Q&A Hero

Q: Suppose the Campus Bookstore purchases 50,000 boxes of writing tablets every year. Ordering costs are $100 per order and carrying costs are $0.40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now offers a quantity discount of $0.02 per box if the company buys tablets in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.) a. $1,000 loss b. $1,000 benefit c. $500 loss d. $500 benefit e. $0 (The change would not affect profits.)

Q: Cross Collectibles currently fills mail orders from all over the U.S. and receipts come in to headquarters in Little Rock, Arkansas. The firm's average accounts receivable (A/R) is $2.5 million and is financed by an 11 percent annual, simple interest bank loan. Cross is considering a regional lockbox system to speed up collections which it believes will reduce A/R by 20 percent. The annual cost of the system is $15,000. What is the estimated net annual savings to the firm from implementing the lockbox system? a. $500,000 b. $30,000 c. $60,000 d. $55,000 e. $40,000

Q: Wicker Corporation is determining whether to support $100,000 of its permanent current assets with a bank note or a short-term bond. The firm's bank offers a two-year note where the firm will receive $100,000 and repay $118,810 at the end of two years. The firm has the option to renew the loan at market rates. As an alternative, the firm can sell its own 8.5 percent annual coupon bonds, with $1,000 face value and 2-year maturity, at a price of $973.97. Comparing the cost of the two alternatives, how many percentage points lower is the interest rate on the less expensive debt instrument? a. 0%; the rates are equal. b. 1.2% c. 1.0% d. 1.8% e. 0.6%

Q: Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days. Out of convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting until day 30. You point out that the approximate cost of not taking the discount and paying on day 30 is around 37 percent. But since your firm is not taking discounts and is paying on day 20, what is the effective annual percentage cost (not approximate) of your firm's current practice, using a 360-day year? a. 36.7% b. 105.4% c. 73.4% d. 43.6% e. 106.9%

Q: You have recently been hired to improve the performance of Multiplex Corporation which has been experiencing a severe cash shortage. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 360-day year, what is your estimate of the firm's current cash conversion cycle? Current inventory = $120,000 Annual sales = $600,000 Accounts receivable = $160,000 Accounts payable = $25,000 Total annual purchases = $360,000 Purchases credit terms: net 30 days Receivables credit terms: net 50 days a. 49 days b. 143 days c. 100 days d. 168 days e. 191 days

Q: Porta Stadium, Inc. has annual sales of $50,000,000. Its cost of goods sold equals 80 percent of sales, and the company keeps $10,000,000 of inventory on hand. On average, the firm has accounts receivable of $7,500,000. The firm buys all raw materials on credit, its trade credit terms are net 30 days, and it pays on time. The firm's managers are searching for ways to shorten the cash conversion cycle. If sales can be maintained at existing levels, but inventory can be lowered by $2,000,000 and accounts receivable lowered by $833,333, what will be the net change in the cash conversion cycle? Use a 360-day year. a. +114 days b. u2212114 days c. +24 days d. u221224 days e. u221290 days

Q: Your firm buys on credit terms of 2/10, net 45, and it always pays on day 45. If you calculate that this policy effectively costs your firm $157,500 each year, what is the firm's average accounts payable balance? a. $1,234,000 b. $75,000 c. $157,500 d. $625,000 e. $750,000

Q: The accounts of Weston Inc. indicate the following changes in long-term assets and capital for the past year: (1) Fifty thousand (50,000) shares of common stock were sold at $25 per share. (2) Two million dollars ($2 million) in bonds matured and were retired. (3) Dividends of $1 million were paid. (4) Net fixed assets declined by $200,000. (5) Net income was calculated to be $2 million. (6) Depreciation expense was $1.5 million. What was the increase or decrease in net working capital? (Hint: Changes in net fixed assets incorporate changes in both gross fixed assets and accumulated depreciation.) a. +$450,000 b. u2212$250,000 c. u2212$1,950,000 d. +$1,950,000 e. +$3,300,000

Q: A firm purchases raw materials on June 1st. It converts the raw materials into inventory by the last day of the month, June 30th. However, it pays for the materials on June 15th. On July 31st, it sells the finished goods inventory. Then the firm collects cash from the sale one month later on August 31st. If this sequence accurately represents the firm's average working capital cycle, what is the firm's cash conversion cycle in days? a. 45 days b. 77 days c. 61 days d. 107 days e. 30 days

