Fin 534

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Monday, March 28, 2011
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(15-1) Net working capital F S Answer: b EASY
1. Net working capital, defined as current assets minus the sum of payables and accruals, is equal to the current ratio minus the quick ratio.
a. True
b. False
(15-1) Net working capital F S Answer: b EASY
2. Net working capital is defined as current assets divided by current liabilities. a. True
b. False
(15-1) Working capital F S Answer: b EASY
3. An increase in any current asset must be accompanied by an equal increase in some current liability.
a. True
b. False
(15-2) Working capital policy F S Answer: a EASY
4. Determining a firm's optimal investment in working capital and deciding how that investment should be financed are elements of working capital policy. a. True
b. False
(15-3) Permanent current assets F S Answer: a EASY
5. The concept of permanent current assets reflects the fact that some components of current assets do not shrink to zero even when a business is at its seasonal or cyclical low. Thus, permanent current assets represent a minimum level of current assets that must be financed.
a. True
b. False
(15-3) Conservative financing F S Answer: a EASY
6. A conservative financing approach to working capital will result in permanent current assets and some seasonal current assets being financed using long-term securities.
a. True
b. False
(15-3) Current asset financing F S Answer: a EASY
7. 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 current asset financing strategy because of the inherent risks of using short-term financing.
a. True
b. False(15-4) Cash conversion cycle F S Answer: b EASY
8. If a firm takes actions that reduce its days sales outstanding (DSO), then, other things held constant, this will lengthen its cash conversion cycle (CCC).
a. True
b. False
(15-4) Cash conversion cycle