Foundations of Financial Mgmt: Ch 6-2

Pressure to increase current asset buildup often results from
rapidly expanding sales.
Working capital management is primarily concerned with the management and financing of
current assets.
A financial executive devotes the most time to
Working capital management.
The term “permanent current assets” implies
some minimum level of current assets that are not self-liquidating.
The concept of a self-liquidating asset implies that
all the product will be sold receivables collected and bills paid over the time period specified.
Well implemented web-based supply chain management has all of the following benefits except
reduces the number of suppliers bidding for a company’s business.
Permanent current assets are not a factor in a manager’s decision making process when all current assets will be
self-liquidating.
RFID chips have been used to
track livestock. track marathon runner’s time. track inventory at retailers.
One advantage of level production is that
manpower and equipment are used efficiently at lower cost.
Publishing companies are characterized by
seasonal sales.
If a firm uses level production with seasonal sales
as sales decline inventory will increase.
Retail companies like Target and The Limited exhibit sales patterns that are mostly influenced by
seasonality.
Retail companies like Target and Limited Brands are more likely to have
cyclical sales and more volatile earnings per share.
The use of cash budgeting procedures:
helps the firm plan its current asset levels for a given production plan. makes managing inventory easier under seasonal production. illustrates fluctuating levels of current assets for a given production plan.
When actual sales are greater than forecasted sales
inventory will decline. production schedules might have to be revised upward. accounts receivable will rise.
Assuming level production throughout the year & assuming receivables are collected in two equal installments over the two months subsequent to the sales period developing the cash budget requires the following steps:
estimate monthly net cash flow and bank borrowing or repayments
Normally permanent current assets should be financed by
long-term funds.
Ideally which of the following type of assets should be financed with long-term financing?
Fixed assets and permanent current assets
A conservatively financed firm would use long-term financing for permanent current assets and fixed assets and
a portion of the short-term fluctuating assets and use short-term financing for all other short-term assets.
Generally more use is made of short-term financing because
short-term interest rates are generally lower than long-term interest rates. most firms do not have easy access to the capital markets.
The term structure of interest rates
is an indication of investors’ expectations about inflation and future interest rates. will be downward sloping if short-term interest rates are higher than long-term rates. will be upward sloping under normal conditions.
The term structure of interest rates
changes daily to reflect current competitive conditions in the money and capital markets.
The term structure of interest rates is influenced by
inflation. money supply. Federal Reserve activities.
The term structure of interest rates or the yield curve
shows the yield to maturity for securities of equal risk over time.
The belief that investors require a higher return to entice them into holding long-term securities is the viewpoint of
the liquidity premium theory.
The term structure of interest rates
is often referred to as the yield curve. depicts the relative level of short and long-term interest rates. is usually constructed with U.S. government securities of varying maturities.
Yield curves change daily to reflect
changing conditions in the money and capital markets. new inflation expectations. changing conditions in the overall economy.
U.S. government securities are used to construct yield curves because
they are free of default risk. the large number of maturities form a continuous curve.
Some analysts believe that the term structure of interest rates is determined by the behavior of various types of financial institutions. This theory is called the
market segmentation theory.
The theory of the term structure of interest rates which suggests that long-term rates are determined by the average of short-term rates expected over the time that a long-term bond is outstanding is the
expectations hypothesis.
A “normal” term structure of interest rates would depict
long-term rates higher than short-term rates.
A firm will usually increase the ratio of short-term debt to long-term debt when
the term structure is inverted and expected to shift down.
Which of the following yield curves would be characteristic during a period of high economic growth?
upward sloping
An inverted yield curve would suggest that
interest rates are expected to fall.
When the term structure of interest rates is downward sloping and interest rates are expected to decline the
financial manager generally borrows short-term.
During tight money periods
short-term rates are higher than long-term rates.
Which of the following techniques allows explicit consideration of more than one possible outcome?
Expected value
Which of the following is a reason for diminishing liquidity in modern corporations?
Just-in-time inventory programs. Better utilization of cash via computers. Increased use of point-of-sale terminals.
An aggressive risk-oriented firm will likely
borrow short-term and carry low levels of liquidity.
Which of the following is not a condition under which a prudent manager would accept some risk in financing?
Inventory is highly perishable
Risk exposure due to heavy short-term borrowing can be compensated for by
carrying highly liquid assets.
Which of the following combinations of asset structures and financing patterns is likely to create the least volatile earnings?
Liquid assets and heavy long-term borrowing
Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings?
Illiquid assets and heavy short-term borrowing
An aggressive working capital policy would have which of following characteristics?
A high ratio of short-term debt to long-term sources of funds.
When the yield curve is upward sloping
generally a financial manager should:, utilize long-term financing
When the yield curve is downward sloping generally a financial manager should
utilize short-term financing