Answered: 1. Explain the profitability-risk…

Business

Accounting

1. Explain the profitability-risk trade-off of alternative levels of working capital balances.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 10QTD

See similar textbooks

Related questions

Q: Under-capitalization of a business entity causes: Select one from the following options. a situation…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Which combination of investment policy and financing policy related to working capital provides the…

A: RELAXED AND CONSERVATIVE Relaxed policy estimates the current assets for achieving the target…

Q: 7. A. which of the following working capital financing policies subjects the firm to a greater risk?…

A: A. Firm needs to match the financial obligation with the accounting principles. The permanent…

Q: Explain how to classify working capital according to its “components” and according to “time” (i.e.,…

A: Working capital is the capital of excess of current assets over current liabilities. Working capital…

Q: Why do come companies prefer to use discounting in their capital investment decisions? What is a…

A: Capital Investment:-It is an investment that a company made to purchase its fixed assets or…

Q: Define each of the following terms:a. Capital; capital structure; optimal capital structureb.…

A: Hi, since there are multiple questions posted, we will answer first five questions. If you want any…

Q: The negative working capital occurs when the اخترأحد الخيارات a. None of the options b. Current…

A: “Since you have posted a many questions, we will solve first question for you. To get the remaining…

Q: Which of the following best characterizes this firm’s policy of financing assets? a)Relaxed policy…

A: Financial Management: Financial management comprises of two words i.e. Finance and management.…

Q: True or False The CFROI is a measure of the dollar surplus value created by an investment or a…

A: The answer is stated below:

Q: A working capital financing policy that finances almost all assets with long-term capital a.…

A: Working capital is the difference between current assets and current liabilities.…

Q: onsidering short term financing for working capital requirement. What are three key factors that…

A: Short-term financing: Short-term financing deals with raising of cash needed for a shorter periods…

Q: A qualitative factor (as opposed to a quantitative factor) that managment should consider when…

A: Qualitative factors are the ones which can be measured in quality. Where as quantitative factors can…

Q: Which of the following is NOT a major step in the capital budgeting process? a. generating…

A: Capital budgeting process is decisions on longer term investment planning and involves complex…

Q: When establishing their optimal capital structure, firms should strive to minimize the amount of…

A: The capital structure is said to be optimum capital structure when the firm has selected such a…

Q: In the aggressive approach to current asset financing, a. fixed assets and permanent current assets…

A: A company's asset financing strategy may be aggressive. The firm is said to be following an…

Q: The cost of capital used in capital budgeting should reflect the average cost of the various sources…

A: Cost of capital reflects long term funds like debt and equity yo acquire assets

Q: For a firm, the Optimal Capital Structure means to choose between equity and bonds so to a.…

A: Optimal capital structure is that mix of debt and equity that enables a company to maximize its…

Q: 1. In _____ approach, the capital design choice is pertinent to the valuation of the firm. a.…

A: “Since you have asked multiple questions, we will solve the one question for you. If you want any…

Q: The Payback Method in capital budgeting ignores: a The expected future cash flows of the firm. b…

A: In capital budgeting, the payback period is the period of time required for the return on an…

Q: Which of the following-would be consistent with a more aggressive approach to financing working…

A: Working capital refers to the short-term capital required by a company to meet its immediate…

Q: Which combination of investment policy and financing policy related to working capital provides the…

A: A relaxed current asset investment policy is one under which relatively large amounts of current…

Q: Determining optimum capital structure is a. An investment decision b. A financing decision c. A…

A: An investment decision is related to the management of the firm's funds into investment in assets.…

Q: What does indifference point mean in EBIT-EPS analysis? Select one: O a. The point of indifference…

A: Since you have asked multiple questions, we will solve the first question for you. If you want any…

Q: Short term investment decisions are also called as Select one: O a. Liquidity decision b. Finance…

A: Investment decisions can be both short term and long term

Q: What risks do common stockholders take that other suppliers of long term capital do not? Discuss the…

A: Common stockholders are the real owner of a company because these are the people who invest in the…

Q: The overall capitalisation rate and the cost of debt remain constant for all degrees of financial…

A: Capital structure refers to the combination of debt and equity in the mode of financing of the…

Q: Evaluate the effect of gearing on cost of capital and firm value taking into consideration the…

A: The term “gearing” can be defined as the tool to gauge company’s financial leverage by emphasizing…

Q: The calculation of a hurdle rate when looking capital expenditures involves looking at what…

A: Generally companies take up new projects only when the project passes the hurdle rate (HR). As the…

Q: A firm will have a financing _________ whenever projected assets are greater than projected…

A: When projected assets is more than projected liabilities and equity, the is shortage of funds for…

Q: 3. Which of the following are acceptable criteria for determining the weights in the weighted…

A: WACC is required for estimating the cost of acquiring the funds to do the business.

