Capital Management Q Flashcards
(10 cards)
Which factor is most likely to lead a company to increase its leverage?
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.
What impact does company size have on capital structure?
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.
How does a just-in-time (JIT) inventory system affect a firm’s working capital requirement?
It reduces the amount of working capital tied up in inventory
A JIT inventory system aims to align inventory orders with production schedules, thereby reducing the amount of inventory on hand and subsequently the amount of working capital tied up in inventory.
Which financial ratio is best used to assess the efficiency of a firm’s credit policy?
Receivables turnover
Receivables turnover measures how effectively a company extends credit and collects debts.
What is float in cash management?
The time delay between writing a check and the actual cash outflow
Float refers to the time delay between the issuance of a payment and the actual movement of funds, affecting the timing of cash flows.
What is the operating balance in the context of cash management?
The amount of cash the firm needs to pay its immediate bills
The operating balance is the amount of cash needed for immediate bill payments.
Why should a firm not carry too much cash?
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.
What is a key consideration when setting credit terms?
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.
What is a primary cost consideration when deciding on the level of inventory to hold?
The trade-off between holding costs and the risk of stockouts
One of the primary cost considerations is balancing the cost of holding inventory with the risk of running out of stock (stockouts), which can lead to missed sales and unsatisfied customers.
What is the effect of just-in-time (JIT) inventory systems on storage costs?
JIT systems reduce storage costs by minimizing inventory levels
JIT systems reduce inventory levels to the minimum necessary, thereby reducing the need for storage space and associated costs.
