1.Define each of the following terms:
Working capital –
Net working capital –
Net operating working capital –
2.Explain the following operating current asset investment policies.
Relaxed policy –
Restricted policy –
Moderate policy –
3.What are reasons for not wanting to hold too little working capital? For not wanting to hold too much?
4.Differentiate between permanent operating current assets and temporary operating current assets.
5.What does maturity matching mean, and what is the logic behind this policy?
6.What are some advantages and disadvantages of short-term versus long-term debt?
7.Define the following terms and list the equation for each.
Inventory conversion period –
Average collection period –
Payables deferral period –
Cash conversion cycle –
8.What should a firm’s goal be regarding the cash conversion cycle, holding other things constant? Explain your answer.
9.What are some actions a firm can take to shorten its cash conversion cycle?
10.What are some costs associated with high inventories? With low inventories?
11.What is a “supply chain” and how are supply chains related to just-in-time inventory procedures?
12.Explain how a new firm’s receivables balance is built up over time.
13.Define the following terms and explain how each is affected by sales fluctuations:
Days sales outstanding (DSO) –
Aging schedule –
14.What are accruals? How much control do managers have over accruals?
15.Define each of the following terms
Trade credit –
Free trade credit –
Costly trade credit –
16.How could the cash budget be used when negotiating the terms of a bank loan?
17.How would a shift from a tight credit policy to a relaxed policy be likely to affect a firm’s cash budget?
18.Suppose a firm’s cash flows do not occur uniformly throughout the month. What effect would this have on the accuracy of the forecasted borrowing requirements based on a monthly cash budget? How could the firm deal with this problem?
19.Why is cash management important?
20.What are the primary motives for holding cash?
21.What is float? How do firms use float to increase cash management efficiency?
22.What are some methods firms can use to accelerate receipts?
23.Why might a company hold low-yielding marketable securities when it could earn a much higher return on operating assets?
24.Define the following terms.
Promissory note –
Line of credit –
Revolving credit agreement –
25.What’s the difference between simple interest and add-on interest?
26.Explain how a firm that expects to need funds during the coming year might make sure that the needed funds will be available.
27.How does the cost of costly trade credit generally compare with the cost of short-term bank loans in terms of the interest costs?
28.What is commercial paper? What types of companies can use commercial paper to meet their short-term financing needs?
29.How does the cost of commercial paper compare with the cost of short-term bank loans? With the cost of Treasury bills?
30.What are some types of current assets that are pledged as security for short-term loans?
31.Briefly discuss the following methods used for accounts receivable financing:
Pledging of accounts receivables –
Factoring –
32.Briefly discuss at least three methods for using inventories as security.