Question

In: Finance

1. With a full capacity, the need of additional funds of a firm is reduced by...

1. With a full capacity, the need of additional funds of a firm is reduced by

a) Spontaneous growth of current liabilities

b) Spontaneous growth of current assets

c) A sharp increase in forecasted sales

d) A moderate growth of dividends

2. For any positive growth in forecasted sales, which of the following firm will most likely require no immediate financing?

a) Firms with short production cycles

b) Firms with an under-utilization of its fixed assets

c) Firms with a high degree of profitability

d) Firms with operations at 100% capacity

3. The internal rate of return (IRR) is a specific discount rate that makes the project’s NPV

a) Equal to the cost of capital

b) Positive

c) Negative

d) Equal to zero

Expert Solution

1. when a firm is operating at it's full capacity , the need for additional funds will reduce when there will be a spontaneous growth in current assets. current assets comprises of cash, accounts receivables, inventory.

the correct option is option B.

growth of current liabilities will increase and not decrease its need for additional funds. a increase in forecasted sales is just forecast and will have no sizeable benefit on the firm. growth of dividends benefits the shareholders , it will have no effect on the firm's need for funds because only if a firm has surplus cash it will declare additional dividends.

2. the correct option is option a .

a firm with under utilization of assets is bad so it may require additional funds to operate at full capacity. even if a firms have operations at 100% capacity what if , it is not generating enough profits so it might be in need for additional funds. since, a firm with high profitability may also require additional financing if too much money is blocked in the production process as a result financing may be required.

but if a firm has a short production cycle, that is the time between the conversion of raw materials into finished products is small , the company can meet the increase in the forecasted sales as well, without any additional working capital requirements .

3. the IRR is the rate at whuch the NPV is zero.

the NPV, is calculated by subtracting the initial investment by the present value of the discounted cash flows when discounted at the IRR, will provide a NPV of zero.

the correct option is d

jeff jeffy answered 2 years ago

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