1. Explain why debt is usually considered the cheapest source of financing available?
2. Differenciate 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 weighted average cost of capital?
6. Explain any two methods of cash management?
7. State with illustration the practical application of time value of money?
8. Critically explain the factors affecting dividend decisions?
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.
1. Provide the brief summary of the case in your own words?
2. What new expectations do your lenders have during the past several years and going into future?
3. What should be done to maintain strong cash and working capital reserves amidst declining revenue?
Question No. 1 Marks - 10
Dividend has no relationship with the value of the firm as per Walter Model.
- Can´t say
Question No. 2 Marks - 10
Wealth management and profit maximisation are the ………………… concepts.
- Can´t say
Question No. 3 Marks - 10
Traditionally the role of finance manager was restricted to …………. Of funds.
Question No. 4 Marks - 10
The sales of a business or other form of revenue from operations of the business is called as ………… .
Question No. 5 Marks - 10
Implicit cost is the cost of using the funds.
- Sometimes False
Question No. 6 Marks - 10
The process of calculating present value of projected cash flows.
Question No. 7 Marks - 10
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.
Question No. 8 Marks - 10
Business practices designed by companies to make production and delivery systems more competitive in world markets by eliminating or minimizing waste, errors, and costs.
Question No. 9 Marks - 10
Cash in hand and cash at bank are examples of …………. Assets.
Question No. 10 Marks - 10
Baumol model and the Miller-Orr model belong to ……………. Management.
Question No. 11 Marks - 10
Current assets /Current liabilities describes ………. Ratio.
- Fixed Asset
- Asset Turnover
Question No. 12 Marks - 10
Inventory and receivables are both current assets.
- Can´t Say
Question No. 13 Marks - 10
Credit analysis, or the assessment of creditworthiness, is undertaken by analysing and evaluating information relating to a customer’s ……………… history?
Question No. 14 Marks - 10
The objective of liquidity ensures that companies are able to meet their liabilities as they fall due, and thus remain in business.
Question No. 15 Marks - 10
Funds held in the form of cash do not earn a return.
Question No. 16 Marks - 10
Holding costs can be ………………. by reducing the level of inventory held by a company.
Question No. 17 Marks - 10
Which technique brings inventory and cash requirment drastically down?
Question No. 18 Marks - 10
Which model belongs to cash management?
- Miller Orr
Question No. 19 Marks - 10
JIT stands for just in …………. .
Question No. 20 Marks - 10
The factors to be considered in formulating a trade receivables policy relate to credit analysis, credit control and receivables collection.
Question No. 21 Marks - 10
Companies with the same business operations may have …………… levels of investment in working capital as a result of adopting different working capital policies.
Question No. 22 Marks - 10
Receibles management is all about?
- Cash Management
- Loan Management
- Credit Management
Question No. 23 Marks - 10
The main reason that companies fail, though, is because they run out of ……………… .
Question No. 24 Marks - 10
Is it right to say that good cash management is an essential part of good working capital management.
- Can´t say
Question No. 25 Marks - 10
Optimum cash balance must reflect the expected need for cash in the next budget period.
- Can´t say
Question No. 26 Marks - 10
The cash operating cycle is the average …………... of time between paying trade payables and receiving cash from trade receivables.
Question No. 27 Marks - 10
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.
- Operating Cycle
Question No. 28 Marks - 10
Liquid funds, for example cash, earn no return and so will not increase profitability.
Question No. 29 Marks - 10
………………….. are your business’ “scores” that come from your Income Statement and Balance Sheet, not the Cash Flow Statement.
- Financial Scores
Question No. 30 Marks - 10
Working capital investment policy is concerned with the level of investment in ………… assets, with one company being compared with another.
Question No. 31 Marks - 10
……………….. can also be used to cover some of the risks associated with giving credit to foreign customers.
Question No. 32 Marks - 10
Aggressive working capital finance means using more …………. term finance
Question No. 33 Marks - 10
Short-term finance is more flexible than long-term finance.
Question No. 34 Marks - 10
Short-term finance tends to be more ………….. than long-term finance.
Question No. 35 Marks - 10
Sales made but not collected is known as…………….?
- A/Cs Payables
- A/Cs Receivables
Question No. 36 Marks - 10
…………. Interest rate depends upon an index and increases or decreases.
Question No. 37 Marks - 10
Short-term finance is more risky than long-term finance.
Question No. 38 Marks - 10
Rate risk refers to the fact that when short-term finance is renewed, the rates may vary when compared to the ………….. rate.
Question No. 39 Marks - 10
The …………. principle suggests that long-term finance should be used for long-term investment.
- Dual Aspect
Question No. 40 Marks - 10
Money paid (cost of credit) for the use of money.
- Usage Money