Managerial Finance Test 3

What is not a valid reason for holding cash? To earn the highest return possible.
The problem with stretching out the maturity of marketable securities is that There is a greater possibility of loss.
Companies that are mostly influenced by seasonal sales have to make a choice between Seasonal production and an uneven workforceA stable workforce and a fluctuating workforceLevel production and inventory buildup
What is not a factor influencing the selection of a marketable security? Float
The corporate sweep account is an account that allows companies to maintain zero balances in their checking accounts, with their excess cash moved to an interest earning account and lets companies write checks on zero balance accounts with the understanding that when the check is presented for payment, money will be moved from the interest earning account to the appropriate payment account.
Some of the services provided around the clock by SWIFT Trade finance transactionsInternational payments between banksForeign exchange
The “Financial Futures Market” Allows for the delivery of financial instruments at a future point in time.
The Economic Order Quantity Assumes that delivery times of each order are consistent.
Some analysts believe that the term structure of interest rates is determined by the behavior of various types of financial institutions. This theory is called the market segmentation theory.
Money Market Funds are accounts that allow small investors to participate in buying large denomination securities.
The inventory decision model provides what type of information? Optimal Order Size
The required compensating balance is usually computed as percentage of the customer’s loans outstanding, or percentage of the bank’s commitments toward future loans to the customer.
Ideally what type of assets should be financed with long term financing? Fixed assets and permanent current assets
The prime rate has been quite volatile during these past two decades, moving several percentage points in a twelve month period.
Commercial paper that is sold without going through a broker or dealer is known as direct paper.
Money Market Funds earn competitive market rates of return.
The cost of carrying inventory do not include ordering costs
What are some methods used for controlling pledged inventory? Public warehousingBlanket inventory liensFloor planning
The Truth in Lending Law is primarily designed to protect consumers.
What is considered to be the least liquid of current assets? Inventory
Web based supply chain management has many benefits EXCEPT it reduces the number of suppliers bidding for a company’s business.
The use of cash budgeting procedures Illustrates fluctuating levels of current assets for a given production plan.Makes managing inventory easier under seasonal production.Helps the firm plan its current asset levels for a given production plan.
Commercial paper that is sold without the use of an actual paper certificate is known as book-entry paper.
The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales forecast. (T/F) True
The successful financial manager is very interested in the term structure of interest rates, but is not concerned with the relative volatility or historical level of interest rates. (T/F) False
Heavy risk exposure due to short term borrowing can be compensated for by carrying illiquid assets. (T/F) False
Firms with predictable cash flow patterns should assume relatively low levels of risk. (T/F) False
Pressure to increase current asset buildup often results from rapidly expanding sales.
Working capital management is primarily concerned with the management and financing of current assets
The term permanent current assets implies some minimum level of current assets that are not self liquidating.
The concept of self liquidating assets implies that all the production will be sold, receivables collected, and bills paid over the time period specified.
Permanent current assets are not a factor in a managers decision making process when all current assets will be self-liquidating.
RFID chips have been used to track livestocktrack inventory at retailerstrack marathon runner’s times
One advantage of level production is that manpower and equipment are used efficiently at lower costs.
Publishing companies are characterized by seasonal sales.
If a firm uses level production with seasonal sales As sales decline, inventory will increase.
Retail companies like Target and Limited Brands exhibit sales patterns that are most typically influenced by seasonality.
Retail companies like Target and Limited brands are more likely to have cyclical sales and more volatile earnings per share.
Assuming level production throughout the year, and assuming receivables are collected in two equal installments over the two months subsequent to the sales period, developing the related areas of the cash budget requires what step? Estimate monthly net cash flow and bank borrowing or repayments.
When actual sales are greater than forecasted sales Production schedules might have to be revised upwardAccounts receivable will riseInventory will decline
Normally, permanent current assets should be financed by long term funds
A conservatively financed firm would Use long term financing for permanent current assets, and a portion of the short term fluctuating assets, and use short term financing for all other short term assets.
Generally more use is made of short term financing because short term interest rates are generally lower than long term interest rates, and most firms do not have basic access to capital markets.
The term structure of interest rates Is an indication of investor’s expectations about inflation and future interest ratesWill be downward sloping if short term interest rates are higher than long term interest ratesWill be upward sloping under normal conditions
The term structure of interest rates changes daily to reflect current competitive conditions in the money and capital market.
The term structure of interest rates is influenced by inflationthe money supplyFederal Reserve activities
The belief that investors require a higher return to entice them into holding long term securities is the view point of Liquidity Premium Theory
The term structure of interest rates is often referred to as the yield curveis usually constructed with U.S. government securities of varying maturitiesdepicts the relative level of short and long term interest rates
Yield curve changes daily to reflect Changing conditions in the overall economyChanging conditions in the money and capital marketNew inflation expectations
U.S. government securities are used to construct yield curves because they are free of default risk and the large number of maturities form a continuous curve.
