CTP Working Capital Management 3 — Questions and Answers
Question 1: Which of the following is the BEST measure of a company's short-term liquidity?
- Debt-to-equity ratio
- Quick ratio (Correct answer)
- Return on assets
- Earnings per share
Correct answer: Quick ratio
The quick ratio (cash + marketable securities + receivables divided by current liabilities) measures ability to meet short-term obligations without relying on inventory liquidation.
Question 2: A company maintains excess cash in a money market fund rather than paying down its revolving credit facility. This decision is MOST justified when:
- The credit facility interest rate exceeds the money market yield
- Prepayment penalties on the revolver outweigh the interest savings (Correct answer)
- The company wants to maximize its net interest expense
- The credit facility has no available borrowing capacity
Correct answer: Prepayment penalties on the revolver outweigh the interest savings
If prepayment penalties on the revolving credit facility exceed the net interest cost of carrying idle cash, it may be cheaper to retain cash in a money market fund.
Question 3: What is the PRIMARY benefit of implementing a payment factory in a multinational company's treasury operations?
- It eliminates the need for a corporate bank account
- It centralizes payment processing to reduce bank fees and improve control (Correct answer)
- It allows subsidiaries to maintain fully independent banking relationships
- It increases the number of payment methods available to customers
Correct answer: It centralizes payment processing to reduce bank fees and improve control
A payment factory centralizes outgoing payments across subsidiaries, achieving economies of scale, reducing banking fees, and strengthening payment controls.
Question 4: Under the Economic Order Quantity (EOQ) model, ordering costs and carrying costs are EQUAL at the:
- Reorder point
- Safety stock level
- Optimal order quantity (Correct answer)
- Maximum inventory level
Correct answer: Optimal order quantity
The EOQ is the quantity at which total ordering costs equal total carrying costs, minimizing total inventory costs.
Question 5: A firm factors its receivables on a recourse basis. Which risk does the firm RETAIN?
- Collection risk
- Credit default risk of the customer (Correct answer)
- Currency conversion risk
- Interest rate risk on the factor's fee
Correct answer: Credit default risk of the customer
With recourse factoring, the seller retains the credit risk; if the buyer defaults, the seller must repurchase the receivable from the factor.
Question 6: Which working capital financing strategy is MOST aggressive in terms of liquidity risk?
- Financing permanent current assets with long-term debt
- Financing all current assets with short-term debt (Correct answer)
- Financing fixed assets with equity
- Financing temporary current assets with long-term debt
Correct answer: Financing all current assets with short-term debt
Financing all current assets, including permanent working capital, with short-term debt is the most aggressive strategy and creates significant rollover and liquidity risk.
Question 7: The primary purpose of a daily cash position report is to:
- Calculate quarterly earnings for financial reporting
- Determine the exact amount of long-term debt outstanding
- Identify surplus or deficit cash to guide same-day investment or borrowing decisions (Correct answer)
- Reconcile accounts payable with vendor invoices
Correct answer: Identify surplus or deficit cash to guide same-day investment or borrowing decisions
A daily cash position report aggregates bank balances, expected receipts, and disbursements so treasury can take timely action to invest surplus or cover shortfalls.
CTP Working Capital Management 3
Which of the following is the BEST measure of a company's short-term liquidity?