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Student Centre Foundations of Financial Management
Fifth Canadian Edition
Block/Hirt/Short

Student Centre

Chapter 6: Working Capital and the Financing Decision

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    Quiz Questions

    6-1. Working capital management is mainly concerned with:

        a. the placement of the firm's debt and equity issues
        b. the financing and management of the firm's current assets
        c. inventory management
        d. management of the firm's capital assets

    6-2. The key to current asset planning is:

        a. ensuring that the firm remains current on its obligation
        b. maintaining an inventory surplus to ensure liquidity
        c. forecasting sales accurately and matching production with the forecast
        d. maintaining the proper rate of asset growth

    6-3. In most firms:

        a. capital assets grow at a constant rate
        b. the rate of growth for fixed and current assets remains constant
        c. there is no relationship between the growth rates for fixed and current assets
        d. capital assets grow slowly, while current assets fluctuate

    6-4. Level production methods tend to:

        a. use manpower and equipment efficiently at a lower cost
        b. be more difficult to manage than those matching sales and productions
        c. result in a more stable value for current assets
        d. eliminate seasonal bulges or reductions in current assets

    6-5. Most retail stores are mainly concerned with:

        a. their buyers' forecasts for the coming season
        b. matching sales and inventory levels
        c. decreasing inventory turnover
        d. their investment in capital assets

    6-6. The cash conversion cycle equals:

        a. inventory period + collection period - payables period
        b. payables period - inventory period - collection period
        c. payables period + inventory period - collection period
        d. inventory period - collection period + payables period

    6-7. Which of the following would not be important in examining the firm's build-up of accounts receivable/cash/current assets:

        a. sales forecast
        b. cash receipts and cash payments schedules
        c. income statement
        d. a brief cash budget

    6-8. The belief that current assets should always be financed by current liabilities:

        a. is sound financial practice and should always be followed
        b. doesn't necessarily hold true
        c. is grounded in the belief that a permanent building of current assets occurs
        d. will often result in bankruptcy for the firm

    6-9. A major advantage of using short term funds is:

        a. there is no advantage
        b. there are always more easily obtained
        c. there are no governmental procedures with which to comply
        d. interest rates are normally lower

    6-10. The term structure of interest rates:

        a. shows the interest rate pattern for securities of different risks but equal maturities
        b. shows the interest rate patterns for securities of equal risk with different maturities
        c. is normally based on corporate securities
        d. remains constant over time

    6-11. The liquidity premium theory suggests that long-term interest rates are higher than short-term interest rates because:

        a. investors generally prefer to invest short periods of time
        b. government policy maintains this relationship
        c. there is greater risk in long-term bonds
        d. exchange rate fluctuations establish this relationship

    6-12. Under normal conditions:

        a. long term rates are lower than short term rates
        b. the yield curve is downward sloping, or inverted
        c. intermediate rates are higher than long or short term rates
        d. short term rates are lower than long term rates

    6-13. An inverted yield curve often foreshadows:

        a. an inflationary period
        b. a recessionary period
        c. a large government bond issue
        d. nothing at all

    6-14. In designing working capital policy, the financial manager is concerned with yield curve and:

        a. dividend policy
        b. balance of trade figures
        c. the relative volatility of short and long term rates
        d. the term structure of interest rates

    6-15. A firm with heavy risk exposure due to short term borrowing should:

        a. carry a large amount of fixed assets
        b. carry more highly liquid assets
        c. increase production to avoid inventory
        d. prosper in the event of a credit crunch



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