1.
Net working capital is a firm's
a. current assets
b. current liabilities
c. current assets less current liabilities
d. total assets less total liabilities
Answer: C
2. Working capital is important for all the following reasons except that it
a. consists of a large portion of a firm's total assets
b. affects a firm's liquidity and profitability
c. consumes a small portion of the financial manager's time
d. consists of those assets that are most manageable
Answer: C
3. The optimal level of working capital depends on all of the following factors
except the
a. kind of firm
b. stability of dividends
c. variability of cash flows
d. length of the cash cycle
Answer: B
4. Which of the following assumptions does not underlie risk-return tradeoffs in
managing working capital?
a. Fixed assets remain constant
b. Current assets are less profitable than fixed assets
c. The yield curve is downward sloping
d. Short-term financing is less expensive than long-term financing
Answer: C
5. A firm following a flexible working capital strategy would
a. hold substantial amounts of liquid assets
b. minimize the amount of short-term financing
c. finance fluctuating assets with long-term financing
d. minimize the amount of funds held in liquid assets
Answer: D
6. Restricted working capital management strategies involve
a. low-risk, low-return
b. low-risk, high-return
c. high-risk, high-return
d. moderate-risk, moderate-return
Answer: A
7. According to the compromise approach, working capital should be financed
with
a. spontaneously generated funds
b. short-term financing
c. short-term and long-term financing
d. long-term financing
Answer: C
8. The probability of technical insolvency is reduced by
a. financing permanent assets with short-term debt
b. financing fluctuating assets with long-term debt
c. maintaining a high level of liquid assets
d. both b and c
Answer: D
9. Which of the following actions would increase risk?
a. Increase the level of working capital
b. Change the composition of working capital to include more liquid assets
c. Increase the amount of short-term borrowing
d. Increase the amount of equity financing
Answer: C
10.The matching principle says to
a. match current assets with current liabilities and match fixed assets with long-term
debt and equity
b. match temporary current assets with current liabilities and match permanent
current assets and fixed assets with long-term debt and equity
c. match sales receipts with debt-service payments
d. match cash inflows with cash outflows
Answer: B
11.For a retailer with a highly seasonal sales volume, the level of investment in
_____ does not change with changes in seasonal demand.
a. current assets
b. total assets
c. permanent current assets
d. temporary current assets
Answer: C
12.For a retailer with a highly seasonal sales volume, the level of investment in
_____ does not change with changes in seasonal demand.
a. total assets
b. fixed assets
c. current assets
d. inventory
Answer: B
13.The information shown below reflects Jed Company's current financial
position:
● Fixed assets = ₱1,500,000
● Long-term debt = ₱1,000,000
● Equity = ₱1,200,000
● Sales = ₱1,500,000
● Earnings after taxes = ₱202,500
● Current asset turnover = 1.25
Suppose Jed's financial manager decides to adopt a more aggressive working-capital policy
by liquidating some current assets and using the proceeds to pay off some long-term debt.
Assume that the current assets are perfectly liquid. If the target current ratio is 1.5, then the
amount of current assets that must be liquidated is
a. ₱200,000
b. ₱750,000
c. ₱600,000
d. ₱450,000
Answer: D
14.A company with a flexible working capital policy would tend to have a current
asset turnover and a current ratio than a similar company with a more
restricted working capital policy.
a. higher, higher
b. higher, lower
c. lower, higher
d. lower, lower
Answer: C