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Finance Flashcards

Managerial Finance Chapter 2

manpower and equipment are used efficiently at lower cost. One advantage of level production is thatmanpower and equipment are used efficiently at lower cost.Bcurrent assets fluctuate more than with seasonal production.seasonal bulges and sharp declines in current assets occur.None of the options are advantageous.
rapidly expanding sales. Pressure to increase current asset buildup often results froma decline in sales growth.rapidly expanding sales.increased demands of short-term creditors.None of the options are true.
high amounts of permanent current assets. A manager can be aggressive if the firm has all of the following EXCEPTpredictable cash-flow patterns.high amounts of permanent current assets.a stableinventory price.basic access to capital markets.
interest rates are expected to fall. An inverted yield curve would suggest thatinterest rates are expected to rise.interest rates are expected to fall.inflation is expected to rise in the future.long-term rates are being pushed up by Federal Reserve policy.
future interest rates are expected to increase. A firm will usually increase the ratio of short-term debt to long-term debt whenshort-term debt has a lower cost than long-term equity.future interest rates are expected to increase.long-term debt has a lower cost than long-term equity.future interest rates are expected to decrease.
cyclical sales and more volatile earnings per share. Retail companies like Target and Macy’s are more likely to havestable sales and earnings per share.cyclical sales but less volatile earnings per share.cyclical sales and more volatile earnings per share.cyclical sales but stable accounts receivable and inventory.
All of the options are correct. The term structure of interest rates is influenced byinflation.money supply.Federal Reserve activities.All of the options are correct.
all the product will be sold, receivables collected, and bills paid over the time period specified. The concept of a self-liquidating asset implies thatthe working capital associated with a product will be liquidated within a one-year period.all the product will be sold, receivables collected, and bills paid over the time period specified.assets associated with the production of a product will be liquidated over the depreciable life of the assets.self-liquidating assets will be financed by long-term sources of capital.
Upward sloping Which of the following yield curves would be present during a period of high economic growth?Upward slopingDownward slopingHorizontalHumped
borrow short-term and carry low levels of liquidity. An aggressive, risk-oriented firm will likelyborrow long-term and carry low levels of liquidity.borrow short-term and carry low levels of liquidity.borrow long-term and carry high levels of liquidity.borrow short-term and carry high levels of liquidity.
synchronization of cash inflows and cash outflows. One of the first considerations in cash management isto have as much cash as possible on hand.synchronization of cash inflows and cash outflows.profitability.to put any excess cash into accounts receivable.
True Cash management becomes more important as the level of short-term interest rates rises.TrueFalse
True When selecting marketable securities, the company should always select securities with longer maturities if they offer higher yields.TrueFalse
True It is possible for companies to operate with negative cash balances on their books.TrueFalse
False In the management of cash and marketable securities, the primary concern is profitability.TrueFalse
False Multinational firms find it difficult to shift funds from one country to another.TrueFalse
long-term corporate bonds. A firm that wishes to minimize risk when investing idle cash would be LEAST likely to buycommercial paper.long-term corporate bonds.certificates of deposit.Treasury bills of the U.S. government.
All of the options are true. International cash management is more complex than domestic-based cash management because ofliquidity management issues.different banking systems.currency fluctuation risk.All of the options are true.
Liquidity and safety In managing cash and marketable securities, what should be the manager’s primary concern?Maximization of profitMaximization of liquid assetsAcceptable return on investmentLiquidity and safety
there is a greater possibility that the value of the security will drop because of the interest fluctuations. The problem in stretching out the maturity of marketable securities is thatyou are legally locked in until the maturity date.longer-term securities always make less interest than shorter-term securities.there is a greater possibility that the value of the security will drop because of the interest fluctuations.interest rates are generally lower overtime.
True If a firm averages $2,000 in daily credit sales and offers 60-day terms, the average accounts receivable balance will be $120,000.TrueFalse
True When considering offering a cash discount, a firm must weigh the benefits of freed-up cash with the cost of the cash discount.TrueFalse
