FI480 FINAL EXAM REVIEW QUESTIONS AND ANSWERS
A+ GRADED
Working capital management involves 2 basic questions:
1. What is the appropriate amount of working capital, both in total and for each specific
account?
2. How should working capital be financed?
Supply chain
network of organizations that convert materials and labor into products or services that
ultimately are purchased by consumers
Requirement for effective supply chain management (SCM) is sharing information
_______________ the chain, all the way from retailers, to wholesalers, to
manufacturers, to suppliers, and even back to the suppliers' suppliers
throughout
Account payable
account where money that will be paid goes
Account receivable
account where the customer accepts credit and doesn't pay the balance immediately
At the time a credit sale is made three events occur:
1. Inventories are reduced by the cost of goods sold
2. Accounts receivable are increased by the sales price
3. The difference between the amounts that receivables increase and that
inventories decrease is reported immediately as pre tax profit, adjusted for taxes,
then added to the previous retained earnings balance
Short term financial assets:
-Checking accounts
-US treasury and agency securities
-Certificates of deposits and time deposits
-Commercial paper
-Money market funds and other mutual funds
-Short term or floating rate corporate and municipal notes and bonds
-Floating rate preferred stock
Most of these holdings can be converted into cash very quickly at prices identical or
very close to their book values, (sometimes called cash equivalents)
Cash
total value of the short term financial assets that are held to support ongoing operations
because it is used to calculate NOWC
Operating current assets (CA) are used to ____________ sales. Having too much
invested in operating CA is _____________, but having too little might
______________ sales
support, inefficient, constrain
, Relaxed policy
hold lots of cash, receivables, and inventories relative to sales
Restricted policy
holdings of current assets are minimized and we say that the firm's policy is tight or lean
and mean
Moderate policy
lies between relaxed and restricted policies
Relaxed policy means a _______ level of current assets and a ______ assets
turnover ratio which results in _______ return on ROE (other things held
constant)
high, low, low
Restricted policy results in _____ current assets, a _______ turnover; and hence a
relatively _______ ROE
low, high, high
Optimal strategy is one that management believes will ____________ the firm's
long run ____ and thus the stocks intrinsic ___________
maximize, FCF, value
Permanent operating current assets
operating current assets needed even at the low point of the business cycle
Temporary operating current assets
extra current assets received during a cyclical upswing
Maturity matching approach (self liquidating approach)
matching assets and liability maturities
2 factors prevent exact maturity matching:
1. Uncertain asset lives
2. Equity financing
Aggressive approach
a firm finances some of its permanent assets with short term debt
The benefit to using short term debt is overall ___________ interest rates since
most of the time the yield curve is __________ sloping
lower, upward
Conservative approach
long term capital is used to finance all permanent assets and also meet some seasonal
needs. Firm uses a small amount of short term credit to meet its peak requirements
Because the yield curve is normally upward sloping, the cost of short term debt is
generally lower than that of long term debt. However, short term debt is riskier for
the borrowing firm for 2 reasons:
1. If a firm borrows on a long term basis, then its interest costs will be relatively
stable over time, but if it uses short term credit, then its interest expense can
fluctuate widely
2. If a firm borrows heavily on a short term basis, then a temporary recession may
drag down its financial ratios, causing a lender to choose not to renew a loan
Cash conversion cycle (CCC)
firms purchase or produce inventory, hold it for a time, and then sell it and receive cash
Definitions used in calculating the cycle length (CCC):
A+ GRADED
Working capital management involves 2 basic questions:
1. What is the appropriate amount of working capital, both in total and for each specific
account?
2. How should working capital be financed?
Supply chain
network of organizations that convert materials and labor into products or services that
ultimately are purchased by consumers
Requirement for effective supply chain management (SCM) is sharing information
_______________ the chain, all the way from retailers, to wholesalers, to
manufacturers, to suppliers, and even back to the suppliers' suppliers
throughout
Account payable
account where money that will be paid goes
Account receivable
account where the customer accepts credit and doesn't pay the balance immediately
At the time a credit sale is made three events occur:
1. Inventories are reduced by the cost of goods sold
2. Accounts receivable are increased by the sales price
3. The difference between the amounts that receivables increase and that
inventories decrease is reported immediately as pre tax profit, adjusted for taxes,
then added to the previous retained earnings balance
Short term financial assets:
-Checking accounts
-US treasury and agency securities
-Certificates of deposits and time deposits
-Commercial paper
-Money market funds and other mutual funds
-Short term or floating rate corporate and municipal notes and bonds
-Floating rate preferred stock
Most of these holdings can be converted into cash very quickly at prices identical or
very close to their book values, (sometimes called cash equivalents)
Cash
total value of the short term financial assets that are held to support ongoing operations
because it is used to calculate NOWC
Operating current assets (CA) are used to ____________ sales. Having too much
invested in operating CA is _____________, but having too little might
______________ sales
support, inefficient, constrain
, Relaxed policy
hold lots of cash, receivables, and inventories relative to sales
Restricted policy
holdings of current assets are minimized and we say that the firm's policy is tight or lean
and mean
Moderate policy
lies between relaxed and restricted policies
Relaxed policy means a _______ level of current assets and a ______ assets
turnover ratio which results in _______ return on ROE (other things held
constant)
high, low, low
Restricted policy results in _____ current assets, a _______ turnover; and hence a
relatively _______ ROE
low, high, high
Optimal strategy is one that management believes will ____________ the firm's
long run ____ and thus the stocks intrinsic ___________
maximize, FCF, value
Permanent operating current assets
operating current assets needed even at the low point of the business cycle
Temporary operating current assets
extra current assets received during a cyclical upswing
Maturity matching approach (self liquidating approach)
matching assets and liability maturities
2 factors prevent exact maturity matching:
1. Uncertain asset lives
2. Equity financing
Aggressive approach
a firm finances some of its permanent assets with short term debt
The benefit to using short term debt is overall ___________ interest rates since
most of the time the yield curve is __________ sloping
lower, upward
Conservative approach
long term capital is used to finance all permanent assets and also meet some seasonal
needs. Firm uses a small amount of short term credit to meet its peak requirements
Because the yield curve is normally upward sloping, the cost of short term debt is
generally lower than that of long term debt. However, short term debt is riskier for
the borrowing firm for 2 reasons:
1. If a firm borrows on a long term basis, then its interest costs will be relatively
stable over time, but if it uses short term credit, then its interest expense can
fluctuate widely
2. If a firm borrows heavily on a short term basis, then a temporary recession may
drag down its financial ratios, causing a lender to choose not to renew a loan
Cash conversion cycle (CCC)
firms purchase or produce inventory, hold it for a time, and then sell it and receive cash
Definitions used in calculating the cycle length (CCC):
