Q&A Hero

Q: The working capital cash flow cycle encompasses order and receipt of raw materials, conversion of raw material into inventory, and finally, conversion of inventory into sales and accounts receivable. a. True b. False

Q: The threat of expropriation creates an incentive for the multinational firm to minimize inventory holdings and to bring in goods only as needed. a. True b. False

Q: Multinational firms can reduce the risk of exchange rate changes between the time a sale is made and the time a receivable is collected without cost by hedging. a. True b. False

Q: Exchange rates influence a multinational firm's inventory policy because changing currency values can affect the value of inventory. a. True b. False

Q: Due to advanced technology and the similarity of general procedures, working capital management for multinational firms is no more complex than it is for domestic firms. a. True b. False

Q: Credit policy for the multinational firm is generally riskier due in part to the additional consideration of exchange rates and also due to uncertainty regarding the credit worthiness of many foreign customers. a. True b. False

Q: The primary motivation behind out-sourcing is to provide the firm with an alternative source of supply in the event that its primary supplier is unable to meet the firm's raw material or component needs. a. True b. False

Q: A just-in-time system of inventory control requires that manufacturers coordinate production with suppliers so that raw materials or components arrive just as they are needed in the production process. The main objective of such a system is to reduce carrying costs. a. True b. False

Q: If the forecasted sales or usage rate is not accurate, the EOQ model may not lead to efficient inventory management. a. True b. False

Q: If the unit sales of a firm double, the optimal order quantity as determined by the EOQ model will also double. a. True b. False

Q: The economic order quantity (EOQ) is that order quantity that results in the minimum ordering cost and the minimum carrying cost; that is, the EOQ minimizes both of these cost components individually. a. True b. False

Q: The economic order quantity is that order quantity that results in the minimum ordering costs. a. True b. False

Q: Generally, ordering costs are the single most important cost element in inventory management, because they are greater in magnitude than carrying costs. a. True b. False

Q: The principal goal of most inventory management systems is to balance the costs of ordering, shipping, and receiving goods with the cost of carrying those goods, while simultaneously meeting the firm's policy with respect to avoiding running short of stock and disrupting production schedules. a. True b. False

Q: The central goal of inventory management is to provide sufficient incentives to ensure that the firm never suffers a stock-out (i.e. runs out of an inventory item). a. True b. False

Q: Inventory management focuses on three basic questions: (1) how many units to hold in stock, (2) how many units of each item to order, and (3) at what point to reorder. a. True b. False

Q: A firm changes its credit policy from 2/10, net 30, to 3/10, net 30. The change is meant to meet competition, so no increase in sales is expected. Average accounts receivable will probably decline as a result of this change. a. True b. False

Q: Offering trade credit discounts is costly to a firm and as a result, firms that offer trade discounts are usually those that are performing poorly and need cash quickly. a. True b. False

Q: The three major elements in a firm's credit policy are (1) credit standards, (2) credit terms, and (3) collection policy. a. True b. False

Q: The aging schedule is a commonly used method of monitoring receivables. a. True b. False

Q: The average accounts receivables balance is determined jointly by the volume of credit sales and the days sales outstanding. a. True b. False

Q: A zero balance account is used by firms as an effective tool of cash management to reduce the amount of idle cash a firm might otherwise keep. a. True b. False

Q: Lockbox arrangements are one way for a firm to speed up the receipt of payments from customers. a. True b. False

Q: For a firm that makes heavy use of float, being able to forecast its collections and disbursement check clearings is essential. a. True b. False

Q: Two of the primary motives for a firm to hold cash are the transaction motive and the precautionary motive. a. True b. False

Q: Firms hold cash balances in order to complete transactions that are necessary in business operations and as compensation to banks for providing loans and services. a. True b. False

Q: Cash is often referred to as a "non-earning" asset. Thus, one goal of cash management is to minimize the amount of cash necessary to conduct business. a. True b. False

Q: The pledging of receivables differs from factoring in that, under pledging, the lender normally has recourse against the borrower. a. True b. False

