Chapt

er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

Chapt
er06
Wor
kingCapi
tal
andt
heFi
nanci
ngDecisi
on

Mul
ti
pleChoi
ceQuest
ions
 

1.
 Wor ki
ngcapitalmanagementispri
mari
l
yconcer
nedwi
tht
hemanagementand
fi
nancingof: 
A. 
cashandi nventor
y.
B. 
currentassetsandcurr
entl
iabi
li
ti
es.
C. 
currentassets.
D. 
receivabl
esandpay abl
es.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-01Definewor
kingcapi
talmanagement
.
Topic:06-01Theshor tter
m
 

2.
 Af i
nanci alexecut
ivedev
otest
hemostt
imet
o: 
A.
 long-rangepl anni
ng.
B.
 capital budgeti
ng.
C.
 shor t
-termf i
nanci
ng.
D.
 wor ki
ngcapi t
almanagement.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-01Definewor
kingcapi
talmanagement
.
Topic:06-01Theshor tter
m
 

6-
1
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

3.
 Pressuref
orcurrentassetbui
ldupoftenresultsf
rom:
 
A.
 decli
neinsalesgrowt h.
B.
 rapi
dlyexpandi
ngsal es.
C.
 incr
easeddemandsofshor t
-t
erm credit
ors.
D.
 decreaseddemandsofshor t-
term credi
tors.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
02Describetheeff
ectassetgr
owt
hhasonwor
kingcapi
talposi
ti
ons.
Topic:06-02TheNat ureofAssetGrowth
 

4.
 I
deally,
allcurrentasset
swil
lbe:
 
A.
 fi
nancedbyshor t-
ter
m debt
.
B.
 l
ong-termi nnature.
C.
 sel
f-
liquidati
ng.
D.
 i
nternall
yf i
nanced.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
02Describetheeff
ectassetgr
owt
hhasonwor
kingcapi
talposi
ti
ons.
Topic:06-02TheNat ureofAssetGrowth
 

5.
 Thet erm"permanentcurr
entassets"i
mplies: 
A.
 thesamet hingascapital
assets.
B.
 nonmar ketabl
eassets.
C.
 somemi ni
mum levelofcurr
entassetsthatisnotsel
f-
li
qui
dat
ing.
D.
 inventor
y.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
02Describetheeff
ectassetgr
owt
hhasonwor
kingcapi
talposi
ti
ons.
Topic:06-02TheNat ureofAssetGrowth
 

6-
2
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

6.
 Nor mal l
y,permanentcurr
entasset
sshoul
dbef
inancedby
: 
A.
 long-termf unds.
B.
 short -
termf unds.
C.
 bor r
owedf unds.
D.
 internall
ygener at
edfunds.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
05Explai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-06Patter
nsofFinanci
ng
 

7.
 I
deal
ly,
whi chofthefol
lowingty
pesofassetsshoul
dbef
inancedwi
thl
ong-
ter
m
fi
nanci
ng? 
A. 
Capi
talassetsonly
B. 
Capi
talassetsandtemporarycurr
entassets
C. 
Capi
talassetsandpermanentcurrentasset
s
D. 
Temporaryandper manentcur
rentassets

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
05Explai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-06Patter
nsofFinanci
ng
 

8.
 Generall
y,moreusei smadeofshort-t
ermfinanci
ngbecause:  
A.
 short
-ter
mf inancingisusual
l
ymor epredi
ctablet
hanl ong-t
ermf inancing.
B.
 mostf i
rmsdohav eeasyaccesstothecapit
almarkets.
C.
 short
-ter
mi nterestrat
esaregener
all
yhigherthanlong-ter
mi nterestrates.
D.
 short
-ter
mi nterestrat
esaregener
all
ylowerthanlong-terminterestrates.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Explai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-09Short-
Term Fi
nanci
ng(Ri
sky)
 

6-
3
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

9.
 Duringt i
ghtmoneyper iods:
 
A.
 long-termr atesarehigherthanshor t-
ter
mr at
es.
B.
 short -
ter
mr atesar
ehi gherthanlong-ter
mr at
es.
C.
 shor t-
ter
mr atesareequal t
olong-termrates.
D.
 ther el
ationshipbetweenshor tandl ong-
termrat
esr
emai
nsunchanged.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
06Descri
bet het
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafi
nancialmanager
.
Topic:06-14ADeci si
onProcess
 

10.
 A"normal"term str
uctureofint
erestr
ateswoulddepi ct:
 
A. 
short
-ter
mr ateshigherthanlong-t
ermrates.
B. 
l
ong-termrateshigherthanshort-t
ermrates.
C. 
nogeneralrelat
ionshipbetweenshort-
andlong-t
ermr ates.
D. 
medium rates(1-5years)lowerthanbothshort
-t
erm andl ong-
ter
mrat
es.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

11. 
Whi choft hefoll
owingisareasonfordimi
nishi
ngl
iqui
dit
yinmoder
n
corporations? 
A. 
Lowi nt er
estrates.
B. 
Lowerut i
li
zati
onofcashv i
acomput er
s.
C. 
Great eruti
li
zati
onofcashv i
ainfor
mat i
onsystems.
D. 
Infl
ationpushesmor ecashint
oinventor
y.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
06Descri
bet het
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafi
nancialmanager
.
Topic:06-17Shift
sinAssetStr
ucture
 

6-
4
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

12.
 Anaggressi
v e,
risk-
ori
ent
edf i
rm wi l
llikel
y: 
A. 
bor
rowlong-term andcarr
ylowlev elsofl i
quidity
.
B. 
bor
rowshor t
-ter
m andcarrylowlev elsofliquidit
y.
C. 
bor
rowlong-term andcarr
yhighlev elsofliquidit
y.
D. 
bor
rowshor t
-ter
m andcarryhighlev elsofliquidi
ty.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

13. 
Whi chofthef oll
owingisnotacondi
ti
onunderwhi
chapr
udentmanagerwoul
d
acceptsomer iski nfi
nancing?  
A. 
Predictabl
ecash- fl
owpat terns
B. 
Inventoryi
shighl yperi
shabl e
C. 
Pri
ceofi nventoryisstable
D. 
Easyaccesst ocapi talmar ket
s

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Explai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-06Patter
nsofFinanci
ng
 

14. 
Riskexposureduet oheav yshort
-t
erm borr
owingcanbecompensat
edf
orby
: 
A. 
carryi
nghighl
yliquidassets.
B. 
carry
ingil
li
quidasset s.
C. 
carryi
nglongerterm, moreprofi
tabl
ecurrentasset
s.
D. 
carryi
ngmor ereceivablest
oincreasecashflow.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
06Descri
bet het
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafi
nancialmanager
.
Topic:06-17Shift
sinAssetStr
ucture
 

6-
5
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

15. 
Whi chofthefol
lowi
ngcombi nati
onsofassetstr
uct
uresandf
inanci
ngpat
ter
nsi
s
l
ikel
yt ocreat
et hel
eastvolati
leearni
ngs? 
A. 
Il
li
quidassetsandheav yshort-t
erm borrowing
B. 
Il
li
quidassetsandheavyl ong-
term borrowing
C. 
Liquidassetsandheavylong-term borr
owi ng
D. 
Liquidassetsandnodebt

