ret ma 1" Part_Fin Man 2 Finals SM True or False. ¥ oan 4s unable to pay its bills as they come due is technically insolvent. ‘The short-term financial management is concerned with management of the firm's current assets and current liabilities. ‘assets and current liabilities in order to achieve a balance between profitability and risk that contributes te-the firm's value. FP 4 Working capital represents the portion of the fim’s investment that circulates from one form to if the long-term conduct of business. “T 5Tn general, the more a firm’s current assets cover its short-term obligations, the better able it will be so pay its bills as they come due. > 5 The more predictable its cash inflows, the more net working capital firm needs. ¥ ae of current assets to totil assets increases, he firm's risk increases. Because. t ms are unable to match cash inflows to outflows with certainty, most of them need i liabilities that more than cover outflows for current assets. the risk of being unable to make the scheduled fixed payments associated with es, and preferred stock financing as they come due. fputs materials and labor into the production process to the point when cash is collected from the sale of the resulting finished product.F ar ‘ing cycle (OC) is simply the sum of the average age of inventory (AAD and. the ayerige payment period (APP). “T- 13, cash conversion cycle is the total numberof days inthe operating cycle less the average payment period for inputs to production, ‘A negative cash conversion cycle (CCC) means the average payment period (APP) excesds the operating’cycle (OC). 4 a \e operating cycle is the recurring transition of a firm's working capital from cash to and inventories to receivables and back to cash, funds and its fixed assets with long-term funds. snt financial need of a firm is the financing requirements for the firm’s fixed assets permanent portion ofthe firm's cutentasbets ‘The conservative financing strategy isa strategy by which the firm finances at least its seasonal requirements, and possibly some of its permanent requirements, with short-term funds and the balance ofits permanent requirements with long-term funds. 25.) The aggressive strategy operates with minimum net working capital since only the permanent the firm’s current assets is being financed with long-term funds. ‘redit,a bank may require an annual cleanup, which means thatthe borrower ‘Although more expensive than a line of credit, a revolving credit agreement can be less risky from the borrower's viewpoint. Generally the increment above the prime rate on a floating-rate loan will be higher than on a fixed-rate loan of equivalent risk because the lender bears higher risk with a floating-rate loan. Fixed-rate loan isa loan whose rate of interest is established at a fixed inerement above the prime is allowed to vary above prime only when the prime rate varies until maturity interest rate for a discount loan is greater than the loan’s stated interest rate. “T 34,Compensating balance, which is «required checking account balance equal toa certain percentage of the borrower's short-term unsecured loan, may not only forces the borrower to be a. good customer of the bank but may also raise the interest cost to the borrower, thereby ised by firms with a high credit standing. = in doing business in foreign countries, financing operations in the local market not only i company’s business ties tothe host community but also minimizes exchange rate by the issuer of commercial paper is determined by the size of the discount of time to maturity. ale 1 risk to a U.S. importer with foreign-currency-denominated accounts payable is that the dollar will depreciate.dD ‘Firms are able to raise funds through the sale of commercial paper more cheaply than by borrowing fyeat a commercial bank. Short-term financing has specific assets pledged as collateral and appears on the fice sheet as current liabilities. 77% ight sale of accounts receivable at a discount in order to obtain funds is called pledging agpotints receivable, A One advantage of factoring accounts receivable i the ability it gives the firm to turn accounts receivable immediately into cash without having to worry about repayment. ion, than the term of the Joan, T 4 ly, lenders recognize that holding collateral can reduce losses.if the borrower defaults, byt the presenceof collateral has,yo impact onthe risk of default. ie € ‘The interest rate charged on secured short-term loans is typically higher than the rate on unsgeufd short-term loans F42-The higher cost of unsecured as opposed to secured borrowing is due to the greater risk of FG, Commercial finance companies are lending institutions that make only unsecured loans—both short-term and long-term—to businesses. &) ‘The commercial fipance companies usually charge a higher interest on secured short-term loans anks because the finance companies generally end up wth higher-risk wants receivable are normally made on a notification basis because the lender st the borrower to collect the pledged account receivable and remit these payments standing that the factor accepts all credit risks on the purchased accounts. ‘The percentage advance constitutes the principal of the secured loan and varies not only i according to the type and liquidity of collateral but also according to the type of security interest being taken. & ( 30.) Commercial banks and other institations donot normally consider secured loans les risky than ‘unsecured loans, and therefore require higher interest rates on them. Multiple Net working capital is defined as (a) _aratio measure of liquidity best used in cross-sectional analysis. (b) the portion of the firm’s assets financed with short-term funds. (©) current liabilities minus current assets. (a) current assets minus current liabilities