Chapter 16, Working Capital Management Video Solutions, Financial Management: Theory & Practice

Problem 1

Define each of the following terms:
a. Working capital; net working capital; net operating working capital
b. Relaxed policy; restricted policy; moderate policy
c. Permanent current operating assets; temporary current operating assets
d. Moderate (maturity matching) financing policy; aggressive financing policy; conservative financing policy
e. Inventory conversion period; average collection period; payables deferral period; cash conversion cycle
f. Cash budget; target cash balance
g. Transactions balances; compensating balances; precautionary balances
h. Trade discounts
i. Credit policy; credit period; credit standards; collection policy; cash discounts
j. Account receivable; days sales outstanding; aging schedule
k. Accruals; trade credit
1. Stretching accounts payable; free trade credit; costly trade credit
m. Promissory note; line of credit; revolving credit agreement
n. Commercial paper; secured loan

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01:29

Problem 2

What are the two principal reasons for holding cash? Can a firm estimate its target cash balance by summing the cash held to satisfy each of the two reasons?

Pragya Ahuja

Numerade Educator

04:34

Problem 3

Is it true that, when one firm sells to another on credit, the seller records the transaction as an account receivable while the buyer records it as an account payable and that, disregarding discounts, the receivable typically exceeds the payable by the amount of profit on the sale?

Puneet Prajapati

Numerade Educator

Problem 4

What are the four elements of a firm's credit policy? To what extent can firms set their own credit policies as opposed to accepting policies that are dictated by its competitors?

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Problem 5

What are the advantages of matching the maturities of assets and liabilities? What are the disadvantages?

James Kiss

Numerade Educator

01:09

Problem 6

From the standpoint of the borrower, is long-term or short-term credit riskier? Explain. Would it ever make sense to borrow on a short-term basis if short-term rates were above long-term rates?