Q: When a firm factors its accounts receivable, the factor normally performs the functions of risk bearing, credit checking, and lending. a. True b. False

Q: Generally, the more stable a firm's operations, the more debt it can handle in its capital structure. a. True b. False

Q: The higher a firm's time-interest-earned ratio, the higher the probability that the firm will default on its debt and experience financial distress. a. True b. False

Q: The optimal capital structure is the one that maximizes the price of the stock, which always calls for a debt/asset ratio that is lower than the one that maximizes EPS. a. True b. False

Q: In signaling theory, when a manager has better information than outside investors about the firm, this is called asymmetric information. a. True b. False

Q: An increase in the financial leverage of a firm will generally increase the variability in EPS for the firm. a. True b. False

Q: Business risk is the single most important determinant of a firm's capital structure. a. True b. False

Q: Changing the capital structure of the firm will affect the riskiness inherent in the firm's common stock, which will affect the return demanded by stockholders and the stock's a. True b. False

Q: A firm's capital structure and dividend policy can affect the firm's cash position but has no impact on the market value of the firm's stock. a. True b. False

Q: If the information content, or signaling, hypothesis is correct, then changes in dividend policy can be important with respect to firm value and capital costs. a. True b. False

Q: If the shape of the curve depicting a firm's WACC versus its debt-to-assets ratio is more like a sharp "V", as opposed to a shallow "U", it will be easier for the firm to maintain a steady dividend in the face of varying investment opportunities from year to year. a. True b. False

Q: How a firm splits its income between retained earnings and dividends does not affect its rate of growth, which is determined by the firm's basic earning power. a. True b. False

Q: A firm that follows a residual dividend policy must believe that the dividend irrelevance theory is correct. a. True b. False

Q: Underlying the dividend irrelevance theory proposed by Miller and Modigliani is their argument that the value of the firm is determined only by its basic earning power and its business risk. a. True b. False

Q: If the firm's actual debt-to-assets ratio is below its target level, expansion capital should be raised by issuing equity in order to preserve the firm's borrowing capacity. a. True b. False

Q: If the announcement of a stock sale does in fact trigger a decline in stock price, this reinforces the effects of flotation costs incurred with new equity issues. Further, this implies a larger break in the MCC schedule. a. True b. False

Q: The announcement of a stock offering by a mature firm that seems to have financing alternatives is taken as a signal that the firm's prospects are very good. a. True b. False

Q: One implication of information asymmetry between investors and firm managers is that if a firm raises new capital by issuing debt rather than by selling stock, it signals that the firm has very good prospects. a. True b. False

Q: If we consider only agency costs associated with the issuance of debt, then this implies that the firm should move toward 100 percent debt financing. a. True b. False

Q: If Miller and Modigliani had considered the cost of bankruptcy, it is unlikely that they would have concluded that 100 percent debt financing is optimal for the firm. a. True b. False

Q: As the debt-to-assets ratio rises, the WACC is reduced because the after-tax cost of debt is usually lower than the cost of equity. What limits the substitution of debt for equity in the capital structure is that as the debt-to-assets ratio rises, the costs of both components eventually increase. a. True b. False

Q: The weighted average cost of capital (WACC) declines as more of the lowest cost component is added. What limits a firm from using nearly all debt is that as the debt-to-assets ratio rises, the absolute interest expense gets very large. The large interest expense reduces income and results in a debt-to-assets ratio limit even though the WACC continues to decline. a. True b. False

Q: Generally, as debt is substituted for equity, risk, as measured by the coefficient of variation of EPS, increases. This negative effect works against the positive effect of substituting debt for equity, which is that higher leverage increases expected EPS. a. True b. False

Q: As the percentage of debt in a firm's capital structure increases, its financial risk increases. Once the firm increases its debt beyond the optimal level, rising interest charges result in an immediate decrease in EPS. a. True b. False

Q: If we include the cost of bankruptcy in the MM analysis of capital structure in a world with taxes, we would tend to believe that the cost of debt increases as leverage increases and that there is probably an optimal capital structure. a. True b. False

Q: The fact that some managers are more aggressive in their use of debt financing in attempting to boost profits does not influence the optimal or value-maximizing capital structure. a. True b. False

