CH 6 POF

question

The faster a firm’s growth in sales, the more likely it is that an increasing percentage of financing will be internally generated. True False
answer

f
question

Supply chain management has little impact on financial performance and is primarily a marketing and management concept. True False
answer

f
question

Many companies such as McDonald’s have embraced supply chain management using Web-based procedures. True False
answer

t
question

Working capital management is relatively unimportant for a small business. True False
answer

f
question

The financial manager generally needs to devote little time to management of working capital. True False
answer

f
question

Liquidating current assets are really fixed assets since they have lives greater than one year. True False
answer

f
question

The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales forecast. True False
answer

t
question

One of the primary benefits of implementing supply chain management is a reduction in inventory on hand. True False
answer

t
question

Permanent current assets are not similar to fixed assets because they are fully liquidated within the year. True False
answer

f
question

Walmart requires manufacturers to ship goods with RFID tags so it can better track inventory and reduce the need for supply chain management. True False
answer

f
question

When using level production, inventory will peak in the month where unit sales trend above the planned production level. True False
answer

f
question

Cash, accounts receivables, and inventory all move monthly in the same direction under level production. True False
answer

f
question

Level production methods smooth production schedules and utilize manpower and equipment more efficiently than seasonal production methods. True False
answer

t
question

The use of point-of-sale terminals has made it easier for many retail store managers to manage their inventory. True False
answer

t
question

The cash budget combines the cash receipts and cash payments schedules in determining cash flow. True False
answer

t
question

Ideally, permanent current assets should be financed exclusively with short-term borrowings. True False
answer

f
question

As a general rule, it is desirable to finance the permanent assets, including “permanent current assets,” with long-term debt and equity. True False
answer

t
question

Increased use of long-term financing is generally a more conservative approach to current asset financing. True False
answer

t
question

A “risky” financial plan will use long-term financing for fixed assets, permanent current assets, and a portion of temporary current assets. True False
answer

f
question

Short-term financing is risky because of the possibility of rising short-term rates and the inability of always being able to refund short-term debt. True False
answer

t
question

Short-term interest rates are generally lower than long-term interest rates. True False
answer

t
question

By using long-term capital to cover short-term needs, the firm is virtually assured of becoming technically insolvent. True False
answer

f
question

Heavy use of long-term financing generally leads to lower financing costs. True False
answer

f
question

During an economic “boom” period, a shortage of low-cost financing alternatives exists. True False
answer

t
question

The “term structure of interest rates” refers to the relationship between yields on debt and their maturities. True False
answer

t
question

The “term structure of interest rates” depicts the competitive cost of funds for the various short-term sources of funds such as Treasury bills, commercial paper, and bank CDs. True False
answer

f
question

The “term structure of interest rates” is a schedule that tells when a company’s bonds mature and shows how many dollars a firm must pay in interest payments. True False
answer

f
question

Yield curves change very little in the short run (three months). True False
answer

f
question

If the liquidity premium theory were the only correct theory, yield curves would always be upward-sloping. True False
answer

t
question

The ratio of long-term financing to short-term financing at any given time will be greatly influenced by the term structure of interest rates. True False
answer

t
question

It is not necessary to understand interest rate movements when deciding the structure of short-term debt relative to long-term debt. True False
answer

f
question

The behavior of various kinds of financial institutions determines the shape of the yield curve, according to the market segmentation theory. True False
answer

t
question

Only the market segmentation theory has any significant impact on interest rates. True False
answer

f
question

According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, long-term rates are expected to decline. True False
answer

f
question

According to the expectations hypothesis, when long-term interest rates are higher than short-term interest rates, short-term rates are expected to rise. True False
answer

t
question

Short-term interest rates have historically been more volatile than long-term rates. True False
answer

t
question

The successful financial manager is very interested in the term structure of interest rates but is not concerned with the relative volatility or historical level of interest rates. True False
answer

f
question

Short-term interest rates are more dependent upon inflation than on current demand for money. True False
answer

f
question

Interest rates and inflation are inversely related. True False
answer

f
question

During tight money periods, short-term financing may be difficult to find. True False
answer

t
question

According to the expectations hypothesis, the expected value is the sum of the probabilities of all expected events. True False
answer

t
question

Expected value techniques allow consideration of more than one possible outcome. True False
answer

t
question

In periods of tight money, long-term rates are typically higher than short-term rates. True False
answer

f
question

If we examine the ratio of working capital to sales, we can see that for the last several decades, firms’ liquidity has been increasing. True False
answer

