Multiple choice
1. Which of the following statement completions is CORRECT? If the yield curve is upward sloping, then the marketable securities held in a firm’s portfolio, assumed to be held for emergencies, should
consist mainly of long-term securities because they pay higher rates.
consist mainly of short-term securities because they pay higher rates.
consist mainly of U.S. Treasury securities to minimize interest rate risk.
consist mainly of short-term securities to minimize interest rate risk.
be balanced between long- and short-term securities to minimize the adverse effects of either an upward or a downward trend in interest rates.
2. Other things held constant, which of the following will cause an increase in net working capital?
Cash is used to buy marketable securities.
A cash dividend is declared and paid.
Merchandise is sold at a profit, but the sale is on credit.
Long-term bonds are retired with the proceeds of a preferred stock issue.
Missing inventory is written off against retained earnings.
3. Which of the following statements is CORRECT?
Other things held constant, the higher a firm’s days sales outstanding (DSO), the better its credit department.
If a firm that sells on terms of net 30 changes its policy to 2/10 net 30, and if no change in sales volume occurs, then the firm’s DSO will probably increase.
If a firm sells on terms of 2/10 net 30, and its DSO is 30 days, then the firm probably has some past-due accounts.
If a firm sells on terms of net 60, and if its sales are highly seasonal, with a sharp peak in December, then its DSO as it is typically calculated (with sales per day = Sales for past 12 months/365) would probably be lower in January than in July.
If a firm changed the credit terms offered to its customers from 2/10 net 30 to 2/10 net 60, then its sales should increase, and this should lead to an increase in sales per day, and that should lead to a decrease in the DSO.
4. Which of the following statements is NOT CORRECT?
A company may hold a relatively large amount of cash and marketable securities if it is uncertain about its volume of sales, profits, and cash flows during the coming year.
Credit policy has an impact on working capital because it influences both sales and the time before receivables are collected.
The cash budget is useful to help estimate future financing needs, especially the need for short-term working capital loans.
If a firm wants to generate more cash flow from operations in the next month or two, it could change its credit policy from 2/10 net 30 to net 60.
Managing working capital is important because it influences financing decisions and the firm’s profitability.
