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Copyright©2005byTheMcGraw-HillCompanies,Inc.S-211Chapter6DiscussionQuestions6-1.Explainhowrapidlyexpandingsalescandrainthecashresourcesofafirm.Rapidlyexpandingsaleswillrequireabuildupinassetstosupportthegrowth.Inparticular,moreandmoreoftheincreaseincurrentassetswillbepermanentinnature.Anonliquidatingaggregatestockofcurrentassetswillbenecessarytoallowforfloordisplays,multipleitemsforselection,andotherpurposes.Alloftheseassetinvestmentscandrainthecashresourcesofthefirm.6-2.Discusstherelativevolatilityofshort-andlong-terminterestrates.Figure6-10showsthelong-runviewofshort-andlong-terminterestrates.Normally,short-termratesaremuchmorevolatilethanlong-termrates.6-3.Whatisthesignificancetoworkingcapitalmanagementofmatchingsalesandproduction?Ifsalesandproductioncanbematched,thelevelofinventoryandtheamountofcurrentassetsneededcanbekepttoaminimum;therefore,lowerfinancingcostswillbeincurred.Matchingsalesandproductionhastheadvantageofmaintainingsmalleramountsofcurrentassetsthanlevelproduction,andthereforelessfinancingcostsareincurred.However,ifsalesareseasonalorcyclical,workerswillbelaidoffinadecliningsalesclimateandmachinery(fixedassets)willbeidle.Hereliesthetradeoffbetweenlevelandseasonalproduction:Fullutilizationoffixedassetswithskilledworkersandmorefinancingofcurrentassetsversusunusedcapacity,trainingandretrainingworkers,withlowerfinancingforcurrentassets.6-4.Howisacashbudgetusedtohelpmanagecurrentassets?Acashbudgethelpsminimizecurrentassetsbyprovidingaforecastofinflowsandoutflowsofcash.Italsoencouragesthedevelopmentofascheduleastowheninventoryisproducedandmaintainedforsales(productionschedule),andaccountsreceivablesarecollected.Thecashbudgetallowsustoforecastthelevelofeachcurrentassetandthetimingofthebuildupandreductionofeach.6-5.Themostappropriatefinancingpatternwouldbeoneinwhichassetbuildupandlengthoffinancingtermsareperfectlymatched.Discussthedifficultyinvolvedinachievingthisfinancingpattern.Onlyafinancialmanagerwithunusualinsightandtimingcoulddesignaplaninwhichassetbuildupandthelengthoffinancingtermsareperfectlymatched.Copyright©2005byTheMcGraw-HillCompanies,Inc.S-212Onewouldneedtoknowexactlywhatpartofcurrentassetsaretemporaryandwhatpartarepermanent.Furthermore,oneisneverquitesurehowmuchshort-termorlong-termfinancingisavailableatalltimes.Evenifthiswereknown,itwouldbedifficulttochangethefinancingmixonacontinualbasis.6-6.Byusinglong-termfinancingtofinancepartoftemporarycurrentassts,afirmmayhavelessriskbutlowerreturnsthanafirmwithanormalfinancingplan.Explainthesignificanceofthisstatement.Byestablishingalong-termfinancingarrangementfortemporarycurrentassets,afirmisassuredofhavingnecessaryfundingingoodtimesaswellasbad,thuswesaythereislowrisk.However,long-termfinancingisgenerallymoreexpensivethanshort-termfinancingandprofitsmaybelowerthanthosewhichcouldbeachievedwithasynchronizedornormalfinancingarrangementfortemporarycurrentassets.6-7.Afirmthatusesshort-termfinancingmethodsforaportionofpermanentcurrentassetsisassumingmoreriskbutexpectshigherreturnsthanafirmwithanormalfinancingplan.Explain.Byfinancingaportionofpermanentcurrentassetsonashort-termbasis,weruntheriskofinadequatefinancingintightmoneyperiods.However,sinceshort-termfinancingislessexpensivethanlong-termfunds,afirmtendstoincreaseitsprofitabilityoverthelongrun(assumingitsurvives).Inanswertotheprecedingquestion,westressedlessriskandlessreturn;heretheemphasisisonriskandhighreturn.6-8.Whatdoesthetermstructureofinterestratesindicate?Thetermstructureofinterestratesshowstherelativelevelofshort-termandlong-terminterestratesatapointintime.Itisoftenreferredtoasayieldcurve.6-9.Whatarethreetheoriesfordescribingtheshapeofthetermstructureofinterestrates(theyieldcurve)?Brieflydescribeeachtheory.Liquiditypremiumtheory,themarketsegmentationtheory,andtheexpectationstheory.Theliquiditypremiumtheoryindicatesthatlong-termratesshouldbehigherthanshort-termrates.Thispremiumoflong-termratesovershort-termratesexistsbecauseshort-termsecuritieshavegreaterliquidity,andthereforehigherrateshavetobeofferedtopotentiallong-termbondbuyertoenticethemtoholdtheselessliquidandmorepricesensitivesecurities.Copyright©2005byTheMcGraw-HillCompanies,Inc.S-213ThemarketsegmentationtheorystatesthatTreasurysecuritiesaredividedintomarketsegmentsbythevariousfinancialinstitutionsinvestinginthemarket.Thechangingneeds,desires,andstrategiesoftheseinvestorstendtostronglyinfluencethenatureandrelationshipofshort-andlong-termrates.Theexpectationshypothesismaintainsthattheyieldsonlong-termsecuritiesareafunctionofshort-termrates.Theresultofthehypothesisisthatwhenlong-termratesaremuchhigherthanshort-termrates,themarketissayingthatisexpectsshort-termratestorise.Conversely,whenlong-termratesarelowerthanshort-termrates,themarketisexpectingshort-termratestofall.6-10.Sincethemiddle1960s,corporateliquidityhasbeendeclining.Whatreasonscanyougiveforthistrend?Thedecreaseisliquiditycanbetracedinparttomoreefficientinventorymanagementsuchasjust-in-timeinventoryandpointofsalesterminalsthatprovidebetterinventorycontrol.Thedeclineinwo