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

16. 
Whi chofthefol
lowi
ngcombi nati
onsofassetstr
uct
uresandf
inanci
ngpat
ter
nsi
s
l
ikel
yt ocreat
et hemostvol
ati
leearnings? 
A. 
Il
li
quidassetsandheavyshort-t
erm borrowing
B. 
Il
li
quidassetsandheavylong-
term borrowing
C. 
Liquidassetsandheavyl
ong-term borr
owi ng
D. 
Liquidassetsandheavyshort
-ter
m borrowi ng

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

17. 
Anaggr essiveworkingcapit
alpoli
cywoul dhavewhichofthef
oll
owi
ng
character
ist
ics? 
A. 
Ahi ghrati
oofl ong-
term debtt
ocapitalassets
B. 
Al owrati
oofshor t-
term debtt
ototaldebt
C. 
Ahi ghrati
oofshor t
-ter
m debttolong-t
erm sourcesoffunds
D. 
Ashor taveragecoll
ectionperi
od

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

6-
6
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

18. 
Whichofthefollowingtechni
quesal
l
owsexpl
i
citconsi
der
ati
onofmor
ethanone
possibl
eoutcome?  
A. 
Operati
ngleverage
B. 
Presentval
ue
C. 
Least-
squaresregressi
on
D. 
Expectedvalue

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:06-
06Descr i
betheter
m str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafinanci
almanager.
Topic:06-16AnExpect edValueApproach
 

19. Undernormalcondit
ions(70%probabi
li
ty)
,Fi
nancingPlanAwillproduce$24,
000
hi
gherr etur
nthanPlanB.Undertightmoneycondit
ions(30%probabil
ity)
,Pl
anAwi l
l
produce$40,000lessthanPlanB. Whati
stheexpectedvalueofr
eturnforPlanAover
PlanB?  
A. $28,
800
B. 
$4,000
C. $4,
800
D. $35,
200

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:06-
06Descr i
betheter
m str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafinanci
almanager.
Topic:06-16AnExpect edValueApproach
 

20. 
Theter
m structur
eofinterestratesi snot:
 
A. 
anindi
cati
onofi nvest
ors'expectationsaboutinfl
ati
onandf ut
ureinter
estrates.
B. 
downwardslopingifshort-
termint erestrat
esarehighert
hanlong-termrates.
C. 
upwardslopi
ngundernor mal condi t
ions.
D. 
upwardslopi
ngi fl
ong-ter
mi nterestr at
esarel
owert hanshort
-ter
mr ates.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

6-
7
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

21. 
Theterm st ructureofint
erestrates: 
A. 
changesdai l
yt orefl
ectcurr
entcompet i
ti
vecondit
ionsinthemoneyandcapit
al
markets.
B. 
plotsr
etur nsf orsecuri
ti
esofdifferentri
sk.
C. 
showst her elati
veinter
estspreadbet weenbondswi thdi
ff
erentr
iskr
ati
ngssuchas
AAA, AA,A, BBB, etc.
D. 
depict
si nterestratesforT-bi
ll
sov erthelastyear
.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

22. 
Theterm str
uctur
eofinter
estr
atesi
snoti
nfl
uencedby
: 
A. 
inf
lat
ion.
B. 
moneysuppl y.
C. 
BankofCanadaact iv
iti
es.
D. 
thenormal y
iel
dcurve.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

23.
 Afi
rm wil
lusual
lyi
ncreasetherati
oofshort-
ter
m debttol
ong-t
erm debtwhen:
 
A. 
shor
t-
ter
m debthasal owercostthanlong-
ter
m equit
y.
B. 
thet
erm st
ructur
eisinver
tedandexpectedtoshif
tdown.
C. 
thet
erm st
ructur
eisupwar dsl
opingandexpectedtoshi
ftup.
D. 
thef
ir
mi sundert
akingalargecapit
albudgeti
ngproj
ect.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

6-
8
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

24. 
Whenact ualsalesaregreat
erthanforecastedsal
es: 
A. 
invent
orywilli
ncrease.
B. 
producti
onschedul esmighthavetober evi
seddownwar d.
C. 
accountsreceivablewil
ldecr
ease.
D. 
invent
orywilldecreaseandaccountsreceivabl
ewil
lincrease.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
02Describetheeff
ectassetgr
owt
hhasonwor
kingcapi
talposi
ti
ons.
Topic:06-02TheNat ureofAssetGrowth
 

25. 
Ifaf
ir
m useslev
elproduct
ionwi t
hseasonal sal
es:
 
A. 
assal
esdecli
neinvent
orywilli
ncrease.
B. 
assal
esdecli
neinvent
orywill
decr ease.
C. 
assal
esdecli
neaccountsreceiv
abl ewil
lincr
ease.
D. 
assal
esdecli
neaccountsreceiv
abl ewil
lremainunchanged.

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diffi
cult
y :Medium
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

26. 
Oneadvantageoflevelproductioni
st hat:
 
A. 
manpowerandequi pmentar eusedef fi
cientl
yatlowercost.
B. 
curr
entassetsf
luctuat
emor ethanwithseasonal product
ion.
C. 
seasonalbul
gesandshar pdecl i
nesincur r
entassetsoccur.
D. 
theri
skofobsoleteinvent
oryincreases.

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diffi
cult
y :Easy
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

6-
9
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

27. 
Theuseofcashbudget i
ngprocedures:
 
A. 
increasesrevenueforagivenproduct
ionplan.
B. 
makesmanagi nginvent
oryharderunderseasonalproduct
ion.
C. 
reducest heneedfortemporar
yper manentassets.
D. 
il
lustrat
esfluct
uati
nglevel
sofcur r
entassetsforagivenproduct
ionpl
an.

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diffi
cult
y :Medium
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

28. 
Whent heter
m structur
eofint
er estratesisdownwar dslopi
ngandi
nter
estr
ates
areexpectedtodecl
ine,the:
 
A. 
fi
nancialmanagergenerall
yborrowsshor t-
ter
m.
B. 
fi
nancialmanagerborrowsatthel owerl ong-t
ermrates.
C. 
corporati
on'
srat
ioofshor t
-t
ermt olong- ter
m debti
sl ow.
D. 
fi
nancialmanagersviewshort-
termr atesashi ghri
sk.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

29. 
Whichofthefol
lowingisat ruest
atementconcerni
ngi
nter
estrat
es?
 
A. 
Short
-ter
mr at
esarenoti nf
luencedbyinfl
ati
on
B. 
Long-t
ermratesareinf
luencedbycur r
entdemandsformoney.
C. 
Duri
ng1990t heter
m structureofi
nterestr
atesf
ormedaninver
tedyi
eldcur
ve.
D. 
Duri
ng2016t heter
m structureofi
nterestr
atesf
ormedaninver
tedyi
eldcur
ve.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

6-
10
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

30. 
Thet er
m struct
ureofinterestrat
esort hey
iel
dcurve: 
A. 
isnormal whenshort-
termr atesarehighert
hanlong-t
ermrates.
B. 
i
si nvert
edwhenshor t
-ter
mr atesarelowert
hanlong-t
ermrates.
C. 
showst hey i
eldt
omat uri
tyf orsecuri
ti
esofequalri
skoverti
me.
D. 
isalwaysflatint
heshor t
-term.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