f
question

Heavy risk exposure due to short-term borrowing can be compensated for by carrying illiquid assets. True False
answer

f
question

Heavy use of long-term financing can generate more profit for the company during a tight money period. True False
answer

t
question

Use of long-term financing and the carrying of highly liquid assets is a high-risk combination. True False
answer

f
question

Firms with predictable cash-flow patterns should assume relatively low levels of risk. True False
answer

f
question

Firms with highly volatile and perishable inventory should assume relatively low levels of risk. True False
answer

t
question

The more short-term financing there is relative to long-term financing, the riskier the financial structure. True False
answer

t
question

Immediate access to capital markets allows greater risk-taking capability. True False
answer

t
question

Working capital management primarily involves long-term planning. True False
answer

f
question

The aggressive financing plan involves utilizing long-term financing for permanent and temporary current assets. True False
answer

f
question

Expected value analysis requires taking the difference between the actual projected outcome and the historic outcome times its probability and then summing these totals. True False
answer

f
question

Expected value analysis involves assigning “weights” to various expected future outcomes by their respective probabilities of occurrence. True False
answer

t
question

Long-term financing is usually less expensive than short-term financing because it is not as advantageous to the corporation as short-term financing. True False
answer

f
question

The three most important factors when selecting a financing plan are risk, asset liquidity, and timing. True False
answer

t
question

Generally, a downward sloping yield curve indicates an imminent economic boom. True False
answer

f
question

Pressure to increase current asset buildup often results from A. a decline in sales growth. B. rapidly expanding sales. C. increased demands of short-term creditors. D. None of the options
answer

b
question

Working capital management is primarily concerned with the management and financing of A. cash and inventory only. B. current assets and current liabilities. C. current assets. D. receivables and payables.
answer

c
question

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

d
question

The term “permanent current assets” implies A. the same thing as fixed assets. B. nonmarketable assets. C. some minimum level of current assets that are not self-liquidating. D. inventory.
answer

c
question

The concept of a self-liquidating asset implies that A. the working capital associated with a product will be liquidated within a one-year period. B. all the product will be sold, receivables collected, and bills paid over the time period specified. C. assets associated with the production of a product will be liquidated over the depreciable life of the assets. D. self-liquidating assets will be financed by long-term sources of capital.
answer

b
question

Well-implemented Web-based supply chain management has all of the following benefits except A. it reduces inventory on hand. B. it speeds up the ordering and delivery process. C. it reduces the number of suppliers bidding for a company’s business. D. it decreases overall costs.
answer

c
question

Permanent current assets are not a factor in a manager’s decision-making process when all current assets will be A. financed by short-term debt. B. long-term in nature. C. self-liquidating. D. internally financed.
answer

c
question

RFID chips have been used to A. track livestock. B. track marathon runners’ times. C. track inventory at retailers. D. All of the options
answer

d
question

Frisch Fish Corp expects net income next year to be $750,000. Inventory and accounts receivable will have to be increased by $650,000 to accommodate this sales level. Frisch will pay dividends of $300,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities? A. No external financing is required. B. $100,000 C. $200,000 D. $300,000
answer

c
question

Tinbergen Cans expects sales next year to be $50,000,000. Inventory and accounts receivable (combined) will increase $8,000,000 to accommodate this sales level. The company has a profit margin of 6 percent and a 30 percent dividend payout. How much external financing will the firm have to seek? Assume there is no increase in liabilities other than that which will occur with the external financing. A. No external financing will be needed. B. Less than $1,000,000 of external financing is needed. C. Between $1,000,000 and $5,000,000 of external financing is needed. D. More than $5,000,000 of external financing is needed.
answer

d
question

Samuelson will produce 20,000 units in January using level production. If each unit costs $500 to manufacture, what is the dollar value of ending inventory in January if beginning inventory is 10,000 units and January sales are 15,000? A. Less than $5,000,000 B. Between $5,000,000 and $10,000,000 C. Greater than $10,000,000 D. There will be a shortage.
answer

b
question

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. None of the options are advantageous.
answer

a
question

Publishing companies are characterized by A. fluctuating production to match sales. B. seasonal sales. C. low inventories due to computer inventory management. D. fluctuating production to match sales and seasonal sales.
answer

b
question

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 receivables will increase. D. as sales decline inventory and accounts receivables will increase.
answer

a
question

Retail companies like Target and Limited Brands exhibit sales patterns that are most typically influenced by A. cyclical economic indicators. B. competitive prices. C. seasonality. D. sales promotions.
answer

