Financial Management (OOBB 402)-Semester IV
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1 Explain why debt is usually considered the cheapest source of financing available?
2 Differentiate between financial and business risks?
3 Discuss the different approaches of financing of working capital requirements?
4 Describe any two methods of incorporating risk in capital budgeting decisions?
5 Explain the merits of using market value weights in computing the weighted average cost of capital?
Case Detail :
Working capital—Do you have enough?
Lending institutions are scrutinizing an operation’s working capital status as part of the lending decision. Now more than ever, it’s time to do a little scrutinizing yourself. When I hit the road to speak, one of the most important slides I regularly use highlights how lending criteria has changed since the financial crisis. To illustrate that point, the slide includes a quote from Nick Parsons, head of research with the National Australia Bank: “So capitalism has changed…the owner or the custodian of capital [i.e. lending institutions] is much more careful about where they use that capital.”
To that end, most readers have likely experienced increased scrutiny from their lenders in this post-crisis world. And one of the key criteria that lenders use to make decisions revolves around availability of working capital within any operation; working capital being a function of current assets less current liabilities. It’s a measure of an operation’s buffer to meet its short-term obligations, hence the importance to lenders.
Perhaps equally important, it’s a key indicator of cash reserve availability to meet unexpected emergencies. Thus, it is an important component of risk management to ensure business continuity within the operation without the need to borrow additional funds. As an example, albeit simplified, a pickup is typically a critical operational asset for most cow-calf operations. What if it catches on fire and suddenly needs to be replaced, else the cows don’t get fed? After insurance provides some portion towards replacement, does the operation have sufficient working capital to meet the remainder of the obligation? This type of assessment has become more important to lenders since the financial crisis.
This week’s graph highlights USDA’s updated aggregate working capital estimates in agriculture. Clearly, as last week’s illustration depicts, declining revenue has taken a big hit out of working capital reserves for agriculture. Working capital has declined nearly 50% – the loss exceeds $82 billion in just three years. That’s a concerning trend – and if it continues, will clearly have implications in the coming years.
What are you doing to maintain strong cash and working capital reserves amidst declining revenue? What new expectations do you your lenders have during the past several years and going into 2017? How will you adjust going forward? Leave your thoughts in the comments section below.
- Provide the brief summary of the case in your own words?
- What new expectations do your lenders have during the past several years and going into future?
- What should be done to maintain strong cash and working capital reserves amidst declining revenue?
” .. are your business scores that come from your Income Statement and Balance Sheet, not the Cash Flow Statement.”
Select one:
a. Marks
b. Financial Scores
c. Points
d. Ratios
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“A part of the organisation where the manager has responsibility for generating revenues, controlling costs and producing a satisfactory return on capital invested in the division.”
Select one:
a. Brekarage
b. Brokerage
c. Division
d. Recasting
“Business practices designed by companies to make production and delivery systems more competitive in world markets by eliminating or minimizing waste, errors, and costs.”
Select one:
a. Re-engineering
b. Restructuring
c. Revaluation
d. Recasting
“Credit analysis, or the assessment of creditworthiness, is undertaken by analysing and evaluating information relating to a customer s history?”
Select one:
a. Non-Financial
b. Non-Monetary
c. Financial
d. Monetary
“Liquid funds, for example cash, earn no return and so will not increase profitability. “
Select one:
a. TRUE
b. FALSE
c. rare
d. Sometimes
“Rate risk refers to the fact that when short-term finance is renewed, the rates may vary when compared to the .. rate. “
Select one:
a. Current
b. Previous
c. Accounting
d. Industry
“The factors to be considered in formulating a trade receivables policy relate to credit analysis, credit control and receivables collection.”
Select one:
a. TRUE
b. Sometimes
c. Rare
d. FALSE
“The length of the cash .. depends on working capital policy in relation to the level of investment in working capital, and on the nature of the business operations of a company.”
Select one:
a. requirement
b. Operating Cycle
c. disbursal
d. Management
“The main reason that companies fail, though, is because they run out of .”
Select one:
a. Customers
b. Inventory
c. Cash
d. Stock
“The objective of liquidity ensures that companies are able to meet their liabilities as they fall due, and thus remain in business.”