31. 
Aconser vat
ivelyfi
nancedfirm would: 
A. 
uselong-termf i
nancingforallcapi
talassetsandshor t
-termf inancingforallother
assets.
B. 
fi
nanceapor tionofpermanentasset sandshor t
-t
erm assetswi thshor t
-t
erm debt.
C. 
useequi t
ytof i
nancecapitalassets,l
ong-term debttofi
nanceper manentasset s,
andshort-t
erm debttof i
nancefluctuati
ngcur r
entassets.
D. 
uselong-termf i
nancingforpermanentasset sandcapi t
al assetsandapor ti
onof
theshort-
termfluctuati
ngassetsanduseshor t-
termf i
nancingf orallothershort-
term
assets.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Expl ai
nfi
nancingofasset
sint
ermsofhedgi
ng.
Topic:06-08Long-Term Fi
nancing(Conserv
ati
ve)
 

32.
 Theterm st
ructur
eofi nterestr
ates:
 
A. 
isbasedonhistori
caly i
elds.
B. 
i
sbasedoncur rentyields.
C. 
isbasedonfutureyields.
D. 
isbasedoncur r
entandf uturepri
ces.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

6-
11
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

33. 
Whichofthefoll
owi
ngy
iel
dcur
veswoul
dbechar
act
eri
sti
catpeakper
iodsof
economicexpansi
ons? 
A. 
Upwardslopi
ng
B. 
Downwar dsl
oping
C. 
Hori
zontal
D. 
Humped

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

34.
 Ani nver
tedy i
eldcur
vewouldsuggestthat
: 
A. 
inter
estratesareexpect
edtori
se.
B. 
i
nterestratesareexpect
edtofal
l.
C. 
infl
ationisexpectedt
orisei
nthefutur
e.
D. 
long-ter
mr atesarebei
ngpushedupbyt heBankofCanada'
smonet
arypol
i
cy.

Accessibil
it
y:Key boardNavi
gati
on
Blooms:Under stand
Diff
icult
y:Medium
LearningObjective:06-
06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafi
nanci
almanager
.
Topic:06-13InterestRateVol
ati
li
ty
 

35.
 Publ i
shingcompaniesarechar
acter
izedby:
 
A. 
flatproducti
ontomat chsal
es.
B. 
seasonal sal
es.
C. 
lowi nventor
iesduetocomputeri
nventorymanagement
.
D. 
shortt er
mf i
nancingchoi
ces.

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Under st
and
Diffi
cult
y :Medium
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

6-
12
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

36. 
Thebel i
eft hati nvestorsrequi
reahigherr
etur
ntoent
icet
hem i
ntohol
ding
l
ong-term secur it
iesi sthev i
ewpointoft
he: 
A. 
theexpect ationshy pothesi
s.
B. 
segment ationt heor y.
C. 
theliqui
ditypr emi um theory.
D. 
mar ketcreditcr uncht heory.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

37. 
Thet heoryofthet erm structureofi
nter
estrat
es,
whichsuggest
sthatl
ong-
ter
m
rat
esar edeterminedbyt heav erageofshor
t-t
ermrat
esexpect
edoverthet
imethata
l
ong-term bondisout standingi sthe:
 
A. 
expectati
onshy pot
hesi s.
B. 
segment ati
ont heory.
C. 
li
quidit
ypremi um theor y.
D. 
mar ketaverager at
et heory.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

38. 
Someanal ystsbelievethatt
hetermstr
uctureofint
erestr
atesisdeter
minedbyt
he
behaviourofvari
oust ypesoff i
nanci
ali
nsti
tut
ions.Thi
stheoryiscal
ledthe:
 
A. 
expectati
onshy pothesis.
B. 
segment ati
ontheory .
C. 
li
quidit
ypremium theor y.
D. 
theoryofindustrysupplyanddemandf orbonds.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

6-
13
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

39. 
Theterm str
uctur
eofinter
estr ates:
 
A. 
isnotrefer
redtoastheyiel
dcur ve.
B. 
depict
stheonlylong-
terminterestrates.
C. 
depict
stheonlyshort-
ter
mi nterestrates.
D. 
isusuall
yconstr
uctedwithGov ernmentofCanadasecur
it
iesofv
ary
ingmat
uri
ti
es.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

40. 
Yieldcurveschangedai l
ytorefl
ect: 
A. 
staticcondit
ionsinthecapit
almar kets.
B. 
staticcondit
ionsinthemoneymar kets.
C. 
histori
cali
nflati
onrates.
D. 
changi ngconditi
onsintheoveral
leconomy.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

41. 
Gover
nmentofCanadasecur i
ti
esareusedtoconst
ructy
iel
dcur
vesbecause:
 
A. 
theyar
eratedashighri
sk.
B. 
thesmall
numberofsecurit
iesareal
lshortt
erm.
C. 
theyar
efreeofdefaul
tri
sk.
D. 
thesmallnumberofmaturi
ti
esformsaflatl
ine.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

6-
14
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

42. 
Theconceptofasel f
-l
iquidatingassetimpli
esthat: 
A. 
thewor kingcapi t
alassociatedwi thaproductwil
l beli
quidatedwithinaoney ear
peri
od.
B. 
allt
hepr oductwi ll
besol d,receivabl
escoll
ected,andbil
lspai dovertheti
meper i
od
speci
fied.
C. 
assetsassoci atedwiththepr oduct i
onofaproductwi l
lbeliquidatedoverthe
amortizedlifeoftheassets.
D. 
self
-li
quidati
ngasset swi ll
bef inancedbylong-t
erm sourcesofcapi tal
.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
02Describetheeff
ectassetgr
owt
hhasonwor
kingcapi
talposi
ti
ons.
Topic:06-02TheNat ureofAssetGrowth
 

43.
 Thecashfl
owcycl
ehasamaj orbear
ingont
hef
ir
m's:
 
A. 
div
idendpol
i
cy.
B. 
l
iquidi
ty.
C. 
cashmanagementef
fi
ciency
.
D. 
ri
sk.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
04Ident
if
ythecashf
lowcy
cleoft
hef
ir
m.
Topic:06-05CashFl owCycl
e
 

44. 
Retail
compani esli
keCanadianTi
reandI
ndi
goexhi
bitsal
espat
ter
nst
hatar
e
mostlyinfl
uencedby :
 
A. 
cycli
caleconomi ci
ndicat
ors.
B. 
compet i
ti
veprices.
C. 
seasonalit
y.
D. 
salespromotions.

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Under st
and
Diffi
cult
y :Easy
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

6-
15
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

45. 
Thecashconv ersi
oncycl
eisequalt
o: 
A. 
thecashflowcy cl
e.
B. 
i
nv ent
oryhol
dingperiodl
esstheaver
agecol
l
ectionper
iodl
esstheaccount
s
payableperi
od.
C. 
invent
oryhol
dingperiodl
esstheaver
agecol
lect
ionper
iodplust
heaccount
s
payableperi
od.
D. 
invent
oryhol
dingperiodpl
ustheaver
agecol
lect
ionper
iodlesst
heaccount
s
payableperi
od.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
04Ident
if
ythecashf
lowcy
cleoft
hef
ir
m.
Topic:06-05CashFl owCycl
e
 

46. 
Ast heeconomymov est hroughabusi nesscycl
e,whichofthefol
lowingt er
m
str
uctureofinterestratestheor i
esdescribetheshapeoft heyi
eldcur
v e?
 