Q: . Qualitative considerations that may influence capital investment analysis include the investment…

A: Note: “Since you have asked multiple questions, we will solve the first question for you. If you…

Q: What capital budgeting rule is a simple but imperfect attempt to solve the capital rationing…

A: Answer: Option c. Payback rule Explanation: Payback rule is a very simple method which is used to…

Q: Which of the following statements relating to working capital financing is not correct? A.…

A: 1. A conservative policy uses long-term debt to finance non-current assets. A conservative policy…

Q: Identify the corect statement: O H EBIT is expected to be below the indifference point, the firm…

A: EBIT - EPS indifferent point is the EBIT level at which EPS is same

Q: Choose from the following that is NOT a major element of the working capital cycle? A…

A: Working Capital is the difference between the company’s current assets and the current liabilities.

Q: . Leverage involves using fixed costs to magnify the potential return to a firm. Explain the hedging…

A: Answer:- Leverage meaning:- Leverage is one of the investing technique that generally involves…

Q: The optimal capital structure for firms in stable industries can reasonably contain ________________…

A: Option A: More Debt - If debt will be more then Fixed charges of Interest will be more. Stable…

Q: The working capital financing policy that would put a company to the highest level of risk is the…

A: Introduction:- Working capital play vital role in every business organization. Which are used to…

Q: Cost of capital O can be calculated with CAPM O is different of the WACC reflects only equity…

A: Solution 1:- Cost of capital means the minimum rate of return required by the fund providers, which…

Q: In capital budgeting, sensitivity analysis is used to: O determine whether an investment is…

A: Solution: In capital budgeting, sensitivity analysis is used to "see how a decision would be…

Q: Which of the following statements is false? A. Net incomes are not cash flows. Financial Managers…

A: Capital budgeting are the process through which the firm decide which project to take up.

Q: A firm’s weighted average cost of capital should not do which one of the following? Group of answer…

A: Weighted average cost of capital means the cost of raising the various fund taking the amount of…

Question

1. Explain the profitability-risk trade-off of alternative levels of working capital balances.

2. Explain the profitability-risk trade-off of alternative methods of financing a given
working capital investment.

3. Discuss the profitability versus risk trade-offs associated with alternative levels of working capital investment.

A. which of the following working capital financing policies subjects the firm to a greater
risk?
i. Financing permanent current assets with short-term debt
ii. Financing fluctuating current assets with long-term debt
B. Which policy will produce the higher expected profitability?

Video Video

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

This is a popular solution!

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

7. A. which of the following working capital financing policies subjects the firm to a greater risk? i. Financing permanent current assets with short-term debt ii. Financing fluctuating current assets with long-term debt B. Which policy will produce the higher expected profitability?
Determining optimum capital structure is a. An investment decision b. A financing decision c. A dividend decision d. liquidity decision
Buying assets that yield a return greater than the minimum acceptable hurdle rate is a part of which core principles of Finance. a. Financing principle b. Investment principle c. Dividend principle d. Cost principle
A firm's overall cost of financing is equal to: I. Its weighted-average cost of capitalII. The required rate of return of its capital providersIII. The returns being generated by investments Select one: A. I only B. I and II only C. I and III only D. I, II, and III
7. How are net working capital, liquidity, technical insolvency and risk related? 8. Briefly explain the essentials of sound working capital management. 9. Describe working capital management, and explain different approaches to finance working capital requirements.
1. Define and identify the components of:a. Operating cycleb. Cash conversion cycle2. What is the impact of longer cash conversion cycles on a firm’s working capital needs?3. Explain the profitability-risk trade-off of alternative levels of working capital balances.4. Explain the profitability-risk trade-off of alternative methods of financing a given working capital investment.5. Why does the typical firm need to make investments in working capital?6. Discuss the profitability versus risk trade-offs associated with alternative levels of working capital investment.7. A. which of the following working capital financing policies subjects the firm to a greater risk?i. Financing permanent current assets with short-term debtii. Financing fluctuating current assets with long-term debt B. Which policy will produce the higher expected profitability?
What refers to the way the company’s assets are financed and includes both long-term as well as short-term sources of funds Select one: a. Profit b. None of the option c. Capital structure d. Working Capital e. Capital Budgeting
Define each of the following terms:a. Capital; capital structure; optimal capital structureb. Business risk; financial riskc. Financial leverage; operating leverage; operating breakevend. Hamada equation; unlevered betae. Symmetric information; asymmetric informationf. Modigliani-Miller theoriesg. Trade-off theory; signaling theoryh. Reserve borrowing capacity; pecking orderi. Windows of opportunity; net debt
The working capital financing policy that would put a company to the highest level of risk is the one where the company finances a. permanent current assets with short-term liabilities b. temporary current assets with short-term liabilities c. permanent current assets with long-term liabilities d. temporary current assets with long-term liabilities
1. Discuss the reasons why capital rationing may arise 2. Discuss the meaning of the term “relevant cash flow” in the context of investment appraisal, giving examples to illustrate your discussion.
The overall capitalisation rate and the cost of debt remain constant for all degrees of financial leverage is advocated by: Choose the correct. A. Traditional Approach B. Net Income Approach C. Net operating Income Approach D. M-M Approach
8.-What is the meaning of current liabilities in Working Capital Management? A) Source of financing of its current assets. B) Source of financing of its fixed assets C) Source of financing of stockholders' equity D) Source of financing of its long-term liabilities. (Choose one option)