procedures: A. increases revenue for a given production plan. B. makes managing inventory harder under seasonal production. C. reduces the need for temporary permanent assets. D. illustrates fluctuating levels of current assets for a given production plan.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-03 Controlling Assets—Matching Sales and Production

28. When the term structure of interest rates is downward sloping and interest rates are expected to decline, the: A. financial manager generally borrows short-term. B. financial manager borrows at the lower long-term rates. C. corporation's ratio of short-term to long-term debt is low. D. financial managers view short-term rates as high risk.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-07 Examine risk and profitability in determining the financing plan for current assets. Topic: 06-18 Toward An Optimal Policy

29. Which of the following is a true statement concerning interest rates? A. Short-term rates are not influenced by inflation B. Long-term rates are influenced by current demands for money. C. During 1990 the term structure of interest rates formed an inverted yield curve. D. During 2016 the term structure of interest rates formed an inverted yield curve.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-12 Term Structure Shapes

30. The term structure of interest rates or the yield curve: A. is normal when short-term rates are higher than long-term rates. B. is inverted when short-term rates are lower than long-term rates. C. shows the yield to maturity for securities of equal risk over time. D. is always flat in the short-term.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure of Interest Rates

31. A conservatively financed firm would: A. use long-term financing for all capital assets and short-term financing for all other assets. B. finance a portion of permanent assets and short-term assets with short-term debt. C. use equity to finance capital assets, long-term debt to finance permanent assets, and shortterm debt to finance fluctuating current assets. D. use long-term financing for permanent assets and capital assets and a portion of the shortterm fluctuating assets and use short-term financing for all other short-term assets.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-05 Explain financing of assets in terms of hedging. Topic: 06-08 Long-Term Financing (Conservative)

32. The term structure of interest rates: A. is based on historical yields. B. is based on current yields. C. is based on future yields. D. is based on current and future prices.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure of Interest Rates

33. Which of the following yield curves would be characteristic at peak periods of economic expansions? A. Upward sloping B. Downward sloping C. Horizontal D. Humped

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-12 Term Structure Shapes

34. An inverted yield curve would suggest that: A. interest rates are expected to rise. B. interest rates are expected to fall. C. inflation is expected to rise in the future. D. long-term rates are being pushed up by the Bank of Canada's monetary policy.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-13 Interest Rate Volatility

35. Publishing companies are characterized by: A. flat production to match sales. B. seasonal sales. C. low inventories due to computer inventory management. D. short term financing choices.

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Chapter 06 - Working Capital and the Financing Decision Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-03 Identify working capital management considerations for permanent components; the effect of sales/production schedules; and liquidity versus risk. Topic: 06-03 Controlling Assets—Matching Sales and Production

36. The belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of the: A. the expectations hypothesis. B. segmentation theory. C. the liquidity premium theory. D. market credit crunch theory.

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 06-06 Describe the term structure of interest rates; explain the theories that suggest its shape; and assess how it may be of use to a financial manager. Topic: 06-11 Term Structure of Interest Rates
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