A. 
Expectati
onst heory,agencyt heoryandsegment ati
ontheory.
B. 
Mar ketsegment ati
ont heory,agencytheoryandliqui
dit
ypremium theory
.
C. 
Liquidi
typreferencetheory ,segmentationtheor
yandagencyt heor
y.
D. 
Liquidi
typremi um theory,segment at
iontheoryandexpectat
ionhypothesis.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

6-
16
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

47. Undernormalcondit
ions(80%probabi
li
ty)
,Fi
nancingPlanAwillproduce$25,
000
hi
gherr etur
nthanPlanB.Undertightmoneycondit
ions(20%probabil
ity)
,Pl
anAwi l
l
produce$50,000lessthanPlanB. Whati
stheexpectedvalueofr
eturnforPlanAover
PlanB?  
A. $25,
000
B. 
$20,000
C. $15,
000
D. $10,
000

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
06Descr i
betheter
m str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafinanci
almanager.
Topic:06-16AnExpect edValueApproach
 

48. 
Thet er
m st ruct
ureofi nt
erestr at
es: 
A. 
isnotani ndicati
onofi nvestors'expectationsaboutinf
lati
onandf
utur
einter
est
rat
es.
B. 
wil
l beupwar dslopingifshor t
-terminterestratesarehighert
hanl
ong-
termrates.
C. 
willbedownwar dslopingundernor mal condit
ions.
D. 
isreferr
edt oast heyieldcurve.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

49. 
Whenact ualsalesaregreaterthanfor
ecast
edsales:
 
A. 
invent
orywilli
ncrease.
B. 
producti
onschedul esremainconstant.
C. 
accountsreceiv
ablewi l
ldecrease.
D. 
producti
onschedul esmighthav etoberevi
sedupward.

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
02Describetheeff
ectassetgr
owt
hhasonwor
kingcapi
talposi
ti
ons.
Topic:06-02TheNat ureofAssetGrowth
 

6-
17
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

50. 
Hedgingi
s: 
A. 
mat chi
ngasset
sandl i
abil
i
tiest
omeasur eri
sk.
B. 
ariskmeasurementsystem.
C. 
possibl
etoachiev
eperfectl
yinpract
ice.
D. 
mat chi
ngthematuri
ti
esofassetsandl i
abi
l
iti
estor
educer
isk.

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Explai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-06Patter
nsofFinanci
ng
 

51. 
Itisdif
ficulttoconstructaper f
ectlyhedgedfinanci
alplanbecause: 
A. 
itiseasyt odet erminewhichpar tofassetsistemporaryandwhi chpartis
permanent .
B. 
i
tisdi f
fi
cul ttoliqui
datecurrentassets.
C. 
af i
nancial manageri ssurehowmuchshor torlong-
ter
mf inanci
ngisav ai
labl
eata
gi
vent ime.
D. 
exacttimi ngofassetl i
quidati
oni sdif
fi
cult
.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Expl ai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-07Alter
nati
vePlans
 

52. 
Ifafirm useslong-termf i
nanci
ngt ocov ershort-
ter
m needsi
tis:
 
A. 
assuringitsel
fofhav ingadequatecapital atal
lti
mes.
B. 
i
st aki
ngapr of
itabl
eappr oachtofinancing.
C. 
istaki
ngar el
ati
v el
yriskyapproachtofinancing.
D. 
incurr
ingal owerov eral
lint
erestcostincompar isonwithshor
t-
ter
mfi
nanci
ng.

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Expl ai
nfi
nancingofasset
sint
ermsofhedgi
ng.
Topic:06-08Long-Term Fi
nancing(Conserv
ati
ve)
 

6-
18
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

53. 
Thef inancemanageratRut hlessManuf actur
ingInc(RMI )wascompar i
ngplans
forfi
nanci nginv
entory
.Undernor mal condit
ions(60%pr obabili
ty),Fi
nancingPlanA
will
pr oduce$60,000higherretur
nt hanPlanB.Undert i
ghtmoneycondi t
ions(40%
probabili
ty),
PlanAwi l
lproduce$50, 000lessthanPlanB.Whi chfinanceplanshould
RMIchooseandwhy ? 
A. 
PlanAbecausei twil
lproduce$36, 000higherexpectedvaluet hanPlanB.
B. 
PlanBbecausei twil
lproduce$50, 000higherexpect
edv aluet hanPlanA.
C. 
PlanAbecausei twil
lproduce$16, 000higherexpectedvaluet hanPlanB.
D. 
Either,asbothexpectedv al
uesar eequal.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Appl y
Diff
icult
y:Hard
LearningObjecti
ve:06-
06Descr i
betheter
m str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafinanci
almanager.
Topic:06-16AnExpect edValueApproach
 

54. 
Theterm st
ruct
ureofinterestrat
es: 
A. 
isnotanindi
cati
onofinv estor
s'expectationsaboutinfl
ati
on.
B. 
wil
lbeupwar dsl
opingifshor t
-t
erminterestratesarehighert
hanlong-
ter
mr ates.
C. 
will
bedownwar dslopi
ngundernor mal condit
ions.
D. 
isanindi
cati
onofinvestors'expect
ationsabouti nf
lati
onandfut
ureint
erestrates.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

6-
19
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

55.
 Theyiel
dona2y earsecur
ityi
s7.
8%.Ift
hey i
eldofasecur
it
ymat ur
ingi
n1y eari
s
7.
2%, whati
stheexpect
edy i
eldona1yearsecuri
tymatur
ingattheendofyear2?
A.7.2% 
A. 
8.4%
B. 
8.8%
C. 
9.6%

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 
 

Tr
ue/Fal
seQuest
ions
 

56. 
Worki
ngcapi
tal
managementi
srel
ati
vel
yuni
mpor
tantt
othesmal
l
busi
nessper
son.
 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-01Definewor
kingcapi
talmanagement
.
Topic:06-01Theshor tter
m
 

57.
 Thef
inanci
almanagergener
all
yneedst
odev
otel
i
ttl
eti
met
omanagementof
worki
ngcapit
al.
 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-01Definewor
kingcapi
talmanagement
.
Topic:06-01Theshor tter
m
 

6-
20
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

58. 
Sel
f-
li
quidat
ingcur
rentasset
sar
ereal
l
ycapi
tal
asset
ssi
ncet
heyhav
eli
vesgr
eat
er
thanoneyear.
 
FALSE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
02Describetheeff
ectassetgr
owt
hhasonwor
kingcapi
talposi
ti
ons.
Topic:06-02TheNat ureofAssetGrowth
 

59.
 I
deal
l
y,per
manentcur
rentasset
sshoul
dbef
inancedwi
thshor
t-
ter
m bor
rowi
ngs.
 
FALSE

Accessibil
it
y:KeyboardNavigat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
02Describetheeff
ectassetgr
owt
hhasonwor
kingcapi
talposi
ti
ons.
Topic:06-02TheNat ureofAssetGrowth
 

60. 
Asageneralr
ule,
iti
sdesir
abl
etofi
nancetheper
manentasset
s,i
ncl
udi
ng
"per
manentcurr
entasset
s,"wi
thl
ong-
ter
m debtandequi
ty.
 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
05Explai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-06Patter
nsofFinanci
ng
 