Q: Picard Orchards requires a $100,000 annual loan in order to pay laborers to tend and harvest its fruit crop. Picard borrows on a discount interest basis at a simple annual rate of 11 percent. If Picard must actually receive $100,000 net proceeds to finance its crop, then what must be the face value of the note? a. $111,000 b. $100,000 c. $112,360 d. $89,000 e. $108,840

Q: Ace Hardware's EOQ is 100 widgets, and it maintains a 50 unit safety stock. Which of the following is Ace's average inventory? a. 100 units b. 60 units c. 57.07 units d. 12.25 units e. 75 units

Q: Calculate the economic ordering quantity for Nashville Records Inc., given the following information: Sales = 15,000 units per year Sales price = $10 per unit Purchase price = $5 Carrying cost = 0.25 times inventory value Fixed cost per order = $1,000 a. 3,464 units b. 4,899 units c. 346 units d. 490 units e. 1,549 units

Q: Sound Systems Inc. wants to use the economic ordering quantity model to determine the optimal order quantity of speakers. The wholesale unit purchase price to Sound Systems is $50, and annual sales at a $100 per unit retail price total $50,000. The fixed cost of placing an order is $10, and the carrying cost is 50 percent of the purchase price. What is the EOQ, in units? a. 10 b. 20 c. 30 d. 40 e. 50

Q: For the Prince Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days. Assume a 360-day year. If Prince's annual sales are $936,000, what is the firm's average accounts receivable balance? a. $104,000 b. $118,000 c. $156,000 d. $212,000 e. $260,000

Q: If Hot Tubs Inc. had sales of $2 million per year (all credit) and its days sales outstanding was equal to 35 days, what was its average amount of accounts receivable outstanding (assume a 360-day year)? a. $194,444 b. $57,143 c. $5,556 d. $97,222 e. $212,541

Q: Jumpdisk Company writes checks averaging $15,000 a day, and it takes 5 days for these checks to clear. The firm also receives checks in the amount of $17,000 per day, but the firm loses three days while its receipts are being deposited and cleared. What is the firm's net float in dollars? a. $126,000 b. $75,000 c. $32,000 d. $24,000 e. $16,000

Q: Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks. The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment. On the used portion of the loan, Inland paid 1.5 percent above prime for the funds actually borrowed on an annual simple interest basis. The prime rate was at 9 percent for the year. If Inland borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year, what was the total dollar cost of the loan agreement for one year? a. $560,000 b. $650,000 c. $540,000 d. $900,000 e. $675,000

Q: If you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, but interest is prepaid (a discounted loan), then what is your effective annual rate? a. 14.00% b. 8.57% c. 16.28% d. 21.21% e. 28.00%

Q: Your company has been offered credit terms on its purchases of 4/30, net 90. What will be the approximate cost of trade credit if your company pays on the 35th day after receiving the invoice? a. 30% b. 300% c. 3% d. 87% e. 156%

Q: Dixie Tours Inc. buys on terms of 2/15, net 30. It does not take discounts, and it typically pays 35 days after the invoice date. Net purchases amount to $720,000 per year. What is the approximate percentage cost of its non-free trade credit? a. 17.2% b. 23.6% c. 26.1% d. 7% e. 50.6%

Q: A firm is offered trade credit terms of 3/15, net 45. The firm does not take the discount, and it pays after 67 days. What is the approximate annual cost of not taking the discount? a. 21.41% b. 22.07% c. 22.95% d. 23.48% e. 24.52%

Q: Wildthing Amusements Company's total assets fluctuate between $320,000 and $410,000, while its fixed assets remain constant at $260,000. If the firm follows a maturity matching or moderate working capital financing policy, what is the likely level of its long-term financing? a. $90,000 b. $260,000 c. $350,000 d. $410,000 e. $320,000

Q: For the Cook County Company, the average age of accounts receivable is 60 days, the average age of accounts payable is 45 days, and the average age of inventory is 72 days. Assuming a 360-day year, what is the length of the firm's cash conversion cycle? a. 87 days b. 90 days c. 65 days d. 48 days e. 66 days

Q: The economic ordering quantity will rise due to an increase in which of the following variable(s)? a. Product demand (sales). b. Carrying costs. c. Ordering costs. d. Both a and b above. e. Both a and c above.

