1- To financial analysts, "working capital" means the same thing as __________.
o total assets
o fixed assets
o current assets
o current assets minus current liabilities.
Ref: Financial analysts use the term "working capital" when referring to current assets.
2- Which of the following would be consistent with an aggressive approach to financing working capital?
o Financing short-term needs with short-term funds.
o Financing permanent inventory buildup with long-term debt.
o Financing seasonal needs with short-term funds.
o Financing some long-term needs with short-term funds.
3- Which of the following would be consistent with a conservative approach to financing working capital?
o Financing short-term needs with short-term funds.
o Financing short-term needs with long-term debt.
o Financing seasonal needs with short-term funds.
o Financing some long-term needs with short-term funds.
Ref: This is an aggressive approach as the firm needs to find short-term financing over and over, but it is paying a lower interest cost
4- Which of the following would be consistent with a hedging (maturity matching) approach to financing working capital?
o Financing short-term needs with short-term funds.
o Financing short-term needs with long-term debt.
o Financing seasonal needs with long-term funds.
o Financing some long-term needs with short-term funds.
Ref: This is an aggressive approach as the firm needs to find short-term financing over and over, but it is paying a lower interest cost
5- Which of the following is a basic principle of finance as it relates to the management of working capital?
o Profitability varies inversely with risk.
o Liquidity moves together with risk.
o Profitability moves together with risk.
o Profitability moves together with liquidity.
Ref: Profitability and liquidity move inversely as the firm will decrease profitability if it increases the liquidity of the firm.
6- Which of the following illustrates the use of a hedging approach to financing assets?
o Temporary current assets financed with long-term liabilities.
o Permanent working capital financed with long-term liabilities.
o Short-term assets financed with equity
o All assets financed with a mixture of 50% equity and 50% long-term debt.
Ref: The hedging approach attempts to match the maturities of both assets and liabilities. In this case all financing is long-term in nature and there is no short-term financing to match the short-term assets.
7- In deciding the optimal level of current assets for the firm, management is confronted with __________.
o a trade-off between profitability and risk
o a trade-off between liquidity and risk
o a trade-off between equity and debt
o a trade-off between short-term versus long-term borrowing
Ref: Financing issues, such as short- versus long-term, are not addressed in this question as the focus is on the amount of current assets.
8- Which of the following statements is most correct?
o For small companies, long-term debt is the principal source of external financing.
o Current assets of the typical manufacturing firm account for over half of its total assets.
o Strict adherence to the maturity matching approach to financing would call for all current assets to be financed solely with current liabilities.
o Similar to the capital structure management, working capital management requires the financial manager to make a decision and not address the issue again for several months.
Ref: Working capital management involves the daily involvement of the financial manager.
9- The amount of current assets required to meet a firm's long-term minimum needs is referred to as __________ working capital.
o permanent
o temporary
o net
o gross
Ref: In this instance, it represents the amount of current assets.
10- The amount of current assets that varies with seasonal requirements is referred to as __________ working capital.
o permanent
o net
o temporary
o gross
Ref: In this instance, it represents the amount of current assets.
11- Having defined working capital as current assets, it can be further classified according to __________.
o financing method and time
o rate of return and financing method
o time and rate of return
o components and time
Ref:
12- Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of the following is the most appropriate form for financing a new capital investment in plant and equipment?
o Trade credit.
o 6-month bank notes.
o Accounts payable.
o Common stock equity.
Ref:
13- Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of the following is the most appropriate non-spontaneous form for financing the excess seasonal current asset needs?
o Trade credit.
o 6-month bank notes.
o Accounts payable.
o Common stock equity.
Ref: This is a long-term form of financing and would not be appropriate under the maturity matching approach.
14- Under a conservative financing policy a firm would use long-term financing to finance some of the temporary current assets. What should the firm do when a "dip" in temporary current assets causes total assets to fall below the total long-term financing?
o Use the excess funds to pay down long-term debt.
o Invest the excess long-term financing in marketable securities.
o Use the excess funds to repurchase common stock.
o Purchase additional plant and equipment.
Ref: This is a possibility, but not the best solution as the asset needs are volatile and increasing in the long-term (assumed). Thus, the firm is not likely to have a need for additional plant and equipment when asset use is already below previous needs. The firm should invest in marketable securities of appropriate length and type.
15- Which of the following statements is correct for a conservative financing policy for a firm relative to a former aggressive policy?
o The firm uses long-term financing to finance all fixed and current assets.
o The firm will see an increase in its expected profits.
o The firm will see an increase in its risk profile.
o The firm will increase its dividends per share (DPS) this period.
Ref: There is no way for us to determine the impact on dividends at this point since most dividend decisions are made with a very long-term perspective.
16- Which of the following statements is correct for an aggressive financing policy for a firm relative to a former conservative policy?
o The firm will use long-term financing to finance all fixed and current assets.
o The firm will see an increase in its expected profits.
o The firm will see a decline in its risk profile.
o The firm will need to issue additional common stock this period to finance the assets.
Ref: The aggressive approach uses greater relative short-term financing. Thus, this is not an appropriate approach for additional financing.
17- How can a firm provide a margin of safety if it cannot borrow on short notice to meet its needs?
o Maintain a low level of current assets (especially cash and marketable securities).
o Shorten the maturity schedule of financing.
o Increasing the level of fixed assets (especially plant and equipment).
o Lengthening the maturity schedule of financing.
18- Risk, as it relates to working capital, means that there is jeopardy to the firm for not maintaining sufficient current assets to __________.
o meet its cash obligations as they occur and take advantage of prompt payment discounts
o support the proper level of sales and take prompt payment discounts
o maintain current and acid-test ratios at or above industry norms
o meet its cash obligations as they occur and support the proper level of sales
19- If a company moves from a "conservative" working capital policy to an "aggressive" policy, it should expect __________.
o liquidity to decrease, whereas expected profitability would increase
o expected profitability to increase, whereas risk would decrease
o liquidity would increase, whereas risk would also increase
o risk and profitability to decrease
Ref: Risk and profitability would increase
20- To financial analysts, "net working capital" means the same thing as __________.
o total assets
o fixed assets
o current assets
o current assets minus current liabilities
MUHAMMAD ZAHEER
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