Deck 11: Optimizing and Financing Working Capital

Question 1

The most liquid of assets and a necessity for working capital transactions is:

A)marketable securities.
B)accounts receivable.
C)current assets.
D)cash.

Answer 1

cash.

Question 2

The theory that excessive cash balances lead managers to make bad decisions is called the:

A)agency cost of free cash flow.
B)excessive cash problem.
C)opportunity cost dilemma.
D)cash balance trap.

Answer 2

agency cost of free cash flow.

Question 3

The traditional argument for maintaining small cash balances says that:

A)cash balances earn below market interest rates or no interest and should be kept to a minimum.
B)the interest that is lost on cash balances is more than offset by the convenience of having cash readily available.
C)cash balances should be held in multiple banks to offset the risk of any one bank failing.
D)the amount of a firm's cash balance is inversely related to the firm's sales volume.

Answer 3

cash balances earn below market interest rates or no interest and should be kept to a minimum.

Question 4

Higher opportunity costs call for:

A)higher cash balances.
B)more implicit costs.
C)less working capital.
D)lower cash balances.

Question 5

Higher currency risk calls for:

A)avoiding countries with volatile currencies.
B)higher implicit cash balance costs.
C)higher cash balances.
D)lower cash balances.

Question 6

In the context of working capital management in MNCs,credit policy involves consideration of:

A)optimizing cash balances across countries where the MNC operates.
B)pricing and credit terms.
C)currency risk and local market conditions.
D)credit rating of customers and competition.

Question 7

What are opportunity costs in the context of maintaining cash balances?

A)Opportunity costs in this context are equal to the amount that a firm maintains in cash balances.
B)Opportunity costs in this context reflect the costs to a firm of monitoring its cash balances and ensuring that its cash balances are sufficient.
C)Opportunity costs in this context are the value of the lost opportunities that could not be pursued because a firm's money was being used to maintain cash balances.
D)Opportunity costs in this context are equal to the firm's working capital.

Question 8

Why have opportunity costs of maintaining cash balances decreased in importance in recent years?

A)Lower interest rates have reduced the opportunity costs associated with maintaining cash balances.
B)Most banks allow firms to move cash in and out of interest-bearing accounts easily and cheaply.
C)More competition among banks has lowered the opportunity costs that arise from maintaining cash balances.
D)Firms are earning higher profits,so opportunity costs have become smaller relative to those profits.

Question 9

In making short-term investments,firms consider:

A)creditworthiness of the company and the interest rate.
B)maturity,liquidity,risk,and flexibility.
C)broker's recommendation and competing opportunities.
D)opportunity costs and flexibility.

Question 10

What sort of bad decisions do excessive cash balances lead managers to make?

A)Managers may embezzle excess cash balances.
B)Managers may lose sight of cost containment and spend cash on unrelated businesses.
C)Managers may invest excessive cash balances so that the liquidity of those funds is lost.
D)Managers may contend that the excessive cash balances are actually profits that they created.

Question 11

Explicit transaction costs,such as __________________________ have been reduced because of increased efficiencies in banking.

A)interest and spreads
B)account charges and spreads
C)interest and commissions on transfers of funds
D)account charges and commissions on transfers of funds

Question 12

What are implicit transaction costs that MNCs incur in dealing with their cash balances?

A)Implicit transaction costs are costs of dealing with a firm's cash balances that are not disclosed to the firm until after the transaction is completed.
B)Implicit transaction costs incurred in dealing with an MNC's cash balance involve costs associated with making internal decisions about the firm's cash balance.
C)Implicit transaction costs are costs of arranging the firm's cash balances that the firm will not have to pay until a later time.
D)Implicit transaction costs are costs that are charged to a firm in connection with managing its cash balances that will be deducted from the firm's cash balance rather than being billed to the firm.

Question 13

The equation for calculating working capital is:

A)quick assets - current liabilities.
B)current assets - current liabilities.
C)assets - liabilities.
D)current assets - liabilities.

Question 14

The balance sheet accounts that day-to-day operations involve include:

A)cash,accounts receivable,liabilities and equity.
B)cash,accounts receivable,accounts payable and short-term debt.
C)assets,short-term debt and long-term debt.
D)assets,liabilities and equity.

Question 15

Cash management for MNCs includes considerations of:

A)currency,interest rate,and transaction risk.
B)interest rates,inflation rates,and default rates.
C)risk,agency cost,and real options.
D)asset and liability levels.

Question 16

The money that a firm uses on a day-to-day basis to carry out transactions with its customers and suppliers is referred to as:

A)short-term financing.
B)accounts receivable and payable.
C)cash and equivalents.
D)working capital.

