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Important Finance Questions

1. In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?
2. Explain the similarities and differences of lockbox systems and regional collection offices.
3. Why would a financial manager want to slow disbursement?
4. Why are Treasury bills a favorite place for financial managers to invest excess cash?
5. Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?
6. What are three quantitative measures that can be applied to the collection policy of the firm?
7. What are the 5 Cs of credit that are sometimes used by bankers and other to determine whether a potential loan will be repaid?
8. What does the EOQ formula tell us? What assumption is made about the usage rate for inventory?
9. Why might a firm keep a safety stock? What effect is it likely to have on carrying cost of inventory?
10. If a firm uses a just-in-time inventory system, what effect is that likely to have on the number and location of suppliers?
11. Under what circumstances would it be advisable to borrow money to take a cash discount?
12. Discuss the relative use of credit between large and small firms. Which group is generally in the net creditor position, and why?
13. How have new banking laws influenced competition?
14. What is the prime interest rate? How does the average bank customer fare in regard to the prime interest rate?
15. What does LIBOR mean? Is LIBOR normally higher or lower than the U.S. prime interest rate?
16. What advantages do compensating balances have for banks? Are the advantages to banks necessarily disadvantages to corporations?
17. A borrower is often confronted with a stated interest rate and an effective interest rate. What is the difference, and which one should be financial manager recognize as the true cost of borrowing?
18. Commercial paper may show up on corporate balance sheet as either a current asset or a current liability. Explain this statement.
19. What are the advantages of commercial paper in comparison with bank borrowing at the prime rate? What is a disadvantage?
20. What is the difference between pledging accounts receivable and factoring accounts receivable?

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1. In the management of cash and marketable securities, why should the primary concern be for safety and liquidity rather than maximization of profit?
Cash and marketable securities are an important part of working capital management. Liquidity and safety is important so that these can be used to make payments at a very short notice.
2. Explain the similarities and differences of lockbox systems and regional collection offices.
In the lockbox the clients deposit their checks and the lockbox is cleared once a day, this facility is provided by a partner, a customer, a bank or even the post office.
3. Why would a financial manager want to slow disbursement?
The financial manager would want to slow disbursement so that the liquidity of the company is not compromised. One of the strategies of working capital management in times of cash shortage is to speed up the receipts and slow down the disbursements.
4. Why are Treasury bills a favorite place for financial managers to invest excess cash?
Treasure bills are a favorite place for financial managers to invest excess cash in is because these provide a reasonable return and can be sold off in open market for cash. Unlike stocks, treasury bills fluctuate far less in value and so provide better liquidity.
5. Explain why the bad debt percentage or any other similar credit-control percentage is not the ultimate measure of success in the management of accounts receivable. What is the key consideration?
The key is the number of days in which the credit is collected by the company. Bad debt percentage alone is not ...

Solution Summary

This posting discusses 20 important questions related to finance... It also provides you with a detailed explanation for these answers.

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