The theory of the term structure of interest rates, which suggests that long term interest rates are determined by the average of short term rates expected over the time that a long term bond is outstanding is the Expectations Hypothesis
A normal term structure of interest rates would depict long term rates higher than short term rates
A firm will usually increase the ratio of short term debt to long term debt when the term structure is inverted and expected to shift down
What yield curve would be characteristic during a period of high economic growth? Upward sloping
An inverted yield curve would suggest Interest rates are expected to fall
When the term structure of interest rates is downward sloping and interest rates are expected to decline the financial manager generally borrows short term.
During tight money periods short term rates are higher than long term rates
What technique allows explicit consideration of more than one possible outcome Expected Value
What is a reason for diminishing liquidity in modern corporations? Better utilization of cash via computersIncreased use of point-of-sale terminalsJust in time inventory programs
An aggressive risk orientated firm will borrow short term and carry low levels of liquidity
Which is not a condition under which a prudent manager would accept some risk in financing? Inventory is highly perishable
Risk exposure due to heavy short term borrowing can be compensated for by carrying highly liquid assests
What combination of asset structures and financing patterns is likely to create the least volatile earnings? Liquid assets and heavy long term borrowing
What combination of asset structures and financing patterns is likely to create the most volatile earnings? Illiquid assets and heavy short term borrowing
An aggressive working capital policy would have A high ratio of short-term debt to long-term sources of funds
When the yield curve is upward sloping, generally a financial manager should Utilize long term financing
When the yield curve is downward sloping, generally a financial manager should utilize short term financing
Cash flow does not rely on The monetary policy of the federal reserve
Cash flow relies on The payment patterns of customersThe speed at which suppliers and creditors process checksThe efficiency of the banking system
The difference between the amount of cash on the firm’s books and the amount credited to it by its bank is float.
“Float” takes place because a lag exists between writing a check and clearing it through the banking system.
What is not a method for speeding up collections? Extended disbursement float
What are methods for speeding up collections? Lock box systemRegional collection centers
The system whereby funds are moved between computer terminals without use of checks is Electronic funds transfer
How will widespread adoption of electronic funds transfer affect the use of “Float”? It will virtually eliminate it’s use.
Automated clearing houses are commonly used by consumers to make direct payments for Insurance premiumsUtility BillsMortgage payments
One of the major cost savings for consumers using automated clearing houses are saving great amounts of money on postagethe security of having the payments and deposits directly deposited or deducted from your accountSaving time paying bills through check writing
What is not true about Automate Clearing Houses? Debits drawn on automated clearing houses cost less than half of the checks processed through financial institutions.
International cash management is more complex than domestic based cash management because Currency fluctuation riskLiquidity management issuesDifferent banking systems
SWIFT’s implementation of the “smart card” is expected to decrease the likelihood of electronic fraud.
International cash management systems are more complex than domestic cash management systems because liquidity management involving short term cash balances and deficits, has to be managed across international boundaries and time zones and is subject to the risk of currency fluctuations.Changing interest rates across countries
A multinational company may prefer to hold sizable cash balances in one currency rather than another because of high interest rates existing in one country and because one country’s currency may be strong relative to the other.
Generally, the safest and most marketable instrument for short term investment is Treasury Bills
What security typically trades on a discount basis? Treasury Bills
A firm that wishes to minimize risk when investing idle cash would be LEAST likely to buy long-term corporate bonds
A banker’s acceptance May be accepted by the bank for future payment.Can be traded in a relatively liquid market until maturity.Is a draft drawn on a bank and paid by the bank when presented to it.
Eurodollar certificates of deposit are used by banks to loan out funds to anyone seeking U.S. dollars
In comparison to securities issued by the U.S. government agencies like Federal Home Loan Bank yield slightly more than treasury securities
What security represents an unsecured promissory note issued by a corporation Commercial Paper
Characteristics of a money market mutual fund include: the purchase of shares by investors, the proceeds by which are reinvested into liquid short term securities
Characteristics of a money market deposit include: A lower risk than money market fundsInsurance by federal agenciesGenerally a limit of three deposits or withdrawals per month
The three primary policy variables to consider when extending credit include: Collection policyCredit StandardsTerms of trade
The most subjective and also significant segment of the 5 C’s of credit for giving approval is Character
Dun and Bradstreet is best known for providing Credit scoring reports that rank a company’s payment habits relative to its peer group
When developing a credit scoring report, many variables are considered. What best represents the major factors Dun and Bradstreet would examine? The financial statements, satisfactory or slow payment experiences, and negative public records (suits, liens, judgments, and bankruptcies).
