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finance ch 6

Working capital management is primarily concerned with the management and financing of what?
current assets
A financial executive devotes the most time to what aspect of finance?
working capital management
What is a common reason for the pressure of current asset buildup?
rapidly expanding sales
What are “self liquidating” assets and how do they relate to permanent current assets?
all the production will be sold, receivables collected, and bills paid over the time period specified.
What are some types of companies that experience seasonal sales?
retail
What effect do seasonal sales have on inventory in a company that uses level production schedules?
As sales decline, inventory will increase.
When actual sales are greater than forecasted sales, what happens to the level of inventory, accounts receivables, and production schedules?
Production schedules might have to be revised upward
Accounts receivable will rise
Inventory will decline
Normally, permanent current assets should be financed by what source of financing?
long-term funds
What types of assets should be financed with long-term financing?
Fixed assets and permanent current assets
What would a conservatively financed firm’s financing mix look like?
Use long term financing for permanent current assets, and a portion of the short term fluctuating assets, and use short term financing for all other short term assets.
Why do firms try to use more short-term financing than long-term financing?
short term interest rates are generally lower than long term interest rates, and most firms do not have basic access to capital markets.
What is the term structure of interest rates, and what influences it?
changes daily to reflect current competitive conditions in the money and capital market.

Influenced by: inflation
the money supply
Federal Reserve activities

If money is tight, what happens to short term rates?
short term rates are higher than long term rates
What effect do illiquid assets have on the borrowing decisions of a firm?
heavy short term borrowing?
“Permanent current assets” means what kind of assets?
some minimum level of current assets that are not self liquidating.
What are some benefits of web-based supply chain management?
1) Lower inventory, transportation, warehousing, and packaging costs
2) Greater supply chain flexibility
3) Improved customer service
4) Higher revenues
5) Increased profitability
Give some examples of RFID use.
track livestock
track inventory at retailers
track marathon runner’s times
Give an advantage of level production.
manpower and equipment are used efficiently at lower costs.
If a firm uses level production with seasonal sales, what happens to inventory as sales decline?
As sales decline, inventory will increase.
What happens when actual sales are greater than forecasted sales?
Production schedules might have to be revised upward
Accounts receivable will rise
Inventory will decline
Why is more use made of short-term financing?
short term interest rates are generally lower than long term interest rates, and most firms do not have basic access to capital markets.
What combination of asset structures and financing patterns is likely to create the least volatile earnings? The most volatile earnings?
Least: Liquid assets and heavy long term borrowing

Most:Illiquid assets and heavy short term borrowing

How can you compensate for the risk exposure due to heavy short-term borrowing?
carry highly liquid assets

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