Q: Which of the following would cause average inventory holdings to decrease, other things held constant? a. Fixed order costs double. b. The purchase price of inventory items decreases by 50 percent. c. The carrying cost of an item decreases (as a percent of purchase price). d. The sales forecast is revised downward by 10 percent. e. None of the above (all would cause average inventory to increase).

Q: Which of the following statements is correct? a. If a firm's volume of credit sales declines, then its DSO will also decline. b. If a firm changes its credit terms from 1/20, net 40 days, to 2/10, net 45 days, the impact on sales can't be determined because the increase in the discount is offset by the longer net terms which tends to reduce sales. c. The DSO of a firm with seasonal sales can vary because while the sales per day figure is usually based on the total annual sales, the accounts receivable balance will be high or low depending on the season. d. An aging schedule is used to determine what portion of customers pay cash and what portion buy on credit. e. Aging schedules can be constructed from the summary data provided in the firm's financial statements.

Q: Which of the following statements is correct? a. A firm that makes 90 percent of its sales on credit and 10 percent for cash is growing at a rate of 10 percent annually. If the firm maintains stable growth it will also be able to maintain its accounts receivable at its current level, since the 10 percent cash sales can be used to manage the 10 percent growth rate. b. In managing a firm's accounts receivable it is possible to increase credit sales per day yet still keep accounts receivable fairly steady if the firm can shorten the length of its collection period. c. If a firm has a large percentage of accounts over 30 days old, it is a sign that the firm's receivables management needs to be reviewed and improved. d. Because receivables and payables both result from sales transactions, a firm with a high receivables-to-sales ratio should also have a high payables-to-sales ratio.

Q: An unusually high turnover of accounts receivable, which implies a very short days sales outstanding (DSO), could indicate that the firm a. Is very conservative (tough) in its credit policy. b. Has a very efficient credit and collection department. c. Offers unusually large discounts. d. All of the above. e. Only answers a and b above.

Q: Which of the following statements is correct? a. If a firm begins buying on terms of 2/20, net 60, after having bought on terms of 2/10, net 30, this will, other things held constant, probably lengthen its cash conversion cycle. b. If a firm begins buying on terms of 2/20, net 60, after having bought on terms of 2/10, net 30, this will, other things held constant, increase the cost of nonfree (costly) trade credit. c. Because the loan is paid off faster, the effective interest rate is lower if a firm borrows $100,000 on the basis of a 10% "add-on interest rate" loan paid off in 12 equal monthly installments than if the firm borrows the $100,000 on a loan which calls for a nominal 10% rate and for all interest and principal to be paid (repaid) at the end of one year. d. "Commercial paper" is the name given to a type of short-term loan typically used by firms that are too small and financially weak to obtain credit from banks and other normal sources of credit. e. Statements a, b, c, and d are all false.

Q: Which of the following statements is correct? a. Poor synchronization of cash flows that results in high cash management costs can be partially offset by increasing disbursement float and decreasing collections float. b. The size of a firm's net float is primarily a function of its natural cash flow synchronization and how it clears its checks. c. Lockbox systems are used mainly for security purposes as well as to decrease the firm's net float. d. If a firm can speed up its collections and slow down its disbursements, it will be able to reduce its net float. e. A firm practicing good cash management and making use of positive net float will bring its check book balance as close to zero as possible, but must never generate a negative book balance.

Q: Which of the following statements is correct? a. Other things held constant, the higher a firm's days sales outstanding (DSO), the better its credit department. b. A firm will relax its credit standards only if it expects bad debts will not increase because of the change. c. If a firm which sells on terms of "net 30" changes its policy and begins offering all customers terms of "2/10, net 30," and if no change in sales volume occurs, then the firm's DSO will probably increase. d. If a firm sells on terms of 2/10, net 30, and its DSO is 30 days, then its aging schedule would probably show some past due accounts. e. Statements a, b, c, and d are all false.