credit scoring reports that rank a company’s payment habits relative to its peer group. Dun & Bradstreet is known for providinginterest rate information to cash managers.credit scoring reports that rank a company’s payment habits relative to its peer group.cash management systems to corporate treasurers.consumer credit reports to credit card companies.
False If a firm’s average accounts receivable balance increases, this could be because the company improved what customers it extended credit to.TrueFalse
True If a firm’s average collection period increases, this could be because the company gave credit to customers with a low credit report.TrueFalse
reducing cash sales. All of the following are methods of controlling receivables exceptoffering a cash discount.reducing net terms.using DBIS.reducing cash sales.
True The 5 Cs of credit include “character, capital, capacity, conditions, and collateral.”TrueFalse
False Cash should have a higher required return than accounts receivable because it is more liquid.TrueFalse
The financial statements, satisfactory or slow payment experiences, and negative public records (suits, liens, judgments, and bankruptcies). When developing a credit scoring report, many variables would be considered. Which of the following best represents the major factors Dun & Bradstreet would examine?The age of the management team, the dollar amount of sales, net profits, and long-term debt.The age of the company, the number of employees, and the level of current assets.The financial statements, satisfactory or slow payment experiences, and negative public records (suits, liens, judgments, and bankruptcies).The company’s cash balances, return on equity, and its average tax rates.
An increase in bank loans that would cost us 8% Assuming that we can earn a 10% return on accounts receivable, which of the following strategies to finance an increase in our accounts receivable balance would be optimal?An increase in bank loans that would cost us 8%A decrease in inventories that are earning a 16% returnA reduction in marketable securities that are earning a return of 14%An increase in accounts payable that would cost our firm 15%
costs are minimized when total carrying costs and total ordering costs are equal. When using the economic order quantity modelordering costs increase as the level of inventory increases.carrying costs decrease as the level of inventory increases.costs are minimized when total carrying costs and total ordering costs are equal.None of the options are true.
Inventory Which of the following is generally considered to be the least liquid of current assets?Accounts receivableInventoryMarketable securitiesCash equivalents
Optimal order size The inventory decision model provides which type of information?Optimal total inventoryOptimal safety stockOptimal order sizeOptimal carrying cost per unit
True A reduction in carrying costs would increase the economic order quantity.TrueFalse
False A stock out saves the firm money because little inventory is held on hand, which saves on storage costs.TrueFalse
True Inventory should have a higher required return than cash because it is less liquid.TrueFalse
Prevents stock outs All of the following are benefits of just-in-time inventory ordering systems except that JITreduces warehouse space.saves utility and manpower costs.reduces inventory costs.prevents stock outs.
All of the options are true. Companies that are mostly influenced by seasonal sales have to make a choice betweenlevel production and inventory buildup.seasonal production and an uneven workforce.a stable workforce and a fluctuating workforce.All of the options are true.
decline as average inventory increases. For a given firm, holding other factors constant, ordering costs per unit generallydecline as average inventory increases.increase in proportion to increases in inventory.are considered fixed costs.are negotiated.
False Commercial paper represents secured short-term borrowing by large companies.TrueFalse
True Monthly installment loans usually increase the effective interest rate of borrowing by approximately 2 times the stated interest rate.TrueFalse
8.8% Holland Construction Co. has an outstanding 180-day bank loan of $475,000 at an annual interest rate of 7.5%. The company is required to maintain a 15% compensating balance in its checking account. What is the effective interest rate on the loan? Assume the company would not normally maintain this average amount.11.2%19.0%22.45%8.8%
True One major advantage of factoring accounts receivable is that the selling firm receives money from its accounts receivable faster than if it waited until the customers paid.TrueFalse
True Approximately 40% of all short-term financing is in the form of accounts payable or trade credit.TrueFalse
The effective rate In determining the cost of bank financing, which is the most important factor?The prime rateThe nominal rateThe effective rateThe discount rate
True Accounts payable is a spontaneous source of funds that usually grows as the business expands.TrueFalse
True Compensating balances are important for banks because their existence allows them to make loans at lower quoted rates.TrueFalse
Consumers The Truth in Lending law is primarily designed to protectcorporate borrowers.banks.consumers.investors in municipal bonds.

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