question

What is not a valid reason for holding cash?

answer

To earn the highest return possible.

question

The problem with stretching out the maturity of marketable securities is that

answer

There is a greater possibility of loss.

question

Companies that are mostly influenced by seasonal sales have to make a choice between

answer

Seasonal production and an uneven workforce A stable workforce and a fluctuating workforce Level production and inventory buildup

question

What is not a factor influencing the selection of a marketable security?

answer

Float

question

The corporate sweep account is an account that

answer

allows companies to maintain zero balances in their checking accounts, with their excess cash moved to an interest earning account and lets companies write checks on zero balance accounts with the understanding that when the check is presented for payment, money will be moved from the interest earning account to the appropriate payment account.

question

Some of the services provided around the clock by SWIFT

answer

Trade finance transactions International payments between banks Foreign exchange

question

The \"Financial Futures Market\"

answer

Allows for the delivery of financial instruments at a future point in time.

question

The Economic Order Quantity

answer

Assumes that delivery times of each order are consistent.

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

answer

market segmentation theory.

question

Money Market Funds are

answer

accounts that allow small investors to participate in buying large denomination securities.

question

The inventory decision model provides what type of information?

answer

Optimal Order Size

question

The required compensating balance is usually computed as

answer

percentage of the customer's loans outstanding, or percentage of the bank's commitments toward future loans to the customer.

question

Ideally what type of assets should be financed with long term financing?

answer

Fixed assets and permanent current assets

question

The prime rate

answer

has been quite volatile during these past two decades, moving several percentage points in a twelve month period.

question

Commercial paper that is sold without going through a broker or dealer is known as

answer

direct paper.

question

Money Market Funds

answer

earn competitive market rates of return.

question

The cost of carrying inventory do not include

answer

ordering costs

question

What are some methods used for controlling pledged inventory?

answer

Public warehousing Blanket inventory liens Floor planning

question

The Truth in Lending Law is primarily designed to protect

answer

consumers.

question

What is considered to be the least liquid of current assets?

answer

Inventory

question

Web based supply chain management has many benefits EXCEPT

answer

it reduces the number of suppliers bidding for a company's business.

question

The use of cash budgeting procedures

answer

Illustrates fluctuating levels of current assets for a given production plan. Makes managing inventory easier under seasonal production. Helps the firm plan its current asset levels for a given production plan.

question

Commercial paper that is sold without the use of an actual paper certificate is known as

answer

book-entry paper.

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. (T/F)

answer

True

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. (T/F)

answer

False

question

Heavy risk exposure due to short term borrowing can be compensated for by carrying illiquid assets. (T/F)

answer

False

question

Firms with predictable cash flow patterns should assume relatively low levels of risk. (T/F)

answer

False

question

Pressure to increase current asset buildup often results from

answer

rapidly expanding sales.

question

Working capital management is primarily concerned with the management and financing of

answer

current assets

question

The term permanent current assets implies

answer

some minimum level of current assets that are not self liquidating.

question

The concept of self liquidating assets implies that

answer

all the production will be sold, receivables collected, and bills paid over the time period specified.

question

Permanent current assets are not a factor in a managers decision making process when all current assets will be

answer

self-liquidating.

question

RFID chips have been used to

answer

track livestock track inventory at retailers track marathon runner's times

question

One advantage of level production is that

answer

manpower and equipment are used efficiently at lower costs.

question

Publishing companies are characterized by

answer

seasonal sales.

question

If a firm uses level production with seasonal sales

answer

As sales decline, inventory will increase.

question

Retail companies like Target and Limited Brands exhibit sales patterns that are most typically influenced by

answer

seasonality.

question

Retail companies like Target and Limited brands are more likely to have

answer

cyclical sales and more volatile earnings per share.

