A "normal" term structure of interest rates would depict

long-term rates higher than short-term rates

During tight money periods often

long-term rates approach or surpass short term rates

If a firm uses level production with seasonal sales

as sales decline inventory will increase

The term "permanent current assets" implies

A minimum level of current assets are not self-liquidating

An inverted yield curve would suggest that

interest rates are expected to fall

Which of the following will have the most volatile earnings?

Illiquid assets and heavy short-term borrowing

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BAC 300 Chapter 6

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Working Capital & the Financing Decision

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Questions 12

Answers

1
A "normal" term structure of interest rates would depict
no general relationship between short- and long-term rates
short-term rates higher than long-term rates
medium rates - lower than both short-term and long-term
long-term rates higher than short-term rates
2
During tight money periods often
long-term rates are higher than short term rates
short-term rates are equal to long-term rates
long-term rates approach or surpass short term rates
relationship between short and long-term rates is unchanged
3
If a firm uses level production with seasonal sales
as sales decline accounts receivable will increase
as sales decline inventory will decrease
a and c are correct
as sales decline inventory will increase
4
Normally, permanent current assets should be financed by
internally generated funds
borrowed funds
long-term funds
short-term funds
5
The term "permanent current assets" implies
inventory
The same thing as fixed assets.
nonmarketable assets
A minimum level of current assets are not self-liquidating
6
What is the Expected Value of Return for Plan A over Plan B?
$4,000
$35,200
$4,800
$28,800
7
Pressure for current asset buildup often results from
rapidly expanding sales
increased demands of short-term creditors
decline in sales growth
none of the above
8
An inverted yield curve would suggest that
inflation is expected to rise in the future
long-term rates are being pushed up by fed. reserve policy
interest rates are expected to rise
interest rates are expected to fall
9
Risk exposure due to heavy short-term borrowing can be compensated for to some degree by
carrying highly liquid assets
carrying more receivables to increase cash flow
carrying illiquid assets
carrying longer term, more profitable current assets
10
Which of the following will have the most volatile earnings?
Liquid assets and heavy short-term borrowing
Liquid assets and heavy long-term borrowing
Illiquid assets and heavy short-term borrowing
Illiquid assets and heavy long-term borrowing
11
A financial executive devotes the most time to
Long-range planning
Short-term financing
Working capital management
Capital budgeting
12
If I believed interest rates were going to decline...
I would borrow short term
I would not borrow any money
I would borrow long term
I would wait until rates go lower

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