1.The economic order quantity (EOQ) formula can be modified to help a company decide the optimum balance of cash and marketable securities. The EOQ model assumes all, except*

a)The total demand for cash is known with certainty.

b)An opportunity cost is associated with holding cash, beginning with the first dollar.

c)Cash flow requirements are random.

d)The cost of a transaction is independent of the dollar amount of the transaction and interest rates are constant over the short run.

2.Which statement is incorrect?*

a.In finance, "working capital" means the same thing as current assets.

b.Current ratio is calculated as working capital divided by current liabilities.

c.Gross working capital represents current assets used in operations.

d.All of the above

e.None of the above

3.S1: More current assets lead to greater liquidity but yield lower returns. S2: More current liabilities lead to lesser liquidity but greater returns. (self constructed)*

a)both are false

b)both are true

c)S2 is true

d)S1 is true

4.Which transaction would increase the current ratio and increase net profit?*

a.cash is used to buy marketable securities

b.merchandise is sold on credit at 25% above cost

c.income tax due last year is paid in the current year

d.a stock dividend is paid

e.uncollectible accounts receivable are written off against allowance account

5.S1: Working capital management involves both setting working capital policy and carrying out that policy in day-to-day operations. S2: The primary objective of working capital management is to achieve a balance between risk and return*

a.both are false

b.S1 is true

c.S2 is true

d.both are true

6.Which combination of investment policy and financing policy related to working capital provides the highest potential for greater profits but entails the greatest risk?*

a)relaxed, conservative

b)restricted, aggressive

c)restricted, conservative

d)relaxed, aggressive

7.Determining the appropriate level of working capital of the firm requires*

a.offsetting the profitability of technical insolvency

b.maintaining a high proportion of liquid assets to total assets in order to maximize the return on total investments

c.changing the capital structure and dividend policy of the firm.

d.evaluating the risk associated with various levels of fixed assets and the types of debt used to finance those assets

8.Which of the following illustrates the use of hedging (or matching) approach to financing?*

a)Short-term assets financed with equity.

b)All assets financed with a 50% equity, 50% long-term debt mixture.

c)Permanent working capital financed with long-term liabilities.

Short-term assets financed with long-term liabilities