Question 17

Short-term government obligations,generally known as T-bills,offer investors:

A)some liquidity and medium risk.
B)high liquidity and low risk.
C)flexible interest rates and low risk.
D)low liquidity and great flexibility.

Question 18

In traditional working capital analysis,holding a large cash balance is:

A)a positive strategy because it reduces the transaction costs involved in liquidating assets to raise cash.
B)a positive strategy because it relieves the firm from having to obtain short-term financing.
C)a negative strategy because it means that the cash is not earning a return.
D)a negative strategy because it imposes additional currency risk on the firm.

Question 19

Why might an MNC's working capital situation be more complex than a domestic firm's working capital situation?

A)An MNC's current assets and current liabilities are consolidated across its subsidiaries,which means that there are a variety of risks involved in those assets and liabilities.
B)An MNC is usually much larger than domestic firms,so MNCs have more assets and more liabilities and more need for working capital.
C)An MNC has more complex financing arrangements than domestic firms.
D)MNCs are subject to more regulation than domestic firms.

Question 20

The default risk involved in money market instruments is:

A)usually higher than most MNCs are willing to accept.
B)usually lower than any other short-term investment.
C)essentially the same for all issuers.
D)determined by the maturity date of the instrument.

Question 21

Financial service firms that provide both financing and other services to MNC as part of a total service bundle are called:

A)multiple-option facilities.
B)full service banks.
C)investment advisors.
D)bundled service providers.

Question 22

If an MNC borrows in a foreign currency and the value of that currency appreciates during the term of the loan:

A)the MNC will not be affected because its obligations are established when the loan is made.
B)the MNC can cancel the loan and refund the proceeds of the loan.
C)the MNC will have to repay the principle and interest of the loan in a more valuable currency.
D)the lender will have the option of canceling the loan.

Question 23

The Euro commercial paper is:

A)a debt instrument denominated in euros.
B)a debt instrument that is issued in Europe and denominated in a European currency.
C)a medium-term debt instrument that is usually denominated in USD but sold in Europe.
D)a short-term debt instrument without coupon payments that matures in a few months.

Question 24

The difference between a best-effort loan and an underwritten loan is that:

A)an underwritten loan has a guaranteed interest rate and a best-effort loan has a flexible interest rate.
B)a best-effort loan requires that the borrower make its best-effort to repay the loan on schedule while an underwritten loan requires that specific payments be made on the loan.
C)a best-effort loan offers the best interest rate that the lender can offer,but an underwritten loan guarantees that a specific interest rate will be charged.
D)an underwritten loan is guaranteed to be made,while a best-effort loan is not guaranteed and will only be made if enough banks can be found to participate in the loan.

Question 25

A Eurobank loan is a loan

A)that is denominated in euros but which is made in a country where the euro is not the domestic currency.
B)that is made in a currency other than the euro but that must be repaid in euros.
C)made by a bank in one country to an entity in another country.
D)a loan made a bank in Europe.

Question 26

A bank loan made for a fixed period of time at a fixed interest rate requiring periodic payments of principle and interest is called a:

A)term loan.
B)line of credit.
C)fixed loan.
D)secured loan.

Question 27

The volatility of business conditions in some countries increase the risk of defaults on accounts receivable in those countries,but that risk may be offset by:

A)lower cost of credit in those countries as volatility increases.
B)the potential for increased sales in those countries as business conditions improve.
C)higher inflation rates in those countries as volatility decreases.
D)investment opportunities in those countries.

Question 28

The primary drawback of money market accounts is that:

A)they may restrict the number of transactions in the account that may take place in a specific period of time.
B)the higher the interest rate they pay,the shorter their maturity date.
C)they require an investment that is larger than many firms can make.
D)the interest rate that they offer is fixed,raising the issue of interest rate risk.

Question 29

Banks may not be willing to accept as collateral for a loan:

A)accounts receivable in countries that do not support the rights of creditors.
B)inventory that a firm usually sells very quickly.
C)accounts receivable that are less than 30 days old.
D)inventory that is specifically branded with the borrower's name.

Question 30

In the duration matching method of evaluating financing,the implicit assumption is that:

A)assets will be used by a firm for a longer period of time than it takes the firm to repay the loan to purchase those assets.
B)asset value will always offset the amount of the liabilities that were incurred to acquire those assets.
C)it is possible to acquire assets that will be productive for exactly the amount of time that it takes to repay the loan to acquire those assets.
D)interest rates affect assets and liabilities in the same way and to the same extent.

Question 31

A time deposit that takes the form of a negotiable instrument is a:

A)checking account.
B)T-bill.
C)certificate of deposit.
D)money market account.