c
question

Retail companies like Target and Limited Brands are more likely to have A. stable sales and earnings per share. B. cyclical sales but less volatile earnings per share. C. cyclical sales and more volatile earnings per share. D. cyclical sales but stable accounts receivable and inventory.
answer

c
question

The use of cash budgeting procedures A. helps the firm plan its current asset levels for a given production plan. B. makes managing inventory easier under seasonal production. C. illustrates fluctuating levels of current assets for a given production plan. D. All of the options are correct.
answer

d
question

Assuming level production throughout the year, and assuming receivables are collected in two equal installments over the two months subsequent to the sales period, developing the related areas of the cash budget requires which of the following steps? A. Calculate beginning accounts receivable balance. B. Calculate COGS. C. Estimate monthly net cash flow and bank borrowing or repayments. D. Calculate ending inventory.
answer

c
question

When actual sales are greater than forecasted sales A. inventory will decline. B. production schedules might have to be revised upward. C. accounts receivable will rise. D. All of the options
answer

d
question

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

a
question

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

c
question

A conservatively financed firm would A. use long-term financing for all fixed 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 fixed assets, use long-term debt to finance permanent assets, and use short-term debt to finance fluctuating current assets. D. use long-term financing for permanent current assets, fixed assets, and a portion of the short-term fluctuating assets, and use short-term financing for all other short-term assets.
answer

d
question

Generally, more use is made of short-term financing because A. short-term interest rates are generally lower than long-term interest rates. B. most firms do not have basic access to the capital markets. C. short-term financing is usually more predictable than long-term financing. D. short-term interest rates are generally lower than long-term interest rates and most firms do not have basic access to the capital markets.
answer

d
question

The term structure of interest rates A. is an indication of investors’ expectations about inflation and future interest rates. B. will be downward sloping if short-term interest rates are higher than long-term rates. C. will be upward sloping under normal conditions. D. All of the options
answer

d
question

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 rate spread between bonds with different risk ratings such as AAA, AA, A, BBB, and so on. D. depicts interest rates for T-bills over the last year.
answer

a
question

The term structure of interest rates is influenced by A. inflation. B. the money supply. C. Federal Reserve activities. D. All of the options
answer

d
question

Financial managers can accurately predict future interest rates by A. calculating the anticipated inflation rate. B. gauging the Fed’s decision regarding the target federal funds rate. C. measuring investor sentiment and consumer confidence indices. D. None of the options
answer

d
question

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

c
question

The term structure of interest rates A. is often referred to as the yield curve. B. depicts the relative level of short- and long-term interest rates. C. is usually constructed with U.S. government securities of varying maturities. D. All of the options
answer

d
question

Yield curves change daily to reflect A. changing conditions in the money and capital markets. B. new inflation expectations. C. changing conditions in the overall economy. D. All of the options
answer

d
question

U.S. government securities are used to construct yield curves because A. they are free of default risk. B. the large number of maturities form a continuous curve. C. they are free of default risk and the large number of maturities form a continuous curve. D. None of the options
answer

c
question

As the economy moves through a business cycle, which of the following “term structure of interest rates” theories dominates the shape of the yield curve. A. The expectations hypothesis B. The market segmentation theory C. The liquidity premium theory D. None of these theories dominate the shape of the yield curve.
answer

d
question

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 A. expectations hypothesis. B. market segmentation theory. C. liquidity premium theory. D. theory of industry supply and demand for bonds.
answer

b
question

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 A. expectations hypothesis. B. segmentation theory. C. liquidity premium theory. D. market average rate theory.
answer

a
question

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. intermediate rates (one to five years) lower than both short-term and long-term rates.
answer

b
question

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.
answer

b
question

Which of the following yield curves would be characteristic during a period of high economic growth? A. Upward sloping B. Downward sloping C. Horizontal D. Humped
answer

a
question

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 Federal Reserve policy.
answer

b
question

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. None of the options
answer

a
question

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.
answer

b
question

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
answer

d
question

Under normal conditions (60% probability), Financing Plan A will produce a $30,000 higher return than Plan B. Under tight money conditions (40% probability), Plan A will produce $40,000 less than Plan B. What is the expected value of return? A. $2,800 B. $4,000 C. $4,800 D. $2,000
answer

d
question

Under normal conditions (70% probability), Plan A will produce a $20,000 higher return than Plan B. Under tight money conditions (30% probability), Plan A will produce $100,000 less than Plan B. What is the expected value of return? A. $28,000 B. ($16,000) C. $58,000 D. ($2,000)
answer