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 what step?

answer

Estimate monthly net cash flow and bank borrowing or repayments.

question

When actual sales are greater than forecasted sales

answer

Production schedules might have to be revised upward Accounts receivable will rise Inventory will decline

question

Normally, permanent current assets should be financed by

answer

long term funds

question

A conservatively financed firm would

answer

Use long term financing for permanent current assets, and a portion of the short term fluctuating assets, and use short term financing for all other short term assets.

question

Generally more use is made of short term financing because

answer

short term interest rates are generally lower than long term interest rates, and most firms do not have basic access to capital markets.

question

The term structure of interest rates

answer

Is an indication of investor's expectations about inflation and future interest rates Will be downward sloping if short term interest rates are higher than long term interest rates Will be upward sloping under normal conditions

question

The term structure of interest rates

answer

changes daily to reflect current competitive conditions in the money and capital market.

question

The term structure of interest rates is influenced by

answer

inflation the money supply Federal Reserve activities

question

The belief that investors require a higher return to entice them into holding long term securities is the view point of

answer

Liquidity Premium Theory

question

The term structure of interest rates

answer

is often referred to as the yield curve is usually constructed with U.S. government securities of varying maturities depicts the relative level of short and long term interest rates

question

Yield curve changes daily to reflect

answer

Changing conditions in the overall economy Changing conditions in the money and capital market New inflation expectations

question

U.S. government securities are used to construct yield curves because

answer

they are free of default risk and the large number of maturities form a continuous curve.

question

The theory of the term structure of interest rates, which suggests that long term interest rates are determined by the average of short term rates expected over the time that a long term bond is outstanding is the

answer

Expectations Hypothesis

question

A normal term structure of interest rates would depict

answer

long term rates higher than short term rates

question

A firm will usually increase the ratio of short term debt to long term debt when

answer

the term structure is inverted and expected to shift down

question

What yield curve would be characteristic during a period of high economic growth?

answer

Upward sloping

question

An inverted yield curve would suggest

answer

Interest rates are expected to fall

question

When the term structure of interest rates is downward sloping and interest rates are expected to decline the

answer

financial manager generally borrows short term.

question

During tight money periods

answer

short term rates are higher than long term rates

question

What technique allows explicit consideration of more than one possible outcome

answer

Expected Value

question

What is a reason for diminishing liquidity in modern corporations?

answer

Better utilization of cash via computers Increased use of point-of-sale terminals Just in time inventory programs

question

An aggressive risk orientated firm will

answer

borrow short term and carry low levels of liquidity

question

Which is not a condition under which a prudent manager would accept some risk in financing?

answer

Inventory is highly perishable

question

Risk exposure due to heavy short term borrowing can be compensated for by

answer

carrying highly liquid assests

question

What combination of asset structures and financing patterns is likely to create the least volatile earnings?

answer

Liquid assets and heavy long term borrowing

question

What combination of asset structures and financing patterns is likely to create the most volatile earnings?

answer

Illiquid assets and heavy short term borrowing

question

An aggressive working capital policy would have

answer

A high ratio of short-term debt to long-term sources of funds

question

When the yield curve is upward sloping, generally a financial manager should

answer

Utilize long term financing

question

When the yield curve is downward sloping, generally a financial manager should

answer

utilize short term financing

question

Cash flow does not rely on

answer

The monetary policy of the federal reserve

question

Cash flow relies on

answer

The payment patterns of customers The speed at which suppliers and creditors process checks The efficiency of the banking system

question

The difference between the amount of cash on the firm's books and the amount credited to it by its bank is

answer

float.

question

\"Float\" takes place because

answer

a lag exists between writing a check and clearing it through the banking system.

question

What is not a method for speeding up collections?

answer

Extended disbursement float

question

What are methods for speeding up collections?

answer

Lock box system Regional collection centers

question

The system whereby funds are moved between computer terminals without use of checks is

answer

Electronic funds transfer

question

How will widespread adoption of electronic funds transfer affect the use of \"Float\"?

answer

It will virtually eliminate it's use.

