[91] .Which of the following statement completions is CORRECT? If the yield curve is upward sloping,

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[91].Which of the following statement completions is CORRECT?  If the yield curve is upward sloping, then the marketable securities held in a firm's portfolio, assumed to be held for emergencies, should

 

a.consist mainly of short-term securities because they pay higher rates.

b.consist mainly of U.S. Treasury securities to minimize interest rate risk.

c.consist mainly of short-term securities to minimize interest rate risk.

d.be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.

e.consist mainly of long-term securities because they pay higher rates.

 

[92].Which of the following statements is CORRECT?

 

a.Commercial paper is a form of short-term financing that is primarily used by large, strong, financially stable companies.

b.Short-term debt is favored by firms because, while it is generally more expensive than long-term debt, it exposes the borrowing firm to less risk than long-term debt.

c.Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.

d.Commercial paper is typically offered at a long-term maturity of at least five years.

e.Trade credit is provided only to relatively large, strong firms.

 

[93].Which of the following statements is NOT CORRECT?

 

a.Accruals are “free” in the sense that no explicit interest is paid on these funds.

b.A conservative approach to working capital management will result in most, if not all, permanent current operating assets being financed with long-term capital.

c.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.

d.Bank loans generally carry a higher interest rate than commercial paper.

e.Commercial paper can be issued by virtually any firm so long as it is willing to pay the going interest rate.

 

[94].Which of the following statements is CORRECT?

 

a.Conservative firms generally use no short-term debt and thus have zero current liabilities.

b.A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is normally higher than that of long-term debt.

c.If a firm that can borrow from its bank at a 6% interest rate buys materials on terms of 2/10 net 30, and if it must pay by Day 30 or else be cut off, then we would expect to see zero accounts payable on its balance sheet.

d.If one of your firm's customers is “stretching” its accounts payable, this may be a nuisance but it will not have an adverse financial impact on your firm if the customer periodically pays off its entire balance.

e.Under normal conditions, a firm's expected ROE would probably be higher if it financed with short-term rather than with long-term debt, but using short-term debt would probably increase the firm's risk.

 

[95].Which of the following statements is NOT CORRECT?

 

a.Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.

b.The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.

c.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.

d.Managing working capital is important because it influences financing decisions and the firm's profitability.

e.A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.

 

[96].Which of the following statements is CORRECT?

 

a.If cash inflows from collections occur in equal daily amounts but most payments must be made on the 10th of each month, then a regular monthly cash budget will be misleading.  The problem can be corrected by using a daily cash budget.

b.Sound working capital policy is designed to maximize the time between cash expenditures on materials and the collection of cash on sales.

c.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.

d.If a firm sells on terms of net 90, and if its sales are highly seasonal, with 80% of its sales in September, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in October than in August.

e.Depreciation is included in the estimate of cash flows (Cash flow = Net income = Depreciation); hence depreciation is set forth on a separate line in the cash budget.

 

 

 

 

 

[97].Which of the following statements is CORRECT?

 

a.A conservative financing policy is one where the firm finances part of its fixed assets with short-term capital and all of its net working capital with short-term funds.

b.If a company receives trade credit under terms of 2/10 net 30, this implies that the company has 10 days of free trade credit.

c.One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its cash budget.

d.If a firm has a relatively aggressive current asset financing policy vis-à-vis other firms in its industry, then its current ratio will probably be relatively high.

e.Accruals are an expensive but commonly used way to finance working capital.

 

 

  Problems

 

[98].Albrecht Inc. is a no-growth firm whose sales fluctuate seasonally, causing total assets to vary from $320,000 to $410,000, but fixed assets remain constant at $260,000.  If the firm follows a maturity matching (or moderate) working capital financing policy, what is the most likely total of long-term debt plus equity capital?

 

a.$260,642

b.$274,360

c.$288,800

d.$304,000

e.$320,000

 

[99].Brothers Breads has the following data. What is the firm's cash conversion cycle?

 

Inventory conversion period =50 days

Average collection period =17 days

Payables deferral period =25 days

 

a.31 days

b.34 days

c.38 days

d.42 days

e.46 days

 

[100].Fireside Inc. has the following data.  What is the firm's cash conversion cycle?

 

Inventory conversion period =38 days

Average collection period =19 days

Payables deferral period =20 days

 

a.33 days

b.37 days

c.41 days

d.45 days

e.49 days

 

 

 

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