Working Capital management

Question 1

What are current liabilities

Answer 1

Debts to be payed in less than one year

Question 2

What is net working capital

Answer 2

Cash + current assets - current liabilities

Question 3

increasing non current liabilities and equity while decreasing non current assets as well as current assets - liabilities will increase the amount of cash in the firm

Answer 3

True

Question 4

What is the inventory duration period

Answer 4

The time from a good is ordered by the firm to that it is sold

Question 5

Name some flexible short term financial policies

Answer 5

Keeping large reserves of cash and marketable securities, making large investments in inventory and granting liberal credit terms which results in a lot of accounts recivables. The oposit of this is to have restrictive short term fiancial policies

Question 6

What are carrying costs

Answer 6

Costs that rise with investment into current assets f.ex opertunity cost of having account recivables instead of cash and the warehousing cost of housing inventory

Question 7

What are shortage costs

Answer 7

Costs that decrease with investment into current assets

Question 8

Large firms with limited growth opertunities, low risk investments and great access to credit tend to hold less liquid assets

Answer 8

True

Question 9

Small firms with large growth opurtunities and high risk invesmtnets and that lack access to credit tend to have more liquid assets

Answer 9

True

Question 10

Name the two general kinds of shortage costs

Answer 10

Trading or order costs f.ex brokarage costs of getting more cash or inventory and costs related to safety reserves f.ex disrupted schedules, lost customer goodwill and lost sales

Question 11

What determines the financial policy of a firm

Answer 11

Where shotage costs + carrying costs are the lowest. As shortage costs decrease carrying costs increase so there is an optimum points where the sum is as low as possible

Question 12

What is the difference between non comited and comited lines of credit

Answer 12

non comitted lines of credit are agreements between a firm and a bank to let the firm borrow up to an amount at standard interest without paperwork. Commited lines are a formal arangement which require a fee and often also compensation balances aka cash in a bank account.

Question 13

How does compensation balances work

Answer 13

A firm keeps money in a bank account with zero interest but recives the money they would have recived as intest as a line of credit instead.

Question 14

What are secured loans

Answer 14

When the bank requires security for a loan f.ex lien on accounts recivables or inventory in the case that a firm fails to pay inters.

Question 15

Treasury bills, certificates of deposits and repurchase agreements are cash equivalents

Answer 15

True

Question 16

The decision to allow purchase on credit and at what time is verry similar regardless of industries

Answer 16

False, retail often has very short account revivavles an example is 5 days while mining firms can have as long as 65 day recivables.

Question 17

Why do firms hold cash

Answer 17

As compensating balances for credit, to make up the difference between unsyncronized cash inflows (collections) and cash outflows (disbursments).

Question 18

What information must be known to determine the optimal cash balance policy according to the baumol model

Answer 18

The fixed cost of selling securities to replenish cash, the total amount of new cash needed over the planing period and the opertunity cost for holding cash which is the interest rate on marketable securities.

Question 19

How is the short term opertunity cost calculated in the baumol model

Answer 19

Average cash balance times the interest rate

Question 20

What are the three limitations of the baumol model

Answer 20

it assumes a constant disbursment rate, It assumes no cash reciepts durring the period and it does not count safety stock buffers which are often present in acutal firms.

Question 21

What 4 things must management do to use the Miller Orr model to determine the optimal cash position

Answer 21

Set a minimum cash limit, Estimate the standard deviation of daily cash inflows, determine the interest rate and estimate the trading costs of buying/selling marketable securities

Question 22

According to the Miller Orr model firms that have more uncertainty in their cashflows should have greater cash reserves

Answer 22

True