Question 32

"Ex ante" financing costs refer to:

A)a firm's estimate of the future spot rate of the currency in which it is obtaining financing.
B)the actual future spot rate of the currency in which it is obtaining financing.
C)the cost of financing not including the interest that will be paid in connection with the financing.
D)all costs of a firm's financing after a loan has been completely paid.

Question 33

The primary drawback of T-bills is:

A)the transaction costs involved in investing in T-bills.
B)the inability to buy them in large denominations.
C)that they require investors to convert their investments to other T-bills on maturity.
D)that they offer interest rates that are lower than most other investments.

Question 34

The process of selling receivable for an amount less than the face value of the receivable is called:

A)factoring.
B)securitizing.
C)receivables financing.
D)recapitalizing.

Question 35

What is the risk to an MNC if its receivables are denominated in one currency and its payables are denominated in another currency?

A)If the value of the currency in which the payable increases in value relative to the currency in which the receivables are denominated,the default risk on the receivables will increase.
B)The International Fisher Effect will cause the values of the two currencies to converge,causing the MNC a loss on the receivable it collects.
C)Since the source of the MNC's collections and the current debts that it owes are in different currencies,a change in the relative values of the two currencies will create either a gain or a loss for the MNC.
D)If the value of one currency increases relative to the other currency,the MNC will be forced to refinance its debt.

Question 36

Firms need financing for the following reasons:

A)refinancing of existing debt,operations,and long-term asset acquisition.
B)long-term asset acquisition,operations,and cash reserves.
C)cash reserves for emergencies,operations,and investments.
D)investments,long-term asset acquisition,and cash reserves.

Question 37

The principle objective of a lockbox system is to:

A)ensure the safety of accounts receivable collections.
B)allow collected accounts receivable to earn interest while they are being processed.
C)reduce mailing and processing time for accounts receivable.
D)provide an accurate accounting of accounts receivable collections.

Question 38

Securitization of accounts receivable solves two problems for MNCs:

A)collecting accounts receivable and writing off bad debts.
B)managing accounts receivable and obtaining financing.
C)creating accounts receivable and collecting accounts receivable.
D)obtaining working capital and avoiding currency risk.

Question 39

A type of bank loan that is more flexible than some other loans but that can save the borrower some interest even though it carries a slightly higher interest rate than other loans is the:

A)bridge loan.
B)line of credit.
C)term loan.
D)bankers' acceptance.

Question 40

U.S.commercial paper is only issued by firms with very high credit ratings because:

A)the Securities and Exchange Commission only allows firms with very high credit ratings to issue commercial paper.
B)only firms with very high credit ratings can list commercial paper on the capital markets.
C)U.S.commercial paper is unsecured and investors are only willing to buy commercial paper that is backed by firms with very high credit ratings.
D)U.S.commercial paper is very expensive to issue and only firms with very high credit ratings can afford to issue it.

Question 41

What is commercial paper,and how does it differ from other financing vehicles that an MNC might use?

Question 42

What is working capital,and how is working capital affected by short-term financing?

Question 43

The International Fisher Effect suggests that if a firm borrows in a lower interest foreign currency:

A)the choice of currency will have a significant effect on the cost of the loan because the interest rate is relatively low.
B)the choice of currency will not matter in the cost of the loan because the foreign currency will appreciate during the term of the loan.
C)the choice of currency will have an effect on the cost of the loan because the foreign currency will depreciate during the term of the loan.
D)the choice of currency may or may not affect the cost of the loan,depending on how interest rates change during the term of the loan.

Question 44

How can a firm create excess capacity?

A)A firm can arrange a line of credit.
B)A firm can borrow more than it currently needs.
C)A firm can sell assets that it does not currently need.
D)A firm can enter a new market in a foreign country.

Question 45

In the context of cash management,what are opportunity costs?

Question 46

How can the way a firm arranges its financing limit its currency risk?

A)It can borrow more than it currently needs so that future cash needs are met.
B)It can arrange for a line of credit to provide for future financing needs.
C)It can coordinate its financing cash flow and its operational cash flow.
D)It can sell debt instruments in its home currency.

Question 47

What is the primary benefit that a firm can achieve by using multiple-currency financing?

A)It will lower cost of capital.
B)It provides new sources of capital.
C)It provides access to more capital markets.
D)It results in diversity and risk reduction.

Question 48

What is the difference between ex ante and ex post financing costs,and what effects do these costs have on an MNC's financing strategy?

Question 49

How does a firm monetize receivables?

Question 50

A firm's capacity to obtain financing as necessary is called:

A)liquidity.
B)financial slack.
C)portfolio affect.
D)leverage.