Q: Which of the following statements is correct? a. The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. The total desired cash balance can be determined by calculating the amount needed for each purpose and then summing them together. b. The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates. c. For some firms, holding highly liquid marketable securities is a substitute for holding cash because the marketable securities accomplish the same objective as cash. d. Firms today are more likely to rely on cash than on reserve borrowing power or marketable securities for speculative purposes because of the need to move quickly. e. Each of the above statements is false.

Q: A lockbox plan is most beneficial to firms that a. Send payables over a wide geographic area. b. Have widely disbursed manufacturing facilities. c. Have a large marketable securities account to protect. d. Hold inventories at many different sites. e. Make collections over a wide geographic area.

Q: Which of the following statements is correct? a. The factoring of accounts receivable consists of a series of individual cycles as opposed to a continuous process. b. Once a factoring agreement is in force, funds from this source are spontaneous in the sense that an increase in sales will automatically generate additional credit from the factor. c. One of the main disadvantages of pledging or factoring is the significant lack of flexibility. d. One disadvantage of factoring is that it reduces the need of the selling firm to maintain a credit department. e. The cost of pledging and factoring generally is very low and the risk bearing fee is incorporated into the interest rate charged on the unpaid balance of the funds advanced by the factor, which is usually one half of one percent above the prime rate.

Q: Which of the following are legitimate financial reasons for holding marketable securities? a. Expansion of inventory for the summer selling season. b. Payment of dividends. c. The firm just sold long-term securities. d. All of the above. e. Only answers a and c above.

Q: Which of the following statements is correct? a. Under normal conditions, the shape of the yield curve implies that the interest cost of short-term debt is greater than that of long-term debt, although short-term debt has other advantages that make it desirable as a financing source. b. Flexibility is an advantage of short-term credit but this is somewhat offset by the higher flotation costs associated with the need to repeatedly renew short-term credit. c. A short-term loan usually can be obtained more quickly than a long-term loan but the penalty for early repayment of a short-term loan is significantly higher than for a long-term loan. d. Statements about the flexibility, cost, and riskiness of short-term versus long-term credit are dependent on the type of credit that actually is used. e. Short-term debt is often less costly than long-term debt and the major reason for this is that short-term debt exposes the borrowing firm to much less risk than long-term debt.

Q: Which of the following statements is correct? a. Under normal conditions, a firm's expected ROE probably would be higher if it financed with short-term than with long-term debt, but the use of short-term debt would probably increase the firm's risk. b. Conservative firms generally use no short-term debt and thus have zero current liabilities. c. A short-term loan can usually be obtained more quickly than a long-term loan, but the cost of short-term debt is likely to be higher than that of long-term debt. d. If a firm that can borrow from its bank buys 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. e. If one of your firm's customers is "stretching" its accounts payable, this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance.

Q: Ski Lifts Inc. is a highly seasonal business. The following summary balance sheet provides data for peak and off-peak seasons (in thousands of dollars): Peak Off-peak Cash $ 50 $ 30 Marketable securities 0 20 Accounts receivable 40 20 Inventories 100 50 Net fixed assets 500 500 $690 $620 Spontaneous liabilities $ 30 $ 10 Short-term debt 50 0 Long-term debt 300 300 Common equity 310 310 $690 $620 From this data, we may conclude that a. Ski Lifts has a working capital financing policy of exactly matching asset and liability maturities. b. Ski Lifts' working capital financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt. c. Ski Lifts follows a relatively conservative approach to working capital financing; that is, some of its short-term needs are met by permanent capital. d. Without income statement data, we cannot determine the aggressiveness or conservatism of the company's working capital policy. e. Both a and c are correct.

Q: Which of the following statements is correct? a. In a factoring arrangement, the factor always performs three functions: (1) credit checking, (2) lending, and (3) receivables collection. b. The pledging of accounts receivable involves a transfer of the risk associated with accounts receivable from the borrower to the lender. c. In a factoring arrangement, the seller can select various combinations of credit checking, lending, and risk bearing the factor performs by changing provisions in the factoring agreement. d. In a factoring agreement, the factor would not perform the credit checking and risk taking functions without performing the lending function, because the former are required before the factor can lend to the seller. e. The financing of accounts receivable involves an agreement which is informal and non-binding, which makes it difficult for the factor to protect itself.

