Multiple-Choice Quiz

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Chapter 8: Overview of Working Capital Management

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1. In finance, "working capital" means the same thing as

total assets.

fixed assets.

current assets.

current assets minus current liabilities.

2. Which of the following would be consistent with a more aggressive approach to financing working capital?

Financing short-term needs with short-term funds.

Financing permanent inventory buildup with long-term debt.

Financing seasonal needs with short-term funds.

Financing some long-term needs with short-term funds.

3. Which asset-liability combination would most likely result in the firm's having the greatest risk of technical insolvency?

Increasing current assets while lowering current liabilities.

Increasing current assets while incurring more current liabilities.

Reducing current assets, increasing current liabilities, and reducing long-term debt.

Replacing short-term debt with equity.

4. Which of the following illustrates the use of a hedging (or matching) approach to financing?

Short-term assets financed with long-term liabilities.

Permanent working capital financed with long-term liabilities.

Short-term assets financed with equity.

All assets financed with a 50 percent equity, 50 percent long-term debt mixture.

5. In deciding the appropriate level of current assets for the firm, management is confronted with

a trade-off between profitability and risk.

a trade-off between liquidity and marketability.

a trade-off between equity and debt.

a trade-off between short-term versus long-term borrowing.

6. varies inversely with profitability.

Liquidity.

Risk.

Blue.

False.

7. Spontaneous financing includes

accounts receivable.

accounts payable.

short-term loans.

a line of credit.

8. Permanent working capital

varies with seasonal needs.

includes fixed assets.

is the amount of current assets required to meet a firm's long-term minimum needs.

includes accounts payable.

9. Financing a long-lived asset with short-term financing would be

an example of "moderate risk -- moderate (potential) profitability" asset financing.

an example of "low risk -- low (potential) profitability" asset financing.

an example of "high risk -- high (potential) profitability" asset financing.

an example of the "hedging approach" to financing.

10. Net working capital refers to

total assets minus fixed assets.

current assets minus current liabilities.

current assets minus inventories.

current assets.

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