Chapter 4

Question 1

concerns the determination of the optimal mix, and use of current assets and current liabilities

Answer 1

working capital finance

Question 2

the objective is to minimize the cost of maintaining liquidity while guarding against the possibility of technical insolvency

Answer 2

working capital finance

Question 3

the current assets needed at the low point of the business cycle

Answer 3

permanent current assets

Question 4

financing policies

Answer 4

moderate approach (maturity matching)
aggressive approach
conservative approach

Question 5

matching assets and liability matures

Answer 5

moderate approach

Question 6

it is financed with long-term capital

Answer 6

fixed assets and permanent current assets

Question 7

it is financed with short-term debt

Answer 7

temporary current assets

Question 8

hurdles to exact maturity matching

Answer 8

uncertainty about the lives of assets
the use of common equity

Question 9

has no maturity

Answer 9

common equity

Question 10

financing of some of its permanent assets with short-term debt

Answer 10

agressive approach

Question 11

in this approach, management keeps the investment in working capital at a minimum

Answer 11

agressive approach

Question 12

this policy maximizes return on investment at the price of the risk of minimal liquidity

Answer 12

agressive approach

Question 13

are generally lower than long-term rates

Answer 13

short term rates

Question 14

financing long term assets with short-term debt is

Answer 14

risky

Question 15

it is used to finance all the permanent assets and to meet some of the seasonal needs

Answer 15

long-term capital

Question 16

the firm uses a small amount of short term credit to meet its peak requirements, but it also meets part of its seasonal needs by

Answer 16

sorting liquidity in the form of marketable securities

Question 17

this policy minimizes liquidity risk by increasing net working capital

Answer 17

conservative approach

Question 18

it is characterized by a higher current ratio and acid test ratio

Answer 18

conservative working capital

Question 19

this policy finances assets using long-term or permanent funds rather than short-term sources

Answer 19

conservative approach