Q: Which of the following statements is most correct? a. Net working capital may be defined as current assets minus current liabilities. Any increase in the current ratio will automatically lead to an increase in net working capital. b. 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 of using short-term financing. c. 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. d. Each of the above statements is true. e. Each of the above statements is false.

Q: Which of the following statements is false? a. In addition to sales price, product quality, and advertising, credit policy is a major controllable variable which can affect product demand. b. Sharp seasonal swings in sales and fast growth are two reasons why a firm's aging schedule and DSO may show high variability. c. Changes in a firm's collection policy can affect sales and working capital but will not affect additional funds needed. d. Cash discounts can be used to influence a firm's sales volume and its DSO. e. Firms which offer credit terms with a cash discount usually seek two benefits: (1) to attract more customers, and (2) to reduce their DSO.

Q: In the text, the "red-line method" refers to a. The policy of drawing a red line around certain neighborhoods on a map and then refusing to sell on credit to people who live within those areas. b. Restrictions imposed by companies which insure credit risks. c. The use, in Dun & Bradstreet's reports, of a red line to show the maximum amount of credit which should be extended to a given customer; companies using this limit when they screen customers' orders are said to be using the "red-line method." d. A method of controlling inventories by drawing a red line on the inside of a bin. e. A method of controlling receivables by drawing a red line on invoices of companies that are expected to pay late.

Q: Which of the following might be attributed to efficient inventory management? a. High inventory turnover ratio. b. Low incidence of production schedule disruptions. c. High total asset turnover. d. All of the above. e. Only answers a and c above.

Q: If easing a firm's credit policy lengthens the collection period and results in a worsening of the aging schedule then why do firms take such actions? a. It normally stimulates sales. b. To meet competitive pressures. c. To increase the firm's deferral period for payables. d. All of the above. e. Both a and b above.

Q: Which of the following is not commonly regarded as being a credit policy variable? a. Credit period. b. Collection policy. c. Credit standards. d. Cash discounts. e. All of the above are credit policy variables.

Q: Analyzing days sales outstanding (DSO) and the aging schedule are two common methods for monitoring receivables. However, they can provide erroneous signals to credit managers when a. Customers' payments patterns are changing. b. Sales fluctuate seasonally. c. Some customers take the discount and others do not. d. Sales are relatively constant, either seasonally or cyclically. e. None of the above.

Q: Which of the following statements is correct? a. A lockbox system is an example of concentration banking. b. For a firm that has many divisions or plants operating over a wide geographic area, payables centralization offers little benefit. c. If a firm increases its disbursement float, its net float will also increase, other things held constant. d. There are no actions a firm can take to improve its synchronization of cash flows. e. A lockbox system does not affect collections float.

Q: Which of the following investments is not likely to be a proper investment for temporarily idle cash? a. Commercial paper. b. Treasury bills. c. Recently issued long-term corporate bonds. d. Government bonds due shortly. e. AT&T bonds due within one year.

Q: Which of the following will not help a firm speed up the timing of when it can obtain the use of funds from checks written to it? a. Lockbox arrangement. b. Concentration banking. c. Zero-balance accounts. d. All of the above. e. Only answers a and b.

Q: A lockbox plan is a. A method for safe-keeping of marketable securities. b. Used to identify inventory safety stocks. c. A system for slowing down the collection of checks written by a firm. d. A system for speeding up a firm's collections of checks received. e. Not described by any of the above statements.

Q: Inventory financing can take the form of a a. Blanket lien. b. Trust receipt. c. Warehouse receipt. d. All of the above. e. Answers a and b above.

Q: Small, undercapitalized firms a. Are generally users of net trade credit. b. Are major users of banker's acceptances. c. Generally do not issue commercial paper. d. Typically have a high cost of debt capital. e. Are described by all of the above statements.

Q: Firms generally choose to finance temporary assets with short-term debt because a. Matching the maturities of assets and liabilities reduces risk. b. Short-term interest rates traditionally have been more stable than long-term interest rates. c. A firm that borrows heavily long-term is more apt to be unable to repay the debt than the firm that borrows heavily short-term. d. The yield curve traditionally has been downward sloping. e. Sales remain constant over the year, and financing requirements also remain constant.

Q: Working capital policy involves a. The level of current assets. b. The financing of current assets. c. Current maturities of long-term debt. d. All of the above. e. Only answers a and b above.