b
question

Which of the following is a reason for diminishing liquidity in modern corporations? A. Just-in-time inventory programs B. Better utilization of cash via computers C. Increased use of point-of-sale terminals D. All of the options are reasons for diminishing liquidity.
answer

d
question

Kuznets Rental Center requires $500,000 in financing over the next two years. Kuznets can borrow long-term at 8 percent interest per year for two years. Alternatively, Kuznets can borrow short-term and pay 6 percent interest in the first year, followed by their paying 9 percent interest in the second year. Assuming Kuznets pays off the accrued interest at the end of each year, which of the following statements is true? A. Kuznets will end up paying more in total interest under the long-term financing plan. B. Kuznets will end up paying less in total interest under the long-term financing plan. C. Kuznets will pay less in the first year under the long-term financing plan. D. Kuznets will pay less in the second year under the short-term financing plan.
answer

a
question

Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 7.5%, and with a long-term financing plan their rate will be 9%. By how much will their earnings after taxes change if they choose the more conservative financing plan instead of the more aggressive plan? A. $10,000 B. ($10,800) C. ($6,000) D. $6,000
answer

b
question

Hicks Health Clubs, Inc., expects to generate an annual EBIT of $750,000 and needs to obtain financing for $1,200,000 of assets. Their tax bracket is 40%. If the firm goes with a short-term financing plan, their rate will be 7.5%, and with a long-term financing plan their rate will be 9%. By how much will their earnings after taxes change if they choose the more aggressive financing plan instead of the more conservative plan? A. $10,800 B. ($10,000) C. ($6,000) D. $6,000
answer

a
question

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.
answer

b
question

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. The price of inventory is stable. D. Basic access to capital markets
answer

b
question

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

a
question

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 heavy short-term borrowing
answer

c
question

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
answer

a
question

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

c
question

The following are the expected one-year T-bill rates for the next four years: 3%, 4%, 5%, and 6%. According to the basic model of the expectations hypothesis, what would you expect the rate for three-year securities to be? A. 4% B. 4.5% C. 6% D. 3.75%
answer

a
question

Riley Co. is considering a short-term or long-term financing plan for $4,000,000 in assets. They expect the following one-year rates over the next three years: 6.5%, 7.75%, and 9%. Their long-term interest rate will be 7.5% for the three years. Assuming the rates follow their expectations, what will be the difference in interest costs over the three years? A. Long-term interest will be $30,000 more than short-term interest. B. Long-term interest will be $30,000 less than short-term interest. C. Long-term interest will be $140,000 less than short-term interest. D. None of the options
answer

b
question

Genetech has $4,000,000 in assets. It has decided to finance 30% with long-term financing (9% rate) and 70% with short-term financing (7%) rate. What will be its annual interest costs? A. $78,000 B. $126,000 C. $440,000 D. $304,000
answer

d
question

When the yield curve is upward sloping, generally a financial manager should A. utilize long-term financing. B. utilize short-term financing. C. wait for future financing. D. lease.
answer

a
question

When the yield curve is downward sloping, generally a financial manager should A. expect an economic boom. B. utilize long-term financing. C. increase investment and the level of financing overall. D. utilize short-term financing.
answer

d
question

Match the following with the items below: 1. self-liquidating assets 2. tight money 3. level production 4. trade credit 5. liquidity 6. market segmentation theory 7. working capital management 8. “permanent” current assets 9. term structure of interest rates 10. point of sales terminals 11. expected value 12. expectations hypothesis 13. fixed assets 14. “temporary” current assets Long-term interest rates reflect the average of expected short-term rates over the life of the long-term security. ___ The financing and management of the current assets of the firm. ___ Assets that are assumed to be long term in nature. ___ Current assets that will not be reduced or converted to cash within the normal operating cycle of the firm. ___ Depicts in graphical form the relationship between interest rates and maturities for securities of equal risk. ___ Financing provided by sellers or suppliers in the normal course of business. ___ Time period in which financing may be difficult to find and interest rates may be quite high by normal standards. ___ Equal monthly production used to smooth out production schedules and employ manpower and equipment more efficiently. ___ A representative quantity from a probability distribution arrived at by multiplying each outcome times the associated probability and summing the values. ___ Current assets that will be reduced or converted to cash within the normal operating cycle of the firm.___ The relative convertibility of short-term assets to cash. ___ Computer terminals in retail stores that may be used for inventory control or other purposes. ___ Assets that are converted in to cash within the normal operating cycle of the firm. ___ The relationship of short- and long-term interest rates relies on the maturity preference of various financial institutions. ___
answer

12,7,13,8,9,4,2,3,11,14,5,10,1,6

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