Financial Management

Question 1

Cash Conversion cycle

Answer 1

Inventory conversion period + Receivables collection period – Payables deferral period

Question 2

Financing permanent working capital with long-term debt

Answer 2

is considered to be a conservative policy

Question 3

Economic Order Quantity formula

Answer 3

The square root of 2 times cost of placing one order and annual demand in units divided by annual cost of carrying one unit in inventory for 1 year (i.e., inventory carrying cost)

Periodic demand must be assumed

Question 4

A company with more debt financing than it’s counterparts will experience

Answer 4

greater fixed financing charges

more volatile net income stream

Question 5

Optimal capital structure

Answer 5

results in the least weighted-average cost of capital

Question 6

The degree of operating leverage (DOL)

Answer 6

is a measure of the change in earnings available to common stockholders associated with a given change in sales volume

Percent change in operating income divided by
Percentage change in sales volume

Question 7

the primary reason for a company to agree to a debt covenant limiting the percentage of its long-term debt

Answer 7

reduce the interest rate on the debt being issued

Question 8

If the nominal rate of interest increases

Answer 8

investors will expect a higher yield from all investments. Therefore, the stock price will decline.

Question 9

optimal capital structure for an organization

Answer 9

is when it minimizes its weighted-average cost of capital.

Question 10

The theory underlying cost of capital is related to

Answer 10

existing long-term financing and obtaining new long-term financing.