Q: Other things held constant, which of the following will cause an increase in working capital? a. Cash is used to buy marketable securities. b. A cash dividend is declared and paid. c. Merchandise is sold at a profit, but the sale is on credit. d. Long-term bonds are retired with the proceeds of a preferred stock issue. e. Missing inventory is written off against retained earnings.

Q: The payables deferral period is the average length of time required to convert the firm's receivables into cash. a. True b. False

Q: The inventory conversion period is the length of time from the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of that product. a. True b. False

Q: Working capital needs typically decline during recessions and increase during booms in the economy. a. True b. False

Q: Because the use of short-term debt to finance fixed assets is a working capital decision variable in the current period, it does not need to be taken into account when managers assess the firm's ability to meet its current obligations using expected cash inflows. a. True b. False

Q: The cash budget focuses on the firm's ability to generate sufficient cash inflows to meet its required cash outflows. a. True b. False

Q: Many start-up firms never make it past the first few months of business, primarily because they lack formal working capital policies. a. True b. False

Q: As long as a firm is generating positive net income each year it need not be concerned with working capital management because it will always be able to meet all short-term liquidity needs. a. True b. False

Q: If your firm's DSO or aging schedule deteriorates from the first quarter of the year to the second quarter, this is a clear indication that your firm's credit policy has weakened. a. True b. False

Q: If a firm's terms are 2/10, net 30 days, and its DSO is 28 days, we can be certain that the credit department is functioning efficiently and the percentage of past due accounts is minimal. a. True b. False

Q: Generally, the longer the normal inventory holding period of a customer the longer the credit period. One effect of extending the credit period to match the customer's merchandise holding period is to increase the customer's payables deferral period, which actually serves to shorten the customer's cash conversion cycle. a. True b. False

Q: If a firm's sales and those of its customers are closely correlated with economic conditions, it is possible for a firm's total investment in accounts receivable to decrease while its days sales outstanding increases. a. True b. False

Q: In part because money has time value, cash sales are always more profitable and more valuable than credit sales. a. True b. False

Q: A firm's collection policy and the procedures it follows to collect accounts receivable play an important role in keeping its deferrables period short, although too strict a collection policy can result in outright losses due to non-payment. a. True b. False

Q: When a firm pledges its accounts receivable, if a customer that purchased goods from the firm does not pay, the selling firm must take the loss. a. True b. False

Q: A revolving credit agreement is a formal line of credit usually used by large firms. The firm will pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds. a. True b. False

Q: If a firm fails to take trade credit discounts it may cost the firm money, but generally such a policy has a negligible effect on the firm's income statement and no effect on the firm's balance sheet. a. True b. False

Q: A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed, would want to separate the construction loan from other current liabilities associated with working capital management. a. True b. False

Q: Long-term loan agreements always contain provisions, or covenants, which constrain the firm's future actions. Short-term credit agreements are just as restrictive in order to protect the interests of the lender. a. True b. False

Q: An aggressive method of financing an ongoing construction program would be for a company to sell bonds and equity before it actually needs funds, and to invest the proceeds in marketable securities until they are actually needed. a. True b. False

Q: A lockbox plan is one method of speeding up the check-clearing process for customer payments and decreasing the firm's net float position. a. True b. False

Q: Synchronization of cash flows is an important cash management technique and effective synchronization can actually increase a firm's profitability. a. True b. False

Q: The risk to the firm of borrowing using short-term credit is usually greater than with long-term debt. Added risk stems from greater variability of interest costs on short-term debt. Even if its long-term prospects are good, the firm's lender may not renew a short-term loan if the firm is even only temporarily unable to repay it. a. True b. False

Q: A firm adopting an aggressive working capital approach is more sensitive to unexpected changes in the term structure of interest rates than is a firm with a conservative policy. a. True b. False

Q: The maturity matching or "self-liquidating" approach involves the financing of permanent current assets with combinations of long-term capital and short-term capital depending on the level of interest rates. When short-term rates are high, short-term assets will be financed with long-term debt to reduce cost and risk. a. True b. False

Q: Uncertainty about the exact lives of assets prevents precise maturity matching in an ex post (i.e. after the fact) sense even though it is possible to maturity match on an expected basis. a. True b. False