Capital Management

Question 1

Which factor is most likely to lead a company to increase its leverage?

Answer 1

Tax shield benefits from debt financing

Tax shield benefits provide an incentive for companies to increase leverage by using debt, which has tax-deductible interest expenses.

Question 2

What impact does company size have on capital structure?

Answer 2

Larger companies can often borrow at lower rates.

Larger companies are generally more established and can borrow at lower rates due to lower perceived risk by lenders.

Question 3

True or False: Smaller companies usually have a higher debt capacity.

Answer 3

False

Smaller companies usually have a lower debt capacity due to higher risk.

Question 4

How does a just-in-time (JIT) inventory system affect a firm’s working capital requirement?

Answer 4

It reduces the amount of working capital tied up in inventory.

A JIT inventory system aligns inventory orders with production schedules, thereby reducing inventory on hand.

Question 5

Which financial ratio is best used to assess the efficiency of a firm’s credit policy?

Answer 5

Receivables turnover

Receivables turnover measures how effectively a company extends credit and collects debts.

Question 6

What is float in cash management?

Answer 6

The time delay between writing a check and the actual cash outflow

Float affects the timing of cash flows.

Question 7

What is the operating balance in the context of cash management?

Answer 7

The amount of cash the firm needs to pay its immediate bills

The operating balance is crucial for meeting short-term financial obligations.

Question 8

Why should a firm not carry too much cash?

Answer 8

To avoid incurring large opportunity costs

Holding too much cash can lead to opportunity costs, as the firm could invest the cash in assets that generate more value.

Question 9

What is a key consideration when setting credit terms?

Answer 9

The impact on the firm’s cash cycle and cash needs

Credit terms affect how long cash is tied up and thus impact the firm’s cash cycle and cash needs.

Question 10

What is a primary cost consideration when deciding on the level of inventory to hold?

Answer 10

The trade-off between holding costs and the risk of stockouts

This consideration is critical in inventory management.

Question 11

What is the effect of just-in-time (JIT) inventory systems on storage costs?

Answer 11

JIT systems reduce storage costs by minimizing inventory levels.

JIT systems reduce inventory levels to the minimum necessary, thus lowering storage space and costs.