CFM Treasury & Working Capital Management 1 — Questions and Answers
Question 1: What is the primary objective of treasury management?
- Maximizing short-term profits from financial market trades
- Ensuring the company has sufficient liquidity while managing financial risks efficiently (Correct answer)
- Minimizing the company's tax liability
- Maximizing the return on the company's pension fund
Correct answer: Ensuring the company has sufficient liquidity while managing financial risks efficiently
Treasury management ensures the company has adequate liquidity to meet obligations, manages financial risks (interest rate, FX, credit), and optimizes the cost of capital.
Question 2: What is working capital defined as?
- Total assets minus total liabilities
- Current assets minus current liabilities (Correct answer)
- Cash and equivalents plus short-term investments
- Long-term assets minus long-term debt
Correct answer: Current assets minus current liabilities
Working capital is calculated as current assets minus current liabilities, representing the short-term liquidity available to fund day-to-day operations.
Question 3: What is days payable outstanding (DPO)?
- Average number of days customers take to pay the company
- Average number of days a company takes to pay its suppliers (Correct answer)
- Number of days inventory is held before sale
- Number of days to convert sales to cash
Correct answer: Average number of days a company takes to pay its suppliers
DPO measures how long a company takes to pay its accounts payable, calculated as (accounts payable ÷ COGS) × days in the period.
Question 4: Which of the following increases a company's working capital?
- Paying down accounts payable with cash
- Collecting outstanding receivables
- Purchasing inventory on credit
- Issuing long-term bonds and using proceeds to buy inventory (Correct answer)
Correct answer: Issuing long-term bonds and using proceeds to buy inventory
Issuing long-term bonds increases cash (a current asset) without increasing current liabilities, thereby increasing working capital.
Question 5: What is an interest rate swap?
- Exchanging one currency for another at a fixed rate
- A derivative where two parties exchange fixed-rate and floating-rate interest payments on a notional principal (Correct answer)
- A bond refinancing where fixed coupons are replaced with variable ones
- A bank agreement to cap interest rate exposure
Correct answer: A derivative where two parties exchange fixed-rate and floating-rate interest payments on a notional principal
An interest rate swap involves exchanging a fixed interest rate for a floating rate (or vice versa) on a notional principal amount, allowing companies to manage rate risk without refinancing debt.
Question 6: What is a commercial paper (CP) program used for in corporate treasury?
- Long-term capital markets financing for major acquisitions
- Short-term unsecured borrowing by investment-grade companies to fund working capital (Correct answer)
- Asset-backed financing collateralized by receivables
- Subordinated debt financing for leveraged buyouts
Correct answer: Short-term unsecured borrowing by investment-grade companies to fund working capital
Commercial paper is a short-term (typically 1–270 days) unsecured promissory note issued by investment-grade companies to fund short-term working capital needs.
CFM Treasury & Working Capital Management 1
What is the primary objective of treasury management?