FIN 534 Quiz 9 week 10 Rating A 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 Answer 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 points Question 2 A lockbox plan is most beneficial to firms that have suppliers who operate in many different parts of the country. have widely dispersed manufacturing facilities. have a large marketable securities portfolio and cash to protect. receive payments in the form of currency, such as fast food restaurants, rather than in the form of checks. have customers who operate in many different parts of the country. 2 points Question 3 Which of the following actions would be likely to shorten the cash conversion cycle? Adopt a new manufacturing process that speeds up the conversion of raw materials to finished goods from 20 days to 10 days. Change the credit terms offered to customers from 3/10 net 30 to 1/10 net 50. Begin to take discounts on inventory purchases; we buy on terms of 2/10 net 30. Adopt a new manufacturing process that saves some labor costs but slows down the conversion of raw materials to finished goods from 10 days to 20 days. Change the credit terms offered to customers from 2/10 net 30 to 1/10 net 60. 2 points Question 4 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. 2 points Question 5 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. 2 points Question 6 Which of the following statements is CORRECT? Net working capital is defined as current assets minus the sum of payables and accruals, and any increase in the current ratio automatically indicates that net working capital has increased. Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive strategy because of the inherent risks associated with using short-term financing. If a company follows a policy of “matching maturities,” this means that it matches its use of commo…
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