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Exam 6: Working Capital and the Financing Decision

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Question 51

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In periods of tight money,long-term rates are often higher than short-term rates.

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Question 52

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During tight money periods,short-term financing may be difficult to find.

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Question 53

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Which of the following yield curves would be characteristic at peak periods of economic expansions?

The use of on-line point-of-sale terminals has made it easier for many retail store managers to manage their inventory.

When actual sales are greater than forecasted sales:

Short-term interest rates are generally lower than long-term interest rates.

The "term structure of interest rates" depicts the competitive cost of funds for the various types of short-term sources of funds such as Treasury bills,commercial paper,and bankers' acceptances.

An inverted yield curve would suggest that:

Normally,short-term assets are financed using long-term financing,such as,bank loans greater than 1 year or mortgages.

Liquidity premium theory states that securities are segmented into markets by various financial institutions.

During an economic "boom" period,a shortage of low-cost financing alternatives exists.

Short-term interest rates are more dependent upon inflation than on current demand for money.

A yield curve is also referred to as the term structure of interest rates.

If a firm uses a conservative financial plan,it will usually have marketable securities at the bottom of a cyclical sales swing.

McKinsee Inc.is developing a plan to finance its asset base.The firm has $5,000,000 in current assets,of which 20% are permanent,and $12,000,000 in capital assets.Long-term rates are currently 9.5%,while short-term rates are at 7%.McKinsee's tax rate is 30%. A)Construct a conservative financing plan with 80% of assets financed by long-term sources.If McKinsee's earnings before interest and taxes are $6,000,000,what will their net income be? B)An alternative and more aggressive plan would be to finance 60% of total assets with long-term financing.Assuming that EBIT was again $6,000,000,what will net income be under this alternative? C)If interest rates were expected to increase,which plan would you recommend? Why?

The cash flow cycle has a major bearing on the firm's:

It is not necessary to understand interest rate movements thoroughly when deciding upon short and long-term debt structure.

Expected value is a representative quantity from a probability distribution arrived at by multiplying each outcome times the associated probability and summing up the products.

The term structure of interest rates:

A "normal" term structure of interest rates would depict: