Questions Liquidity

Questions-Liquidity Management
1) A company that increases its liquidity by holding more cash and marketable securities is
A) likely to achieve a higher return on equity because of higher interest income.
B) likely to achieve a lower return on equity because of the smaller rates of return earned on cash and
marketable securities compared to the firm's other investments.
C) going to maximize firm value because risk is decreased.
D) going to have to sell common stock to raise the cash to become more liquid.
2) Which of the following statements concerning liquidity and debt is true?

A) The greater the use of short-term debt, the lower the risk of illiquidity.
B) Long-term debt is generally less costly than short-term debt.
C) A firm can reduce its risk for illiquidity by shifting from short-term debt to long-term debt.
D) The risk of illiquidity does not depend on the mix of short-term versus long-term debt
3) ) Interest costs for short-term debt are generally lower than interest costs for long-term debt because
A) the term structure of interest rates generally reflects an upward sloping yield curve.
B) short-term debt is more flexible, allowing a match of short-term needs with short-term financing.
C) both A and B.
D) investors demand higher returns on short-term debt due to liquidity concerns.
4) All of the following are potential disadvantages of short-term debt EXCEPT

A) short-term debt must be paid back more quickly than long-term debt.
B) uncertainty of interest costs because short-term debt must be replaced often.
C) a greater risk of illiquidity than long-term debt.
D) short-term debt generally has a higher interest cost than long-term debt.
5) Which of the following is an advantage of the use of current liabilities to finance assets?
A) less risk of illiquidity
B) more flexibility
C) lower interest costs
D) Both B and C
6) Which of the following actions would improve a firm's liquidity?

A) purchasing inventories for cash
B) purchasing inventory on trade credit
C) purchasing inventory with long-term debt
D) buying machinery with long-term debt
7) Net working capital refers to which of the following?

A) cash, accounts receivable, and inventory
B) notes payable, accruals, and accounts payable
C) current assets plus current liabilities
D) current assets divided by current liabilities
E) current assets minus current liabilities
8) Working capital includes all of the following EXCEPT

A) cash.
B) accounts receivable.
C) accounts payable.
D) inventories.
9) AFB, Inc. purchases a new delivery van which is expected to increase cash flows for the next 10
years. AFB can finance the purchase with a standard 48 month vehicle loan, or by getting a 10 year
loan from the bank. According to the hedging principle, AFB should
A) use the 10-year financing in order to match the cash flow stream from the asset with the financing
repayments.
B) use the 48 month loan since it matches the type of asset with the type of loan.
C) use either type of financing, but hedge the risk in the options market.
D) avoid using either loan and finance the truck with current cash reserves to avoid interest expense.
10) According to the hedging principle, fixed assets should NOT be financed with
A) permanent financing.
B) temporary financing.
C) permanent plus spontaneous financing.
D) equity financing.
11) Accrued wages and accrued taxes are considered to be

A) permanent sources of financing because companies must always pay wages and taxes.
B) spontaneous sources of unsecured short-term financing.
C) secured sources of short-term financing.
D) current assets.
12)Spontaneous sources of financing include

A) marketable securities.
B) wages payable.
C) accounts receivable.
D) common stock
13) Permanent sources of financing include all but

A) corporate bonds.
B) common stock.
C) preferred stock.
D) commercial paper.
14) A toy manufacturer following the hedging principle will generally finance seasonal inventory
build-up prior to the Christmas season with
A) common equity to avoid interest on a recurring annual need.
B) selling equipment.
C) trade credit.
D) long-term bonds since this is a recurring financing need
15) According to the hedging principle, which of the following assets should be financed with
permanent sources of financing?
A) seasonal expansions of inventory
B) seasonal increases in accounts receivable
C) levels of inventory and accounts receivable the firm maintains throughout the year
D) none of the above
16) Trade credit is an example of which of the following sources of financing?

A) spontaneous
B) temporary
C) permanent
D) discretionary
17) Parsons Company has a cash flow problem. The company owes its suppliers $300,000 on credit
terms of 2/10 net 40, but Parsons doesn't have the cash to pay during the discount period. Parsons,
however, can borrow the $300,000 at annual rate of 24%. Should Parsons borrow the money to pay its
accounts payable?
A) No, additional borrowing will cost more for interest ($60,000 per year) than the discount is worth.
B) Yes, the effective cost of forgoing the discount is greater than 24%.
C) No, the effective cost of forgoing the discount is equal to 24%, and there are transactions costs
associated with borrowing.
D) It doesn't matter because the present value of the cost of borrowing is exactly equal to the amount
of the discount for paying within 10 days.
18)Your company buys supplies on credit terms of 2/10 net 45. Suppose the company makes a
purchase of $20,000 today. Which of the following payment options makes the most sense as a general
rule?
A) Pay the bill as soon as possible to keep the supplier happy.
B) Pay the bill on day 45 due to the time value of money.
C) Pay the bill on day 10 to get the discount.
D) Either pay the bill on day 10 to get the discount, or wait until day 45.
19) Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after
120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the
APR, or annual percentage rate, calculation?
A) 3.33%
B) 4.00%
C) 10.00%
D) 11.75%
20) Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after
120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the
APY, or annual percentage yield, calculation?
A) 4.33%
B) 10.34%
C) 12.25%
D) 12.46%

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Questions-Liquidity Management

2) Which of the following statements concerning liquidity and debt is true?

4) All of the following are potential disadvantages of short-term debt EXCEPT

6) Which of the following actions would improve a firm's liquidity?

7) Net working capital refers to which of the following?

8) Working capital includes all of the following EXCEPT

11) Accrued wages and accrued taxes are considered to be

12)Spontaneous sources of financing include

13) Permanent sources of financing include all but

16) Trade credit is an example of which of the following sources of financing?

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