Q: Once the target capital structure for a firm is decided, managerial decisions can result in the actual capital structure differing from the target structure, but operating conditions will have a negligible effect on actual capital structure. a. True b. False

Q: An all equity firm has some risk inherent in its operations. When the firm decides to finance some of its operations with debt, it exposes itself to financial risk and it increases its business risk. a. True b. False

Q: The benefit to the firm of the tax deductibility of interest can be lowered if the firm's marginal tax rate is reduced by accumulated depreciation or tax-loss carry-forwards. a. True b. False

Q: Debt has benefits for firms because interest is tax deductible. As long as a firm has positive earnings it can receive the full benefit of the tax deductibility of debt interest expense. a. True b. False

Q: A consistent supply of capital is essential for the long-run success of a firm. Although a firm may have access to capital under all types of economic conditions, the concept of financial flexibility implies that the firm can obtain capital on acceptable, competitive terms. a. True b. False

Q: Two firms, although they operate in different industries, have the same expected earnings per share and the same standard deviation of expected EPS. Thus, the two firms must have the same business risk. a. True b. False

Q: In theory, dividends are determined as a residual item. Therefore, the better the firm's investment opportunities, the lower its dividend payments should be. a. True b. False

Q: The announcement of an increase in the cash dividend always causes an increase in the price of the firm's common stock. a. True b. False

Q: If investors do, in fact, prefer that firms retain most of their earnings, then firms that want to maximize stock price should hold dividend payments to low levels. a. True b. False

Q: Modigliani and Miller's dividend irrelevance theory says that dividend policy does not affect a firm's value but can affect its cost of capital. a. True b. False

Q: The dividend irrelevance theory, proposed by Miller and Modigliani, says that as long as a firm pays a dividend, how much it pays does not affect either its cost of capital or its stock price. a. True b. False

Q: The optimal dividend policy for a firm strikes a balance between payment of current dividends and retention of earnings for future growth, and results in the maximization of stock price. a. True b. False

Q: One of the implications of signaling theory for capital structure decisions is that firms should normally seek to maintain a reserve borrowing capacity. a. True b. False

Q: The presence of asymmetric information affects capital structure because it can affect managers' financing decisions. a. True b. False

Q: You are the president of a small, publicly-traded corporation. Since you believe that your firm's stock price is temporarily depressed, all additional capital funds required during the current year will be raised using debt. Thus, the appropriate marginal cost of capital for the current year is the after-tax cost of debt. a. True b. False

Q: According to MM, in a world without taxes, the optimal capital structure for a firm should approach 100 percent debt financing. a. True b. False

Q: In a world with no taxes, MM show that the capital structure of a firm does not affect the value of the firm. However, when taxes are considered, MM show a positive relationship between debt and firm value. a. True b. False

Q: Because creditors can foresee, to at least some extent, the costs of bankruptcy, they charge an interest rate that has a premium built into it to compensate for the present value of bankruptcy costs. a. True b. False

Q: The central result from the work of Miller and Modigliani (MM) and subsequent researchers, is that it is now possible to precisely identify a firm's optimal capital structure. a. True b. False

Q: Asymmetric information involves a situation where the firm's managers have different (better) information about their firm's prospects than do investors. a. True b. False

Q: The level of sales at which expected EPS will be the same regardless of whether the firm uses debt or common stock financing is called the EPS indifference point. a. True b. False

Q: Financial leverage affects both EPS and EBIT, while operating leverage only affects EBIT. a. True b. False

Q: Other things held constant, an increase in financial leverage will increase a firm's market (or systematic) risk as measured by its beta coefficient. a. True b. False

Q: If a firm utilizes debt financing, a decrease in earnings before interest and taxes (EBIT) will result in a more than proportionate decrease in earnings per share. a. True b. False

Q: The degree of financial risk is the single most important determinant of a firm's capital structure. a. True b. False

Q: Financial risk refers to the extra risk stockholders bear as a result of the use of debt as compared with the risk they would bear if no debt were used. a. True b. False