fmgt 201 ch 6

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wsrdpc
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fmgt 201 ch 6
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2011-04-27 21:41:13
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fmgt 201 ch 6
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  1. Short-term interest rates have historically been more volatile than long-term rates
    True
  2. During tight money periods, short term financing may be difficult to find
    True
  3. Cash, accounts receivables, and inventory all move monthly in the same direction under level production
    False
  4. Normally, permanent current assets should be financed by
    a. long term funds
    b. short term funds
    c. borrowed funds
    d. internally generated funds
    a long term funds
  5. Increased use of long term financing is generally a more conservative approach to current asset financing
    True
  6. The term structure of interest rates
    a. is often referred to as the yield curve
    b. depicts the relative level of short and long term interest rates
    c. is usually constructed with U.S. government securities of varying maturities
    d. all of the above
    d all of the above
  7. When actual sales are greater than forecasted sales
    a. inventory will decline
    b. production schedules might have to be revised upward
    c. accounts receivable will rise
    d. all of the above
    d all of the above
  8. When using level production, inventory will peak in the month where unit sales trend above the production level.
    false
  9. The theory of the term structure of interest rates which suggests that long term rates are determined by the average of short term rates expected over the time that a long term bond is outstanding is the
    a. expectations hypothesis
    b. segmentation theory
    c. liquidity premium theory
    d. market average rate theory
    a expectations hypothesis
  10. The term structure of interest rates
    a. changes daily to reflect current competitve conditions in the money and capital markets
    b. plots returns for securities of different risk
    c. shows the relative interest spread between bonds with differing risk ratings such as AAA, AA, A, BBB, etc
    d. Depicts interest rates for T-bills over the last year
    a changes daily to reflect current competitve conditions in the money and capital markets
  11. Working capital management is relatively unimportant for the small business
    False
  12. As a general rule, it is desirable to finance the permanent assets, including “permanent current assets”, with long term debt and equity
    True
  13. The cash budget combines the cash receipts and cash payments schedules in determining cash flow.
    True
  14. According to the expectation hypothesis, when long-term interest rates are higher than short-term interest rates, short-term rates are expected to rise.
    True
  15. As the economy moves through a business cycle, which of the following term structure of interest rates theories dominate the shape of the yield curve.
    a. The expectations theory
    b. The market segmentation theory
    c. The liquidity premium theory
    d. None of the above dominate the shape of the yield curve
    d None of the above dominate the shape of the yield curve
  16. The key to current asset planning is the ability of management to forecast sales accurately and then match production schedules with the sales forecast.
    True
  17. Under normal conditions (70% probability, Financing Plan A will produce $24,000 higher return than Plan B. Under tight money conditions (30% probability) Plan A will produce $40,000 less than Plan B. What is the expected value of return for Plan A over Plan B?
    a. $28,800
    b. $4,000
    c. $4,800
    d. $35,200
    c $4800
  18. A “normal” term structure of interest rates would depict
    a. Short-term rates higher than long-term rates
    b. Long-term rates higher than short-term rates
    c. No general relationship between short- and long-term rates
    d. Medium rates (1-5 years) lower than both short-term and long-term rates
    b Long-term rates higher than short-term rates
  19. Level production methods smooth production schedules and utilize manpower and equipment more efficiently than seasonal production methods.
    True
  20. The use of cash budgeting procedures
    a. Helps the firm plan its current asset levels for given production plan
    b. Makes managing inventory easier under seasonal production
    c. Illustrates fluctuating levels of current assets for a given production plan
    d. All of the above are correct
    d All of the above are correct
  21. In periods of tight money, long-term rates are often higher than short-term rates
    False
  22. 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
    a. Expectations hypothesis
    b. Segmentation theory
    c. Liquidity premium theory
    d. Theory of industry supply and demand for bonds
    b segmentation theory
  23. Working capital management is primarily concerned with the management and financing of
    a. Cash and inventory
    b. Current assets and current liabilities
    c. Current assets
    d. Receivables and payables
    c current assets
  24. Retail companies like Target and The Limited exhibit sales patterns that are mostly influenced by
    a. Cyclical economic indicators
    b. Competitive prices
    c. Seasonality
    d. Sales promotions
    c seasonality
  25. Retail companies like Target and Limited Brands are more likely to have
    a. Stable sales and earnings per share
    b. Cyclical sales but less volatile earnings per share
    c. Cyclical sales and more volatile earnings per share
    d. Cyclical sales but stable accounts receivable and inventory
    c cyclical sales and more volatile earnings per share
  26. An inverted yield curve would suggest that
    a. Interest rates are expected to rise
    b. Interest rates are expected to fall
    c. Inflation is expected to rise in the future
    d. Long-term rates are being pushed up by federal reserve policy
    b interest rates are expected to fall
  27. If a firm uses level production with seasonal sales
    a. As sales decline inventory will increase
    b. As sales decline inventory will decrease
    c. As sales decline accounts receivable will increase
    d. A and c are correct
    a as sales decline inventory will increase
  28. One advantage of level production is that
    a. Manpower and equipment are used efficiently at lower cost
    b. Current assets fluctuate more than with seasonal production
    c. Seasonal bulges and sharp declines in current assets occur
    d. None of the above are advantageous
    a manpower and equiment are used efficiently at lower cost
  29. The term structure of interest rates is influenced by
    a. Inflation
    b. Money supply
    c. Federal Reserve activities
    d. All of the above are true
    d all of the above are true
  30. Frisch Fish Corp expects net income next year to be $600,000. Inventory and accounts receivable will have to be increased by $300,000 to accommodate this sales level. Frisch will pay dividends of $400,000. How much external financing will Frisch Fish need assuming no organically generated increase in liabilities?
    a. No external financing is required
    b. $100,000
    c. $200,000
    d. $300,000
    b $100,000
  31. The financial manager generally needs to devote little time to management of working capital.
    False
  32. The concept of a self-liquidating asset implies that
    a. The working capital associated with a product will be liquidated within a one year period
    b. All the product will be sold, receivables collected and bills paid over the time period specified
    c. Assets associated with the production of a product will be liquidated over the depreciable life of the asset
    d. Self-liquidating assets be financed by long-term sources of capital
    b all the product will be sold, receivables collected and bills paid over the time period specified
  33. The “term structure of interest rates” refers to the relationship between yields on debt and their maturities.
    True
  34. During tight money periods
    a. Long-term rates are higher than short-term rates
    b. Short-term rates are higher than long-term rates
    c. Short-term rates are equal to long-term rates
    d. The relationship between short and long-term rates remains unchanged
    b short term rates are higher than long term rates
  35. 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 cash budge requires the following steps:
    a. Estimate bank borrowing and repayments
    b. Create a monthly sales forecast
    c. Estimate monthly cash receipts
    d. After calculating production related cash payments calculate cash flow
    a estimated bank borrowing and repayments
  36. Which of the following is not a condition under which a prudent manager would accept some risk in financing?
    a. Predictable cash-flow patterns
    b. Inventory is highly perishable
    c. Price of inventory is stable
    d. Easy access to capital markets
    b inventory is highly perishable
  37. The term structure of interest rates
    a. Is an indication of investors’ expectations about inflation and future interest rates
    b. Will be downward sloping if short-term interest rates are higher than long-term rates
    c. Will be upward sloping under normal conditions
    d. All of the above
    d all of the above

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