What are qualitative measures for accounts receivable collection policies Aging of account receivablesRation of bad debts to credit salesAverage collection period
Variables important to credit scoring models include Negative public recordsAge of company in yearsFacility ownership
Inventory is usually divided into what three basic categories Raw MaterialWork in progressFinished goods
For a given firm, holding all other factors constant, ordering costs per unit generally decline as average inventory increases
Use of the Economic Order Quantity Provides the lowest overall inventory costs
When using the economic order quantity model Costs are minimized when total carrying costs and total ordering costs are equal.
The amount of safety stock that a firm carries depends upon the predictability of inventory usage, and the time period necessary to fill inventory orders
A just in time inventory management program has what requirements? Quality productionMinimizing inventory levelsClose ties between suppliers, manufacturers, and customers
Cost savings from just in time inventory include greater productivitylower inventory financing costsreduced overhead expenses
Just in time ordering systems prevent stock outs
Methods of controlling receivables are using DBISOffering a cash discountReducing Net terms
Level production benefits are higher use of capacitymaximum efficiencylower overtime usage
Carrying Costs are Interest expenseWarehouse spaceInsurance premiums
What is generally the largest source of short term credit for small firms? Trade credit
Trade credit may used to finance a major part of a firm’s working capital when the firm extends less liberal credit terms than the supplier
A large manufacturing firm has been selling on a 3/10 net 30 basis. The firm changes its credit to 2/20 net 90. What change might be expected on the balance sheet of its customers Increased payables and decreased bank loans
Large firms tend to be net suppliers of a trade credit
From a banker’s point of view short term bank credit is an excellent way of financing seasonal bulges in inventory and receivables
Bank loans to business firms are usually short term in naturemay require compensating balancesare preferred by the banker to be self liquidating
Commercial bank term loans are offered to superior credit applicants
Recent problems facing the U.S. financial system were the result of what? A huge increase in the amount of mortgage backed securities being bundled up and sold in the markets.A huge drop in the value of mortgage backed securities.Government permitting commercial and investment banks to merge.
The London Inter Bank Offer Rate is an estimate of the interbank lending rate for London banks.has been lower than the U.S. prime rate for at least the last decade.competes with the U.S. prime rate for those companies with an international presence.
LIBOR is interest rate paid on eurodollar loans in the London market
Compensating Balances are used by banks as a substitute for charging service fees
A term loan is usually characterized by monthly or quarterly installment paymentsmaturity of one to seven yearsa variable interest rate
In determining the cost of bank financing, and important factor is the effective rate
Commercial paper is very popular with firms because It can usually be issued below the prime rate
Commercial paper offers what advantages to the issuer? May be issued below the prime rate and requires no compensating balances
What is NOT a characteristic of commercial paper? It has one to two year maturity
What is not a true statement about commercial paper? Dealer paper is sold directly to the lender by a finance company
Multinational firms have found that they can lower borrowing costs by borrowing eurodollars at a rate lower than the U.S. prime rate and by borrowing foreign currencies through foreign subsidiaries at rates lower than the U.S. prime rate and then converting these foreign loans into dollars
Accounts receivable may be used as a source of financing by pledging the receivables as loan collateralselling securities backed by the receivables”factoring” the receivables to a finance company
What best describes the benefits to the borrower of selling asset-backed securities The borrower trade future cash flows for current cash flows and the asset backed security is likely to carry a high credit rating of AA or better.
What is associated with the recession of 07-09 Commercial and investment banks were allowed to merge.Hundreds of bank failures occurred.Federal Reserve and Federal Deposit Insurance Corporation forced large banks at risk of collapse to be taken over by healthy banks.
The extent to which inventory financing may be used depends on the price stability of goods.perishability of goods.marketability of pledged goods.
What are methods for lenders to control pledged inventory? WarehousingTrust ReceiptsBlanket Inventory Liens
What method of controlling pledged inventory provides the greatest degree of security to the lender? Warehousing
Hedging refers to transaction that reduces risk exposure
Firms exposed to the risks of interest rate changes may reduce that risk by hedging in the financial future markets
If a firm has invested in corporate bonds, it may engage in financial futures contract in order to protect itself from rising interest rates.
what is NOT evident in a credit crunch? a decrease in interest rates occur
What is NOT a benefit of commercial paper to a corporation? It is less risky.
What is NOT a reason why a company may choose to pledge accounts receivables? A lower interest rate
What are reasons why a company may choose to pledge accounts receivables? It provides another source of financing for companies with lower credit ratings.The borrowing capacity fluctuates with accounts receivable.

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