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Working Capital Management
solved mcqs
2 of 6 sets
26. Your firm has a philosophy that is analogous to
the hedging (maturitymatching) approach. Which
of the following is the most appropriate form for
financing a new capital investment in plant and
equipment?
a. trade credit.

B. 6-month bank notes.

c. accounts payable.

d. common stock equity.

Discussion
d. common stock equity.
27. Your firm has a philosophy that is analogous to
the hedging (maturitymatching) approach. Which
of the following is the most appropriate non-
spontaneous form for financing the excess seasonal
current asset needs?
a. trade credit.

B. 6-month bank notes.

c. accounts payable.

d. common stock equity.

Discussion
b. 6-month bank notes.
28. -Under a conservative financing policy a firm
would use long-term financing tofinance 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 longterm
financing?
a. use the excess funds to pay down long-term debt.

B. invest the excess long-term financing in marketable securities.

c. use the excess funds to repurchase common stock.

d. purchase additional plant and equipment.

Discussion
b. invest the excess long-term financing in marketable securities.
29. -Which of the following statements is correct
for a conservative financing policyfor a firm
relative to a former aggressive policy?
a. the firm uses long-term financing to finance all fixed and current assets.

B. the firm will see an increase in its expected profits.

c. the firm will see an increase in its risk profile.

d. the firm will increase its dividends per share (dps) this period.

Discussion
a. the firm uses long-term financing to finance all fixed and current assets.
30. Which of the following statements is correct for
an aggressive financing policyfor a firm relative to
a former conservative policy?
a. the firm will use long-term financing to finance all fixed and current
assets.

B. the firm will see an increase in its expected profits.

c. the firm will see a decline in its risk profile.

d. the firm will need to issue additional common stock this period to
finance the assets.

Discussion
b. the firm will see an increase in its expected profits.
31. How can a firm provide a margin of safety if it
cannot borrow on short notice tomeet its needs?
a. maintain a low level of current assets (especially cash and marketable
securities).

B. shorten the maturity schedule of financing.

c. increasing the level of fixed assets (especially plant and equipment).

d. lengthening the maturity schedule of financing.

Discussion
d. lengthening the maturity schedule of financing.
32. Risk, as it relates to working capital, means
that there is jeopardy to the firm for not
maintaining sufficient current assets to
__________.
a. meet its cash obligations as they occur and take advantage of prompt
payment discounts

B. support the proper level of sales and take prompt payment discounts

c. maintain current and acid-test ratios at or above industry norms

d. meet its cash obligations as they occur and support the proper level of
sales

Discussion
d. meet its cash obligations as they occur and support the proper level of
sales
33. If a company moves from a "conservative"
working capital policy to an"aggressive" policy, it
should expect __________.
a. liquidity to decrease, whereas expected profitability would increase

B. expected profitability to increase, whereas risk would decrease

c. liquidity would increase, whereas risk would also increase

d. risk and profitability to decrease

Discussion
a. liquidity to decrease, whereas expected profitability would increase
34. To financial analysts, "net working capital"
means the same thing as __________.
a. total assets

B. fixed assets

c. current assets

d. current assets minus current liabilities.

Discussion
d. current assets minus current liabilities.
35. Working Capital Turnover measures the
relationship of Working Capital with:
a. fixed assets,

B. sales,

c. purchases,

d. stock.

Discussion
a. fixed assets,
36. Dividend Payout Ratio is:
a. pat capital,

B. dps ÷ eps,

c. pref. dividend ÷ pat,

d. pref. dividend ÷ equity dividend.

Discussion
b. dps ÷ eps,
37. Inventory Turnover measures the relationship
of inventory with:
a. average sales,

B. cost of goods sold,

c. total purchases,

d. total assets.

Discussion
b. cost of goods sold,
38. The term 'EVA' is used for:
a. extra value analysis,

B. economic value added,

c. expected value analysis,

d. engineering value analysis.

Discussion
b. economic value added,
39. In Current Ratio, Current Assets are compared
with:
a. current profit,

B. current liabilities,

c. fixed assets,

d. equity share capital.

Discussion
b. current liabilities,
40. There is deterioration in the management of
working capital of XYZ Ltd. Whatdoes it refer to?
a. that the capital employed has reduced,

B. that the profitability has gone up,

c. that debtors collection period has increased,

d. that sales has decreased.

Discussion
c. that debtors collection period has increased,
41. Which of the following statements is correct?
a. a higher receivable turnover is not desirable,

B. interest coverage ratio depends upon tax rate,

c. increase in net profit ratio means increase in sales,

d. lower debt-equity ratio means lower financial risk.

Discussion
d. lower debt-equity ratio means lower financial risk.
42. Debt to Total Assets of a firm is .2. The Debt to
Equity boo would be:
a. 0.80,

B. 0.25,

c. 1.00,

d. 0.75

Discussion
b. 0.25,
43. In Inventory Turnover calculation, what is
taken in the numerator?
a. sales,

B. cost of goods sold,

c. opening stock,

d. closing stock.

Discussion
b. cost of goods sold,
44. Walter’s Model suggests that a firm can always
increase i.e. of the share by
a. increasing dividend ,

B. decreasing dividend,

c. constant dividend,

d. none of the above

Discussion
d. none of the above
45. ‘Bird in hand' argument is given by
a. walker's model,

B. gordon's model,

c. mm mode,

d. residuals theory

Discussion
b. gordon's model,
46. Residuals Theory argues that dividend is a
a. relevant decision ,

B. active decision,

c. passive decision,

d. irrelevant decision

Discussion
c. passive decision,
47. Dividend irrelevance argument of MM Model
is based on:
a. issue of debentures,

B. issue of bonus share,

c. arbitrage ,

d. hedging

Discussion
c. arbitrage ,
48. Which of the following is not true for MM
Model?
a. share price goes up if dividend is paid

B. share price goes down if dividend is not paid,

c. market value is unaffected by dividend policy,

d. all of the above.

Discussion
c. market value is unaffected by dividend policy,
49. Which of the following stresses on investor's
preference reorient dividend thanhigher future
capital gains ?
a. walter's model,

B. residuals theory,

c. gordon's model,

d. mm model.

Discussion
c. gordon's model,
50. MM Model of Dividend irrelevance uses
arbitrage between
a. dividend and bonus,

B. dividend and capital issue,

c. profit and investment,

d. none of the above

Discussion
b. dividend and capital issue,

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