61.
 I
ncreaseduseoflong-
ter
mfi
nanci
ngi
sgener
all
yamor
econser
vat
iveappr
oacht
o
cur
rentassetf
inanci
ng. 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
05Expl ai
nfi
nancingofasset
sint
ermsofhedgi
ng.
Topic:06-08Long-Term Fi
nancing(Conserv
ati
ve)
 

6-
21
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

62.
 Shor
t-
ter
mint
erestr
atesar
egener
all
ylowert
hanl
ong-
ter
mint
erestr
ates.
 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

63. 
The"t
erm st
ruct
ureofint
erestr
ates"r
efer
stot
her
elat
ionshi
pbet
weeny
iel
dson
debtandthei
rmaturi
ti
es.
 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

64.
 The"t
erm st
ruct
ureofint
erestrat
es"depict
sthecompetit
ivecostoff
undsforthe
var
ioust
ypesofshort-
ter
msour cesoffundssuchasTreasur
ybill
s,commerci
alpaper
,
andbankers'
accept
ances. 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

6-
22
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

65.
 The"
term st
ruct
ureofi
nter
estr
ates"isaschedul
ethattel
lswhenacompany'
s
bondsmatureandshowshowmanydol larsafi
rm mustpayinint
erestpay
ment
s. 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

66.
 I
nper
iodsoft
ightmoney
,long-
ter
mrat
esar
eof
tenhi
ghert
hanshor
t-
ter
mrat
es.
 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

67.
 Dur
ingt
ightmoneyper
iods,
shor
t-
ter
mfi
nanci
ngmaybedi
ff
icul
ttof
ind.
 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

68.
 Heav
yuseofl
ong-
ter
mfi
nanci
nggener
all
yleadst
olowerf
inanci
ngcost
s. 
FALSE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

6-
23
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

69.
 Heav
yriskexposur
eduet
oshor
t-
ter
m bor
rowi
ngcanbecompensat
edf
orby
car
ryi
ngil
li
quidasset
s. 
FALSE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

70. 
Heavyuseofl
ong-
ter
m debtwi
l
lal
l
owaf
ir
mtocar
ryl
essl
i
qui
d,mor
epr
ofi
tabl
e
assets.
 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

71.
 Useoflong-
ter
mfi
nanci
ngandt
hecar
ryi
ngofhi
ghl
yli
qui
dasset
sisahi
gh-
ri
sk
combinat
ion.
 
FALSE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

72. 
Fir
mswi
thpr
edi
ctabl
ecash-
fl
owpat
ter
nsshoul
dassumer
elat
ivel
ylowl
evel
sof
ri
sk.
 
FALSE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

6-
24
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

73.
 Fir
mswi t
hhi
ghl
yvol
ati
l
eandper
ishabl
einv
ent
oryshoul
dassumer
elat
ivel
ylow
l
evelsofr
isk.
 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Hard
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

74.
 I
mmedi
ateaccesst
ocapi
tal
mar
ket
sal
l
owsgr
eat
err
isk-
taki
ngcapabi
l
ity
. 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

75.
 Ari
skyfinancial
planwil
luselong-
ter
mf inancingforcapi
tal
asset
s,per
manent
cur
rentassets,andaport
ionoftemporarycurrentassets.
 
FALSE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

76. 
Themoreshort
-ter
mfi
nanci
ngr
elat
ivet
olong-
ter
mfi
nanci
ng,
themor
eri
skyt
he
fi
nanci
alst
ruct
ure.
 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

6-
25
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

77.
 Shor
t-
ter
mf inancingi
sriskybecauseofthepossi
bil
it
yofri
singshor
t-
ter
mrat
es
andthei
nabil
it
yofal waysbeingabletoref
undshort-
ter
m debt
. 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

78. 
Ifafi
rm usesaconser
vat
ivef
inanci
alpl
an,i
twil
lusual
l
yhav
emar
ket
abl
e
securi
ti
esatthebott
om ofacycl
i
calsal
esswing. 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

79.
 Theexpect
edv
aluei
sthesum oft
hepr
obabi
l
iti
esofal
lexpect
edev
ent
s. 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
06Descr i
betheter
m str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafinanci
almanager.
Topic:06-16AnExpect edValueApproach
 

80.
 Expect
edv
aluet
echni
quesal
l
owconsi
der
ati
onofmor
ethanonepossi
ble
out
come.  
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
06Descr i
betheter
m str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafinanci
almanager.
Topic:06-16AnExpect edValueApproach
 

6-
26
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

81.
 Ov
ert
hel
astsev
eral
decades,
mostbusi
nessf
ir
mshav
eincr
easedt
hei
rli
qui
dit
y. 
FALSE

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diffi
cult
y :Easy
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

82.
 Oner
easonforl
ong-
ter
m di
mini
shi
ngl
i
qui
dit
yismor
eef
fi
cientcash
management.
 
TRUE

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diffi
cult
y :Easy
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

83. 
Thekeyt ocurr
entassetplanni
ngistheabi
li
tyofmanagementtofor
ecastsal
es
accurat
elyandthenmat chproduct
ionschedul
eswitht
hesalesf
orecast
. 
TRUE

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diffi
cult
y :Easy
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

84.
 Theuseofon-
li
nepoi
nt-
of-sal
etermi
nal
shasmadei
teasi
erf
ormanyr
etai
lst
ore
managerstomanaget
hei
rinventor
y. 
TRUE

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diffi
cult
y :Easy
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

6-
27
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

85.
 Shor
t-
ter
minter
estr
atesar
emor
edependentuponi
nfl
ati
ont
hanoncur
rent
demandformoney.
 
FALSE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Hard
LearningObjecti
ve:06-
05Explai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-09Short-
Term Fi
nanci
ng(Ri
sky)
 

86.
 Ahumpedyi
eldcur
vehasl
owermedi
um-
ter
mrat
est
hanbot
hshor
t-
ter
m and
l
ong-t
ermrat
es.
 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

87.
 I
nvent
oryremainsasigni
fi
cantper
cent
ageofcur
rentasset
sfornon-
fi
nanci
al
Canadi
ancorporat
ions.
 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
04Ident
if
ythecashf
lowcy
cleoft
hef
ir
m.
Topic:06-05CashFl owCycl
e
 

88.
 General
l
yspeaki
ng,duri
ngthepastt
wodecadescorpor
ati
onswer
erel
yi
ngmor
e
andmor eonshor
t-t
erm bor
rowingt
ocarryl
essl
i
quidasset
s. 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
04Ident
if
ythecashf
lowcy
cleoft
hef
ir
m.
Topic:06-05CashFl owCycl
e
 

6-
28
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

89. 
Whenusi
ngl
evel
producti
on,i
nvent
orywi
l
lpeaki
nthemont
hwher
euni
tsal
es
tr
endabovet
hepr
oducti
onlevel
. 
FALSE

Accessibi l
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diffi
cult
y :Easy
LearningObj ecti
ve:06-
03Identi
fywor
kingcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedul
es;andli
qui
dit
yv er
susr i
sk.
Topic:06- 04Tempor ar
yAssetsUnderLevelProducti
on—AnExample
 