question

Automated clearing houses are commonly used by consumers to make direct payments for

answer

Insurance premiums Utility Bills Mortgage payments

question

One of the major cost savings for consumers using automated clearing houses are

answer

saving great amounts of money on postage the security of having the payments and deposits directly deposited or deducted from your account Saving time paying bills through check writing

question

What is not true about Automate Clearing Houses?

answer

Debits drawn on automated clearing houses cost less than half of the checks processed through financial institutions.

question

International cash management is more complex than domestic based cash management because

answer

Currency fluctuation risk Liquidity management issues Different banking systems

question

SWIFT's implementation of the \"smart card\" is expected to

answer

decrease the likelihood of electronic fraud.

question

International cash management systems are more complex than domestic cash management systems because

answer

liquidity management involving short term cash balances and deficits, has to be managed across international boundaries and time zones and is subject to the risk of currency fluctuations. Changing interest rates across countries

question

A multinational company may prefer to hold sizable cash balances in one currency rather than another because

answer

of high interest rates existing in one country and because one country's currency may be strong relative to the other.

question

Generally, the safest and most marketable instrument for short term investment is

answer

Treasury Bills

question

What security typically trades on a discount basis?

answer

Treasury Bills

question

A firm that wishes to minimize risk when investing idle cash would be LEAST likely to buy

answer

long-term corporate bonds

question

A banker's acceptance

answer

May be accepted by the bank for future payment. Can be traded in a relatively liquid market until maturity. Is a draft drawn on a bank and paid by the bank when presented to it.

question

Eurodollar certificates of deposit are

answer

used by banks to loan out funds to anyone seeking U.S. dollars

question

In comparison to securities issued by the U.S. government agencies like Federal Home Loan Bank

answer

yield slightly more than treasury securities

question

What security represents an unsecured promissory note issued by a corporation

answer

Commercial Paper

question

Characteristics of a money market mutual fund include:

answer

the purchase of shares by investors, the proceeds by which are reinvested into liquid short term securities

question

Characteristics of a money market deposit include:

answer

A lower risk than money market funds Insurance by federal agencies Generally a limit of three deposits or withdrawals per month

question

The three primary policy variables to consider when extending credit include:

answer

Collection policy Credit Standards Terms of trade

question

The most subjective and also significant segment of the 5 C's of credit for giving approval is

answer

Character

question

Dun and Bradstreet is best known for providing

answer

Credit scoring reports that rank a company's payment habits relative to its peer group

question

When developing a credit scoring report, many variables are considered. What best represents the major factors Dun and Bradstreet would examine?

answer

The financial statements, satisfactory or slow payment experiences, and negative public records (suits, liens, judgments, and bankruptcies).

question

What are qualitative measures for accounts receivable collection policies

answer

Aging of account receivables Ration of bad debts to credit sales Average collection period

question

Variables important to credit scoring models include

answer

Negative public records Age of company in years Facility ownership

question

Inventory is usually divided into what three basic categories

answer

Raw Material Work in progress Finished goods

question

For a given firm, holding all other factors constant, ordering costs per unit generally

answer

decline as average inventory increases

question

Use of the Economic Order Quantity

answer

Provides the lowest overall inventory costs

question

When using the economic order quantity model

answer

Costs are minimized when total carrying costs and total ordering costs are equal.

question

The amount of safety stock that a firm carries depends upon

answer

the predictability of inventory usage, and the time period necessary to fill inventory orders

question

A just in time inventory management program has what requirements?

answer

Quality production Minimizing inventory levels Close ties between suppliers, manufacturers, and customers

question

Cost savings from just in time inventory include

answer

greater productivity lower inventory financing costs reduced overhead expenses

question

Just in time ordering systems prevent

answer

stock outs

question

Methods of controlling receivables are

answer

using DBIS Offering a cash discount Reducing Net terms

question

Level production benefits are

answer

higher use of capacity maximum efficiency lower overtime usage

question

Carrying Costs are

answer

Interest expense Warehouse space Insurance premiums

question

What is generally the largest source of short term credit for small firms?

