Multiple choice questions Try the multiple choice questions below to test your knowledge of Chapter 8.

Onc e you have completed the test, click on 'Submit Answers for Grading' to get your results. If your lecturer has requested that you send your results to them, please comple te the Routing Information found at the bottom of your graded page and click on the 'E-Mail Results' button. Please DO NOT forward your results unless your lect urer has specifically requested that you do so. This activity contains 20 questions.

To financial analysts, "working capital" means the same thing as __________. total assets fixed assets current assets current assets minus current liabilities.

Which of the following would be consistent with an aggressive approach to financ ing working capital? Financing short-term needs with short-term funds. Financing permanent inventory buildup with long-term debt. Financing seasonal needs with short-term funds. Financing some long-term needs with short-term funds.

Which of the following would be consistent with a conservative approach to finan cing working capital? Financing short-term needs with short-term funds. Financing short-term needs with long-term debt. Financing seasonal needs with short-term funds. Financing some long-term needs with short-term funds.

Which of the following would be consistent with a hedging (maturity matching) ap proach to financing working capital? Financing short-term needs with short-term funds. Financing short-term needs with long-term debt. Financing seasonal needs with long-term funds. Financing some long-term needs with short-term funds.

Which of the following is a basic principle of finance as it relates to the mana gement of working capital? Profitability varies inversely with risk. Liquidity moves together with risk. Profitability moves together with risk. Profitability moves together with liquidity.

Which of the following illustrates the use of a hedging approach to financing as sets? Temporary current assets financed with long-term liabilities. Permanent working capital financed with long-term liabilities. Short-term assets financed with equity All assets financed with a mixture of 50% equity and 50% long-term debt.

In deciding the optimal level of current assets for the firm, management is conf ronted with __________. a trade-off between profitability and risk a trade-off between liquidity and risk a trade-off between equity and debt a trade-off between short-term versus long-term borrowing

Which of the following statements is most correct? For small companies, long-term debt is the principal source of external finan cing. Current assets of the typical manufacturing firm account for over half of its t otal assets. Strict adherence to the maturity matching approach to financing would call for all current assets to be financed solely with current liabilities. Similar to the capital structure management, working capital management require s the financial manager to make a decision and not address the issue again for s everal months.

The amount of current assets required to meet a firm's long-term minimum needs i s referred to as __________ working capital. permanent temporary net gross

The amount of current assets that varies with seasonal requirements is referred to as __________ working capital. permanent net temporary gross

Having defined working capital as current assets, it can be further classified a ccording to __________. financing method and time rate of return and financing method time and rate of return components and time

Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of the following is the most appropriate form for financing a ne w capital investment in plant and equipment? Trade credit. 6-month bank notes. Accounts payable. Common stock equity.

Your firm has a philosophy that is analogous to the hedging (maturity matching) approach. Which of the following is the most appropriate non-spontaneous form fo r financing the excess seasonal current asset needs? Trade credit. 6-month bank notes. Accounts payable. Common stock equity.

Under a conservative financing policy a firm would use long-term financing to fi nance some of the temporary current assets. What should the firm do when a "dip" in temporary current assets causes total assets to fall below the total long-te rm financing? Use the excess funds to pay down long-term debt. Invest the excess long-term financing in marketable securities. Use the excess funds to repurchase common stock. Purchase additional plant and equipment.

Which of the following statements is correct for a conservative financing policy for a firm relative to a former aggressive policy? The firm uses long-term financing to finance all fixed and current assets. The firm will see an increase in its expected profits. The firm will see an increase in its risk profile.

The firm will increase its dividends per share (DPS) this period.

Which of the following statements is correct for an aggressive financing policy for a firm relative to a former conservative policy? The firm will use long-term financing to finance all fixed and current assets . The firm will see an increase in its expected profits. The firm will see a decline in its risk profile. The firm will need to issue additional common stock this period to finance the assets.

How can a firm provide a margin of safety if it cannot borrow on short notice to meet its needs? Maintain a low level of current assets (especially cash and marketable securi ties). Shorten the maturity schedule of financing. Increasing the level of fixed assets (especially plant and equipment). Lengthening the maturity schedule of financing.

Risk, as it relates to working capital, means that there is jeopardy to the firm for not maintaining sufficient current assets to __________. meet its cash obligations as they occur and take advantage of prompt payment discounts support the proper level of sales and take prompt payment discounts maintain current and acid-test ratios at or above industry norms meet its cash obligations as they occur and support the proper level of sales

If a company moves from a "conservative" working capital policy to an "aggressiv e" policy, it should expect __________.

liquidity to decrease, whereas expected profitability would increase expected profitability to increase, whereas risk would decrease liquidity would increase, whereas risk would also increase risk and profitability to decrease

To financial analysts, "net working capital" means the same thing as __________.

total assets fixed assets current assets current assets minus current liabilities.