90. 
Cash,accountsrecei
vabl
es,
andi
nvent
oryal
lmov
emont
hlyi
nthesamedi
rect
ion
underl
evelproducti
on. 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
04Ident
if
ythecashf
lowcy
cleoft
hef
ir
m.
Topic:06-05CashFl owCycl
e
 

91.
 Duri
nganeconomi
c"boom"per
iod,
ashor
tageofl
ow-
costf
inanci
ngal
ter
nat
ives
exi
sts.
 
TRUE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-05Explai
nf i
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-10TheFi nanci
ngDecision
 

92. 
Therat
iooflong-
ter
mf i
nanci
ngtoshor
t-
ter
mf i
nanci
ngatanypoi
nti
nti
mewi l
lbe
great
lyi
nfl
uencedbytheter
m str
uct
ureofi
nter
estr
atesandcommonstockpr
ices.
 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-05Explai
nf i
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-10TheFi nanci
ngDecision
 

6-
29
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

93.
 Yi
eldcur
veschangev
eryl
i
ttl
eint
heshor
trun(
3mont
hs)
. 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

94.
 I
nfl
ati
onandi
nter
estr
ates(
yiel
ds)ar
einv
ersel
yrel
ated.
 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

95. 
Humpedy iel
dcurveshavehigheri
nter
medi
atet
ermr
ates(
4-7y
earmat
uri
ti
es)
thanei
thershort
-ter
m orl
ong-t
ermr at
es. 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

96.
 I
fthel
i
qui
dit
ypr
emi
um t
heor
ywascor
rect
,yi
eldcur
veswoul
dbeupwar
d-sl
opi
ng.
 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

6-
30
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

97.
 Thebehavi
ourofvari
ouskindsoff
inanci
ali
nsti
tut
ionsdet
ermi
nest
heshapeoft
he
yi
eldcur
ve,accor
dingtothesegmentati
ontheor
y. 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

98. 
Accor
dingt
otheexpectat
ionshypothesi
s,shor
t-
ter
mrat
eswoul
dbeexpect
edt
o
ri
seift
heywerefarbel
owlong-ter
mr at
es. 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

99.
 Onl
ythesegment
ati
ont
heor
yhasanysi
gni
fi
canti
mpactoni
nter
estr
ates.
 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

100. 
Shor
t-
ter
mint
erestr
ateshav
ehi
stor
ical
l
ybeenmor
evol
ati
l
ethanl
ong-
ter
m
rat
es. 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafi
nanci
almanager
.
Topic:06-13Int
erestRateVol
ati
li
ty
 

6-
31
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

101.
 Thesuccessf
ulf
inanci
almanageri
sv er
yint
erest
edintheterm structureof
i
nter
estrat
esbutisnotconcer
nedwiththerel
ati
vevol
ati
l
ityorhist
oricallevelof
i
nter
estrat
es. 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

102. 
Thefast
erafi
rm'sgr
owthi
nsales,t
hemorelikel
yiti
sthatani
ncr
easi
ng
percent
ageoffi
nanci
ngwil
lbei
nter
nall
ygener
ated. 
FALSE

Accessibi l
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diffi
cult
y :Medium
LearningObj ecti
ve:06-03Identi
fyworki
ngcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedules;andli
qui
dit
yv er
susr i
sk.
Topic:06- 03Controll
i
ngAsset s—MatchingSalesandProduct
ion
 

103.
 Lev
elproduct
ionmethodssmoothproducti
onschedul
esanduti
li
zemanpower
andequipmentmoreeff
ici
entl
ythanseasonalpr
oduct
ionmethods.
 
TRUE

Accessibi l
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diffi
cult
y :Medium
LearningObj ecti
ve:06-
03Identi
fywor
kingcapitalmanagementconsi
der
ati
onsf
orper
manentcomponent
s;t
heef
fectof
sales/productionschedul
es;andli
qui
dit
yv er
susr i
sk.
Topic:06- 04Tempor ar
yAssetsUnderLevelProducti
on—AnExample
 

104. 
Thecashbudgetcombi
nest
hecashr
ecei
ptsandcashpay
ment
sschedul
esi
n
deter
mini
ngcashflow. 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
04Ident
if
ythecashf
lowcy
cleoft
hef
ir
m.
Topic:06-05CashFl owCycl
e
 

6-
32
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

105.
 Byusinglong-
ter
m capit
altocov
ershor
t-
ter
m needs,
thef
ir
misv
irt
ual
l
yassur
ed
ofbecomingtechni
call
yinsol
vent.
 
FALSE

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Expl ai
nfi
nancingofasset
sint
ermsofhedgi
ng.
Topic:06-08Long-Term Fi
nancing(Conserv
ati
ve)
 

106. 
Therat
iooflong-
ter
mf i
nancingtoshort
-t
ermfinanci
ngatanygi
vent
imewi
l
lbe
great
lyi
nfl
uencedbytheter
m struct
ureofint
erestr
ates.
 
TRUE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

107.
 I
tisnotnecessar
ytounderst
andinter
estratemov
ement
sthor
oughl
ywhen
deci
dinguponshortandl
ong-t
erm debtstr
ucture.
 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

108.
 Hedgi
ngi
smat
chi
ngt
hemat
uri
ti
esofasset
sandl
i
abi
l
iti
est
oreducer
isk.
 
TRUE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Explai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-06Patter
nsofFinanci
ng
 

6-
33
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

109. 
Thecashconv
ersi
oncy
clei
sthet
imet
hati
stakent
ocol
l
ectaccount
s
recei
vabl
e. 
FALSE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
04Ident
if
ythecashf
lowcy
cleoft
hef
ir
m.
Topic:06-05CashFl owCycl
e
 

110.
 Thecur
rentr
ati
ofornon-
fi
nanci
alcor
por
ati
onsr
eveal
sast
eadyi
ncr
easei
n
l
iqui
dit
yoverti
me. 
FALSE

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
06Descri
bet het
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafi
nancialmanager
.
Topic:06-17Shift
sinAssetStr
ucture
 

111.
 Ay
iel
dcur
vei
sal
sor
efer
redt
oast
het
erm st
ruct
ureofi
nter
estr
ates.
 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

112.
 Anor
mal
yiel
dcur
vei
sdownwar
dsl
opi
ngt
other
ight
. 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
bethet
erm st
ruct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager
.
Topic:06-12Term Struct
ureShapes
 

6-
34
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

113.
 Normall
y,shor
t-t
erm assetsar
efi
nancedusi
ngl
ong-
ter
mfi
nanci
ng,
suchas,
bankloansgreat
erthan1y earormort
gages.
 
FALSE

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

114. 
Liqui
ditypremium t
heoryst
atest
hatsecur
it
iesar
esegment
edi
ntomar
ket
sby
var
iousf i
nanciali
nsti
tut
ions.
 
