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FIN 534 FIN534 Quiz 9
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1. 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 Answer consist mainly of long-term securities because they pay higher rates. consist mainly
of short-term securities because they pay higher rates. consist mainly of U.S. Treasury securities to minimize interest rate risk. consist mainly of
short-term securities to minimize interest rate risk. be balanced between long- and short-term securities to minimize the adverse effects of either
an upward or a downward trend in interest rates. 2 points Question 2 1. A lockbox plan is most beneficial to firms that Answer have suppliers who
operate in many different parts of the country. have widely dispersed manufacturing facilities. have a large marketable securities portfolio and
cash to protect. receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks. have customers who
operate in many different parts of the country. 2 points Question 3 1. Which of the following actions would be likely to shorten the cash conversion
cycle? Answer Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days.
Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50. Begin to take discounts on inventory purchases; we buy on terms of
2/10 net 30. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods
from 10 days to 20 days. Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60. 2 points Question 4 1. Which of the
following statements is CORRECT? Answer Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit
department. If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm’s DSO
will probably increase. If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts. If a firm
sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales
per for past 12 months/365) would probably be lower in January than in July. If a firm changed the credit terms offered to its customers from 2/10
net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the
DSO. 2 points Question 5 1. Which of the following statements is NOT CORRECT? Answer 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. Credit policy has an impact
on working capital because it influences both sales and the time before receivables are collected. The cash budget is useful to help estimate future
financing needs, especially the need for short-term working capital loans. 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. Managing working capital is important because it influences financing
decisions and the firm’s profitability. 2 points Question 6 1. Which of the following statements is CORRECT? Answer Net working capital is
defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working
capital has increased. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is
considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. If a company follows a policy of
“matching maturities,” this means that it matches its use of common stock with its use of long-term debt as opposed to short-term debt. Net
working capital is defined as current assets minus the sum of payables and accruals, and any decrease in the current ratio automatically indicates
that net working capital has decreased. If a company follows a policy of “matching maturities,” this means that it matches its use of short-term
debt with its use of long-term debt. 2 points Question 7 1. Other things held constant, which of the following will cause an increase in net working
capital? Answer Cash is used to buy marketable securities. A cash dividend is declared and paid. Merchandise is sold at a profit, but the sale is on
credit. Long-term bonds are retired with the proceeds of a preferred stock issue. Missing inventory is written off against retained earnings. 2
points Question 8 1. Which of the following statements is CORRECT? Answer Accruals are an expensive but commonly used way to finance
working capital. 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. 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. One cannot tell if a firm has a conservative, aggressive, or moderate current asset financing policy without an examination of its
cash budget. 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. 2 points Question 9 1. Which of the following statements is CORRECT? Answer 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. Conservative firms generally use no short-term debt and thus have zero current liabilities. 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. 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. 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. 2 points Question 10
1. Which of the following statements is NOT CORRECT? Answer Commercial paper can be issued by virtually any firm so long as it is willing to
pay the going interest rate. Accruals are “free” in the sense that no explicit interest is paid on these funds. A conservative approach to working
capital management will result in most if not all permanent current operating assets being financed with long-term capital. 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. Bank loans generally carry a higher interest rate than
commercial paper. 2 points Question 11 1. Firms generally choose to finance temporary current operating assets with short-term debt because
Answer matching the maturities of assets and liabilities reduces risk under some circumstances, and also because short-term debt is often less
expensive than long-term capital. short-term interest rates have traditionally been more stable than long-term interest rates. a firm that borrows
heavily on a long-term basis is more apt to be unable to repay the debt than a firm that borrows short term. the yield curve is normally downward
sloping. short-term debt has a higher cost than equity capital. 2 points Question 12 1. Which of the following statements is CORRECT? Answer
Depreciation is included in the estimate of cash flows (Cash income + Depreciation), hence depreciation is set forth on a separate line in the cash
budget. 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. Sound working capital policy is designed to
maximize the time between cash expenditures on materials and the collection of cash on sales. 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. 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 for past 12 months/365) would
probably be lower in October than in August. 2 points Question 13 1. A lockbox plan is Answer used to protect cash, i.e., to keep it from being
stolen. used to identify inventory safety stocks. used to slow down the collection of checks our firm writes. used to speed up the collection of
checks received. used primarily by firms where currency is used frequently in transactions, such as fast food restaurants, and less frequently by
firms that receive payments as checks. 2 points Question 14 1. Which of the following statements is most consistent with efficient inventory
management? The firm has a Answer below average inventory turnover ratio. low incidence of production schedule disruptions. below average
total assets turnover ratio. relatively high current ratio. relatively low DSO. 2 points Question 15 1. Other things held constant, which of the
following would tend to reduce the cash conversion cycle? Answer Carry a constant amount of receivables as sales decline. Place larger orders for
raw materials to take advantage of price breaks. Take all discounts that are offered. Continue to take all discounts that are offered and pay on the
net date. Offer longer payment terms to customers.