Your Results for: "Multiple choice questions" Print this page Site Title: Fundamentals of Financial Management, twelfth edition Book Title: Fundamentals of Financial Management, twelfth edition Book Author: Van Horne/Wachowicz Location on Site: Student Resources > Chapter 8 > Multiple choice questions Date/Time Submitted: October 22, 2011 at 7:10 PM (UTC/GMT) Summary of Results 55% Correct of 20 Scored items: 11 Correct: 9 Incorrect: 45% 55%

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-------------------------------------------------------------------------------1. To financial analysts, "working capital" means the same thing as __________. Your Answer: current assets -------------------------------------------------------------------------------2. Which of the following would be consistent with an aggressive approach to fin ancing working capital? Your Answer: Financing some long-term needs with short-term funds. -------------------------------------------------------------------------------3. Which of the following would be consistent with a conservative approach to fi nancing working capital? Your Answer: Financing short-term needs with short-term funds. Correct Answer: Financing short-term needs with long-term debt. This is a maturity matching approach and is neither aggressive nor conservativ e in nature (Table 8-1). Rather, it is a moderate approach. -------------------------------------------------------------------------------4. Which of the following would be consistent with a hedging (maturity matching) approach to financing working capital? Your Answer: Financing short-term needs with short-term funds. --------------------------------------------------------------------------------5. Which of the following is a basic principle of finance as it relates to the m anagement of working capital? Your Answer: Profitability moves together with risk. --------------------------------------------------------------------------------

6. Which of the following illustrates the use of a hedging approach to financing assets? Your Answer: Permanent working capital financed with long-term liabilities. -------------------------------------------------------------------------------7. In deciding the optimal level of current assets for the firm, management is c onfronted with __________. Your Answer: a trade-off between profitability and risk -------------------------------------------------------------------------------8. Which of the following statements is most correct? Your Answer: Strict adherence to the maturity matching approach to financing would call for all current assets to be financed solely with current liabilities. Correct Answer: Current assets of the typical manufacturing firm account for over half of its t otal assets. Only the "temporary" component of current assets would be financed with curren t liabilities under the maturity matching approach. -------------------------------------------------------------------------------9. The amount of current assets required to meet a firm's long-term minimum need s is referred to as __________ working capital. Your Answer: temporary Correct Answer: permanent Actually, this is the amount of current assets that varies with seasonal requi rements. -------------------------------------------------------------------------------10. The amount of current assets that varies with seasonal requirements is referr ed to as __________ working capital. Your Answer: temporary -------------------------------------------------------------------------------11.

Having defined working capital as current assets, it can be further classifie d according to __________. Your Answer: financing method and time Correct Answer: components and time Components (e.g. cash, marketable securities, receivables) and time (permanent or temporary) -------------------------------------------------------------------------------12. Your firm has a philosophy that is analogous to the hedging (maturity matchin g) approach. Which of the following is the most appropriate form for financing a new capital investment in plant and equipment? Your Answer: 6-month bank notes. Correct Answer: Common stock equity. These bank notes are very short-term and would not match closely to the long-t erm life of the plant and equipment. -------------------------------------------------------------------------------13. Your firm has a philosophy that is analogous to the hedging (maturity matchin g) approach. Which of the following is the most appropriate non-spontaneous form for financing the excess seasonal current asset needs? Your Answer: Common stock equity. Correct Answer: 6-month bank notes. This is a long-term form of financing and would not be appropriate under the m aturity matching approach. -------------------------------------------------------------------------------14. Under a conservative financing policy a firm would use long-term financing to finance some of the temporary current assets. What should the firm do when a "d ip" in temporary current assets causes total assets to fall below the total long -term financing? Your Answer: Purchase additional plant and equipment. Correct Answer: Invest the excess long-term financing in marketable securities. This is a possibility, but not the best solution as the asset needs are volati le and increasing in the long-term (assumed). Thus, the firm is not likely to ha ve a need for additional plant and equipment when asset use is already below pre vious needs. The firm should invest in marketable securities of appropriate leng th and type.

-------------------------------------------------------------------------------15. Which of the following statements is correct for a conservative financing pol icy for a firm relative to a former aggressive policy? Your Answer: The firm uses long-term financing to finance all fixed and current assets. -------------------------------------------------------------------------------16. Which of the following statements is correct for an aggressive financing poli cy for a firm relative to a former conservative policy? Your Answer: The firm will need to issue additional common stock this period to finance the assets. Correct Answer: The firm will see an increase in its expected profits. The aggressive approach uses greater relative short-term financing. Thus, this is not an appropriate approach for additional financing. -------------------------------------------------------------------------------17. How can a firm provide a margin of safety if it cannot borrow on short notice to meet its needs? Your Answer: Maintain a low level of current assets (especially cash and marketable securiti es). Correct Answer: Lengthening the maturity schedule of financing. However, increasing the level of current assets (especially cash and marketabl e securities) would help provide a margin of safety. -------------------------------------------------------------------------------18. Risk, as it relates to working capital, means that there is jeopardy to the f irm for not maintaining sufficient current assets to __________. Your Answer: meet its cash obligations as they occur and support the proper level of sales -------------------------------------------------------------------------------19. If a company moves from a "conservative" working capital policy to an "aggres sive" policy, it should expect __________. Your Answer: liquidity to decrease, whereas expected profitability would increase

-------------------------------------------------------------------------------20. To financial analysts, "net working capital" means the same thing as ________ __. Your Answer: current assets minus current liabilities.