Select one:
a. Rare
b. TRUE
c. Sometimes
d. FALSE
“Working capital investment policy is concerned with the level of investment in assets, with one company being compared with another.”
Select one:
a. Permanent
b. Temporary
c. Current
d. Fixed
Clear my choice
. Interest rate depends upon an index and increases or decreases.
Select one:
a. Stationary
b. Variable
c. Stable
d. Fixed
.. can also be used to cover some of the risks associated with giving credit to foreign customers.
Select one:
a. Locking
b. Awards
c. Insurance
d. Rewards
Aggressive working capital finance means using more . term finance
Select one:
a. Credit
b. Short
c. Medium
d. Long
Clear my choice
Baumol model and the Miller-Orr model belong to . Management.
Select one:
a. Cash
b. Credit
c. Inventory
d. Purchase
Cash in hand and cash at bank are examples of . Assets.
Select one:
a. Current
b. Fixed
c. Working
d. Permanent
17. Companies with the same business operations may have levels of investment in working capital as a result of adopting different working capital policies.
Select one:
a. lower
b. higher
c. different
d. Same
Current assets /Current liabilities describes . Ratio.
Select one:
a. Fixed Asset
b. Quick
c. Liquidity❤
d. Asset Turnover
19. Dividend has no relationship with the value of the firm as per Walter Model.
Select one:
a. Yes
b. No
c. Can’t say
d. Sometimes
20. Funds held in the form of cash do not earn a return.
Select one:
a. TRUE
b. Sometimes
c. FALSE
d. Rare
Clear my choice
Holding costs can be . by reducing the level of inventory held by a company.
Select one:
a. minimised
b. control
c. increased
d. reduced
Implicit cost is the cost of using the funds.
Select one:
a. TRUE
b. FALSE
c. None
d. Sometimes False
Inventory and receivables are both current assets.
Select one:
a. FALSE
b. Can’t Say
c. Sometimes
d. TRUE
Clear my choice
Is it right to say that good cash management is an essential part of good working capital management.
Select one:
a. Sometimes
b. never
c. Always
d. Can’t say
Clear my choice
JIT stands for just in . .
Select one:
a. totality
b. technical
c. tenure
d. time
26. Money paid (cost of credit) for the use of money.
Select one:
a. Interest
b. Dividend
c. Usage Money
d. Principal
Clear my choice
Optimum cash balance must reflect the expected need for cash in the next budget period.
Select one:
a. never
b. Always
c. Can’t say
d. Sometimes
28. Receiable management is all about?
Select one:
a. Cash Management
b. Loan Management
c. Credit Management
d. All
29. Sales made but not collected is known as .?
Select one:
a. A/Cs Payables
b. A/Cs Receivables
c. Both
d. None
30. Short-term finance is more flexible than long-term finance.
Select one:
a. TRUE
b. FALSE
c. Never
d. Sometimes
31. Short-term finance is more risky than long-term finance.
Select one:
a. FALSE
b. Never
c. Sometimes
d. TRUE
32. Short-term finance tends to be more .. than long-term finance.
Select one:
a. Softer
b. Rigid
c. Flexible
d. harder
33. The . principle suggests that long-term finance should be used for long-term investment.
Select one:
a. Matching
b. Traditional
c. Dual Aspect
d. Monetary
34. The cash operating cycle is the average … of time between paying trade payables and receiving cash from trade receivables.
Select one:
a. Lag
b. period
c. length
d. gap
35. The process of calculating present value of projected cash flows.
Select one:
a. Discounting
b. Brokerage
c. Benefit
d. Budgeting
36. The sales of a business or other form of revenue from operations of the business is called as .
Select one:
a. Profit
b. Margin
c. Contribution
d. Turnover
37. Traditionally the role of finance manager was restricted to . Of funds.
Select one:
a. Use
b. Procurement
c. Management
d. Administration
Wealth management and profit maximisation are the concepts.
Select one:
a. Yes
b. Sometimes
c. No
d. Can’t say
39. Which model belongs to cash management?
Select one:
a. LIFO
b. Miller Orr
c. HIFO
d. ABC
40. Which technique brings inventory and cash requirment drastically down?
Select one:
a. LIFO
b. Baumal
c. ABC
d. JIT
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