answer

Trade credit

question

Trade credit may used to finance a major part of a firm's working capital when

answer

the firm extends less liberal credit terms than the supplier

question

A large manufacturing firm has been selling on a 3/10 net 30 basis. The firm changes its credit to 2/20 net 90. What change might be expected on the balance sheet of its customers

answer

Increased payables and decreased bank loans

question

Large firms tend to be

answer

net suppliers of a trade credit

question

From a banker's point of view short term bank credit is an excellent way of financing

answer

seasonal bulges in inventory and receivables

question

Bank loans to business firms

answer

are usually short term in nature may require compensating balances are preferred by the banker to be self liquidating

question

Commercial bank term loans

answer

are offered to superior credit applicants

question

Recent problems facing the U.S. financial system were the result of what?

answer

A huge increase in the amount of mortgage backed securities being bundled up and sold in the markets. A huge drop in the value of mortgage backed securities. Government permitting commercial and investment banks to merge.

question

The London Inter Bank Offer Rate

answer

is an estimate of the interbank lending rate for London banks. has been lower than the U.S. prime rate for at least the last decade. competes with the U.S. prime rate for those companies with an international presence.

question

LIBOR is

answer

interest rate paid on eurodollar loans in the London market

question

Compensating Balances

answer

are used by banks as a substitute for charging service fees

question

A term loan is usually characterized by

answer

monthly or quarterly installment payments maturity of one to seven years a variable interest rate

question

In determining the cost of bank financing, and important factor is

answer

the effective rate

question

Commercial paper is very popular with firms because

answer

It can usually be issued below the prime rate

question

Commercial paper offers what advantages to the issuer?

answer

May be issued below the prime rate and requires no compensating balances

question

What is NOT a characteristic of commercial paper?

answer

It has one to two year maturity

question

What is not a true statement about commercial paper?

answer

Dealer paper is sold directly to the lender by a finance company

question

Multinational firms have found that they can lower borrowing costs

answer

by borrowing eurodollars at a rate lower than the U.S. prime rate and by borrowing foreign currencies through foreign subsidiaries at rates lower than the U.S. prime rate and then converting these foreign loans into dollars

question

Accounts receivable may be used as a source of financing by

answer

pledging the receivables as loan collateral selling securities backed by the receivables \"factoring\" the receivables to a finance company

question

What best describes the benefits to the borrower of selling asset-backed securities

answer

The borrower trade future cash flows for current cash flows and the asset backed security is likely to carry a high credit rating of AA or better.

question

What is associated with the recession of 07-09

answer

Commercial and investment banks were allowed to merge. Hundreds of bank failures occurred. Federal Reserve and Federal Deposit Insurance Corporation forced large banks at risk of collapse to be taken over by healthy banks.

question

The extent to which inventory financing may be used depends on the

answer

price stability of goods. perishability of goods. marketability of pledged goods.

question

What are methods for lenders to control pledged inventory?

answer

Warehousing Trust Receipts Blanket Inventory Liens

question

What method of controlling pledged inventory provides the greatest degree of security to the lender?

answer

Warehousing

question

Hedging refers to

answer

transaction that reduces risk exposure

question

Firms exposed to the risks of interest rate changes may reduce that risk by

answer

hedging in the financial future markets

question

If a firm has invested in corporate bonds, it may engage in financial futures contract in order to protect itself from

answer

rising interest rates.

question

what is NOT evident in a credit crunch?

answer

a decrease in interest rates occur

question

What is NOT a benefit of commercial paper to a corporation?

answer

It is less risky.

question

What is NOT a reason why a company may choose to pledge accounts receivables?

answer

A lower interest rate

question

What are reasons why a company may choose to pledge accounts receivables?

answer

It provides another source of financing for companies with lower credit ratings. The borrowing capacity fluctuates with accounts receivable.

Managerial Finance Test 3

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