FALSE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

115. 
Expectedvaluei
sarepr
esentat
ivequanti
tyfr
om aprobabi
li
tydi
str
ibut
ionar
ri
ved
atbymultipl
yingeachout
cometimest heassoci
atedpr
obabil
it
yandsummi ngupthe
product
s. 
TRUE

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-
06Descr i
betheter
m str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oafinanci
almanager.
Topic:06-16AnExpect edValueApproach
 
 

Shor
tAnswerQuest
ions
 

6-
35
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

116.
 Def
inewor
kingcapi
tal
management
.Whyi
siti
mpor
tantt
oaf
ir
m? 

Wor ki
ngcapi talmanagementent ailsarr
angingshort-
termf i
nancing(cur
rentl
iabi
li
ti
es)
tofacili
tateinvestmenti
nt hecurrentasset
soft hefir
m.Wi t
hincreasi
ngsalesther
e
wil
lbegr owthinthefir
m'si nvent
oriesandreceivabl
es,represent
ingmoreandmor e
cash(capi tal
)tiedupincurrentassets.Thecurrentassetinvestmentmustbe
suffi
cientlyli
quidandachiev eappropri
ateretur
ns.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-01Definewor
kingcapi
talmanagement
.
Topic:06-01Theshor tter
m
 

117.
 Whati
nfl
uencest
heamountofl
i
qui
dit
yint
hef
ir
m? 

Li
qui
dit
yint
hefi
rmi
sinfl
uencedbyassetgr
owt
h,t
hesal
esandpr
oduct
ionschedul
e
andt
hecashfl
owcy
cle.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Remember
Diff
icult
y:Easy
LearningObjecti
ve:06-01Definewor
kingcapi
talmanagement
.
Topic:06-01Theshor tter
m
 

118.
 Li
stthe5consi
derati
onsaf
inanci
almanagershoul
dbal
ancebet
weenshor
t-
ter
m
ver
suslong-t
ermfi
nancing.
 

1.t
hecomposi t
ionoft hefir
m' sassets
2.t
hefi
rm'swill
ingnesst oacceptrisk
3.t
heri
sksandpot ent
ialpayoffsfrom eachf
inanci
ngal
ter
nat
ive
4.t
heter
m structureofinterestrat
es
5.t
hevol
atil
i
tyofi nter
estrates

Accessibil
it
y:KeyboardNavigati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-05Explai
nf i
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-10TheFi nanci
ngDecision
 

6-
36
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

119.
 Expl
ainwhyshor
t-
ter
mfi
nanci
ngi
slessexpensi
vebutr
iski
ert
hanl
ong-
ter
m
fi
nanci
ng. 

1.l
owerinter
estr ates(usual
ly)
2.shor
t-t
ermr atesarev ol
ati
le
3.ri
skofdefaultifsalesslowdown
4.ri
skthatbankmaynotext end/r
enewl
oans

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Explai
nfi
nanci
ngofasset
sint
ermsofhedgi
ng.
Topic:06-09Short-
Term Fi
nanci
ng(Ri
sky)
 

120.
 Expl
ainwhyl
ong-
ter
mfi
nanci
ngi
smor
eexpensi
vebutl
essr
iskyt
hanshor
t-
ter
m
fi
nanci
ng. 

1usual
l
yhigheri
nterestrat
es
2youmaypayinterestonfundsy
oudon'
tal
way
sneed
3youhavecapi
talatallt
imes

Accessibil
it
y:KeyboardNavigati
on
Blooms:Under st
and
Diff
icult
y:Medium
LearningObjecti
ve:06-
05Expl ai
nfi
nancingofasset
sint
ermsofhedgi
ng.
Topic:06-08Long-Term Fi
nancing(Conserv
ati
ve)
 

6-
37
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

121. 
Whati
sthecashconv
ersi
oncy
cle?Whatdoest
hecashconv
ersi
oncy
cleconsi
st
of?
 

Thet i
meittakesfr
omt hei nit
ialout layoffundsforrawmater
ial
sunti
lthefi
rmcol
lect
s
fundsfrom i
tscli
entsf
ort hef inishedpr oduct,of
fsettosomedegreebythefi
rm'
s
purchasesboughtoncr edit,i
sr ef err
edtoast hecashconver
sioncycl
e.
Basical
ly,
thecashconv ersioncy clewill
consistof:

1.Thetimemat eri
alsareini
nventory(calcul
atedasthei
nventor
yholdingper i
od)
2.Plustheti
mei tt
akest ocoll
ectsalesfrom cli
ent
s(cal
cul
atedastheav erage
coll
ecti
onperiod)
3.Lesstheti
met hefir
mi sall
owedt odelaypay mentt
oit
ssuppli
ers(calcul
atedasthe
accountspayableperi
od).

Accessibil
it
y:KeyboardNavi
gati
on
Blooms:Remember
Diff
icult
y:Medium
LearningObjecti
ve:06-
04Ident
if
ythecashf
lowcy
cleoft
hef
ir
m.
Topic:06-05CashFl owCycl
e
 

6-
38
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

122. 
Thr
eebasictheor
iesdescr
ibethet
erm st
ruct
ureofi
nter
estr
ates,
orshapeoft
he
yi
eldcur
ve.Li
stendexplai
nthesetheor
ies.
 

Thel i
quiditypr emi um t heor yst atest hatl ong- ter mr atesshoul dbehi ghert han
short-
termr ates.Thi spr emi um ofl ong- termr at esov ershor t-
termr at esexi sts
becauseshor t
-ter msecur i
tieshav egr eat erliqui dit
y ,andt hereforehi gherr at eshav eto
beof f
eredt opot ent i
allong- ter m bondbuy er st oent icet hem t ohol dt hesel essl iquid
andmor epr ice-sensi ti
vesecur iti
es.Thegr eat erliqui dityofshor t-term secur it
iesi s
part
lybecauset her eisl essuncer tai ntyaboutt heirf ut ur epay ment s.Shor t-term
securit
iesar el esspr icesensi tivebecauseunder l
yingy ieldchangesi nt heeconomydo
notaffectt heirpr i
cest ot hesameext entasl onger -ter m secur iti
es.
Thesegment at i
ont heor yst at est hatsecur it
iesar edi videdi nt omar ketsegment sby
thevariousf i
nanci alinst i
tutionsi nv est ingi nt hemar ket .Char teredbankspr efer
short-
term secur i
tiesofoney earorl esst omat cht hei rshor t
-terml endi ngst r
ategies.
Mor t
gage- or i
ent edf i
nanci al inst i
tutionspr ef ert hei nt ermedi ate-lengt hsecur i
ti
esof
betweenf i
veandsev eny ear s, andl if ei nsur ancecompani espr eferl ong- term,
20-t
o-30-y earsecur it
iest oof fsett hel ong- ter m nat ur eoft heircommi tment st o
poli
cyholder s.Thechangi ngneeds, desi res, andst rat egi esoft hesei nvest orst endt o
str
onglyi nfluencet henat ur eandr elat ionshi pofshor t-term andl ong- ter mi nterest
rat
es.
Theexpect ationshy pothesi sexpl ainst hey i
eldsonl ong- term secur itiesasaf unction
oftheshor t
-termr at es.Theexpect at ionst heor ysay sl ong- t
er mr at esr eflectt he
averageofshor t-term expect edr at esov ert het imeper iodt hatt hel ong- t
erm secur i
ty
i
sout standi ng.Theexpect ationshy pot hesisi sespeci allyusef ul inexpl ai
ningt he
shapeandmov ementoft hey ieldcur v e.

