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Complete the following tasks.
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1. In finance, "working capital" means the same thing as
a total assets.
b fixed assets.
c current assets.
d current assets minus current liabilities.
2. Which of the following would be consistent with a more aggressive approach to financing working capital?
a Financing short-term needs with short-term funds.
b Financing permanent inventory buildup with long-term debt.
c Financing seasonal needs with short-term funds.
d 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?
a Increasing current assets while lowering current liabilities.
b Increasing current assets while incurring more current liabilities.
c Reducing current assets, increasing current liabilities, and reducing long-term debt.
d Replacing short-term debt with equity.
4. Which of the following illustrates the use of a hedging (or matching) approach to financing?
a Short-term assets financed with long-term liabilities.
b Permanent working capital financed with long-term liabilities.
c Short-term assets financed with equity.
d 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 a trade-off between profitability and risk.
b a trade-off between liquidity and marketability.
c a trade-off between equity and debt.
d a trade-off between short-term versus long-term borrowing.
6. __________ varies inversely with profitability.
a liquidity.
b risk.
c blue.
d false.
7. Spontaneous financing includes
a accounts receivable.
b accounts payable.
c short-term loans.
d a line of credit.
8. Permanent working capital
a varies with seasonal needs.
b includes fixed assets.
c is the amount of current assets required to meet a firm's long-term minimum needs.
d includes accounts payable.
9. Financing a long-lived asset with short-term financing would be
a an example of "moderate risk - moderate (potential) profitability" asset financing.
b an example of "low risk - low (potential) profitability" asset financing.
c an example of "high risk - high (potential) profitability" asset financing.
d an example of the "hedging approach" to financing.
10. Net working capital refers to
a total assets minus fixed assets.
b current assets minus current liabilities.
c current assets minus inventories.
d current assets.
Paste your answers accordingly.
Complete the following tasks.
1. All of the following influence capital budgeting cash flows EXCEPT:
a accelerated depreciation.
b salvage value.
c tax rate changes.
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d method of project financing used.
2. In proper capital budgeting analysis we evaluate incremental
a accounting income.
b cash flow.
c earnings.
d operating profit.
3. The estimated benefits from a project are expressed as cash flows instead of income flows because:
a it is simpler to calculate cash flows than income flows.
b it is cash, not accounting income, that is central to the firm's capital budgeting decision.
c this is required by the Internal Revenue Service.
d this is required by the Securities and Exchange Commission.
4. In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT:
a sunk costs.
b opportunity costs.
c changes in working capital resulting from the project, net of spontaneous changes in
current liabilities.
d effects of inflation.
5. A capital investment is one that
a has the prospect of long-term benefits.
b has the prospect of short-term benefits.
c is only undertaken by large corporations.
d applies only to investment in fixed assets.
6. Taxing authorities allow the fully installed cost of an asset to be written off for tax purposes. This amount is called the asset's
a cost of capital.
b initial cash outlay.
c depreciable basis.
d sunk cost.
7. Adam Smith is considering automating his pin factory with the purchase of a $475,000 machine. Shipping and installation would cost $5,000. Smith has calculated that automation would result in savings of $45,000 a year due to reduced scrap and $65,000 a year due to reduced labor costs. The machine has a useful life of 4 years and falls in the 3-year property class for MACRS depreciation purposes. The estimated final salvage value of the machine is $120,000. The firm's marginal tax rate is 34 percent. The incremental cash outflow at time period 0 is closest to
a $280,000.
b $380,000.
c $480,000.
d $580,000.
8. (See information in Question #7 above.) The "cost" of this asset that, by law, may be written off over time "for tax purposes" is closest to
a $280,000.
b $380,000.
c $480,000.
d $580,000.
9. In general, if a depreciable asset used in business is sold for more than its depreciated (tax) book value, any amount realized in excess of book value but less than the asset's depreciable basis is considered a
a "capital gain" and is taxed at the corporate capital gains tax.
b "recapture of depreciation" and is taxed at the corporate capital gains rate.
c "capital gain" and is taxed at a rate equal to the firm's ordinary tax rate, or a maximum of
35 percent.
d "recapture of depreciation" and is taxed at the firm's ordinary income tax rate.
10. Under the Modified Accelerated Cost Recovery System (MACRS), an asset in the "5-year property class" would typically be depreciated over ____ years.
a four
b five
c six
d seven
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