Accessibil
it
y:KeyboardNav i
gati
on
Blooms:Under st
and
Diff
icult
y:Hard
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInter
estRates
 

6-
39
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

123. 
King,Inc.
,asuccessfulMi dwestfi
rm,isconsider
ingopeningabr anchoffi
ceon
thewestcoast .Undernormaleconomi ccondit
ions,wit
ha45%pr obabili
tyofoccurr
ing,
Kingcanexpectt oear nanetincomeof$50, 000pery ear
.Inami ni-
recession,at25%
probabil
it
y,Kingwillearn$20,
000. I
nasev ererecessi
on,ata20%pr obabil
it
y,Kingwill
l
ose$10, 000.Thereisalsoaslightprobabi
li
ty(10%)thatKingwilll
ose$300, 000ifthe
expansionfail
sandt hebranchof f
icemustbecl osed.ShouldKingopenabr anch
offi
ceinBriti
shCol umbia? 

Scenar
io Economi c Expect
ed Wei ghted
Return Probabi
l
ity Return
Normal $50,000 .
45 $22. 500
Mini- 20,000 .
25 5,000
Severe (10,000) .
20 (2,000)
Chaos 300,000) .
10 (30,000)
       
Weighted     $(4,500)
Average      

No,
abr
anchof
fi
ceshoul
dnotbeopened.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Anal y
ze
Diff
icult
y:Hard
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

6-
40
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

124. Usi
ngtheexpectati
onshypothesi
sfortheter
m st
ructur
eofint
erestrat
es,
calculat
etheexpectedyi
eldsforsecur
it
ieswit
hmat ur
it
iesoftwoandthreeyear
son
thebasisofthefol
lowingdata:

   
 

Expect
edy
iel
don2-
yearsecur
it
y=(
7.2%+7.
8%)
/2y
r
=7.5%
Expect
edy
iel
don3-
yearsecur
it
y=(
7.2%+7.
8%+8.4%)
/3y
r
=7.8%

Blooms:Appl y
Diff
icult
y:Medium
LearningObjecti
ve:06-06Descri
betheterm str
uct
ureofi
nter
estr
ates;
expl
aint
het
heor
iest
hatsuggesti
tsshape;
andassess
howi tmaybeofuset oaf i
nanci
almanager .
Topic:06-11Term Struct
ureofInt
erestRates
 

125. 
Christ
ensen&Assoc.isdevelopinganassetf
inanci
ngplan.Christensenhas
$500,000incurr
entasset
s,ofwhich15%ar epermanent,and$700,000i ncapi
tal
assets.Thecurr
entl
ong-t
ermratei s11%,andthecurr
entshort
-ter
mr ateis8.
5%.
Chri
stensen'
staxrat
eis40%.

A)Const
ructtwofi
nancingplans—oneconser vat
ive,
wi t
h80%ofasset
sfi
nancedby
l
ong-t
erm sour
ces,andtheotheraggressive,
withonly60%ofasset
sfi
nancedby
l
ong-t
erm sour
ces.
B)I
fChri
stensen'
searningsbeforei
nterestandtaxesare$325,
000,
cal
culat
enet
i
ncomeundereachal t
ernati
ve.
C)Whataresomeoft her i
sksassoci
atedwi t
heachpl an?

6-
41
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

D)Whi
chpl
anwoul
dyour
ecommendt
oChr
ist
ensen?Why
? 

    PlanA   Pl
anB
(
conservativ
e) (
Aggressiv
e)
A) Short-
term (
20%) $240, 000   $480, 000
  Long-ter
m (
80%) 960,000 (
40%) 720,000
      $1,200,000 (
60%) $1,200,000
B)          
  EBIT   $325, 000   $325, 000
  Int
erest        
  Short-
term @ 8.
5%   (20,400)   (
40,800)
  Long-ter
m @ 11%   (105,600)   (
79,200)
  EBT   199,000   205,000
  Taxes@ 40%   79,600   82,000
  Netincome   $119, 400   $123, 000

C)PlanA: Interestratescoulddropsigni
ficantl
y,whichwoul
dincreaset
heef f
ect
ive
costoflong-ter mfinanci
ngataf utur
epoi ntinti
me.
PlanB:Interestratescouldincrease,i
ncreasingthecostofshor
t-
termfi
nancingand
possibl
ytight eni
ngt heavai
labi
lit
yofshor t
-termfunds.Pr
ofi
twoulddecrease.
D)(Subjective)Itdependsupont heinter
estr at
eforecast
.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Anal y
ze
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

6-
42
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

126. 
McKi nseeInc.isdevel
opingaplantof
inanceit
sassetbase.Thefi
rm has
$5,
000,000i ncurrentasset
s,ofwhi
ch20%ar epermanent,
and$12,000,000i
ncapi
tal
assets.Long-t
ermr atesarecurr
ent
ly9.5%,
whileshort
-t
ermratesareat7%.
McKinsee'staxrateis30%.

A)Const ructaconservati
vef i
nancingpl
anwi th80%ofassetsfi
nancedbylong-t
erm
sources.IfMcKi nsee'
searningsbeforeinter
estandtaxesar
e$6,000,
000,whatwill
thei
rneti ncomebe?
B)Anal ternat
iveandmor eaggr essiv
eplanwoul dbetofi
nance60%oft ot
alasset
s
withlong-termfinanci
ng.Assumi ngthatEBITwasagai n$6,
000,
000,whatwill
net
i
ncomebeundert hisalt
ernati
ve?
C)Ifinterestr
ateswer eexpectedtoincrease,whichpl
anwouldyourecommend?
Why ? 

A) CONSERVATI VEPLAN    
  Shor
t-
term( 20%ofasset s)   $3,
400,
000
  Long-
term( 80%ofasset s)   13,
600,
000
       
  EBI T   $6,
000,
000
  InterestExpense    
  $3,400,000@ 7% $238,
000  
  $13,600,000@ 9. 5% 1,
292,
000 1,
530,
000
  EBT   4,
470,
000
  Taxes( 30%)   1,
341,
000
  NetIncome   $3,
129,
000
       
B) AGGRESSI VEPLAN    
  Shor
t-
term( 40%ofasset s) $6,
800,
000  
  Long-
term( 60%ofasset s) 10,
200,
000  
      $6,
000,
000
  EBI T    
  InterestExpense    
  $6,800,000@ 7% $476,
000  
  $10,200,000@ 9. 5% 969,
000 1,
445,
000
  EBT   4,
555,
000
  Taxes( 30%)   1,
366,
500
  NetIncome   $3,
188,
500

6-
43
Chapt
er06-Wor
kingCapi
tal
andt
heFi
nanci
ngDeci
si
on

C)PlanBpr oducesslightl
yhi gherneti
ncome.Howev er,
sinceshort-
ter
mr atesare
mor evolat
il
e,ageneralincreaseinint
erestr
ateswouldprobablyr
aisetherel
at i
vecost
ofshor t
-t
ermfinanci
ngsi gnifi
cantl
yandpossiblymakeshor t
-t
erm cr
editdif
ficul
tto
obtain.Thefi
rm'snetincomecoul dbesigni
fi
cantl
yreduced.

Accessibil
it
y:KeyboardNav
igat
ion
Blooms:Anal y
ze
Diff
icult
y:Medium
LearningObjecti
ve:06-
07Examineri
skandpr
ofi
tabi
l
ityi
ndet
ermi
ningt
hef
inanci
ngpl
anf
orcur
rentasset
s.
Topic:06-18Towar dAnOpti
malPoli
cy
 

6-
44