Q&A Hero

Q: Which of the following is NOT a source of unsecured short-term credit? A) trade credit B) a line of credit C) floating lien D) commercial paper

Q: Which of the following loans provide the least amount of security to the lender? A) chattel mortgage B) factoring C) floating lien D) terminal warehouse agreement

Q: A company that forgoes the discount when credit terms are 2/10 net 60 is essentially borrowing money from his supplier for an additional A) 10 days. B) 50 days. C) 60 days. D) 70 days.

Q: An inventory loan agreement in which the inventories pledged as collateral are physically separated from the firm's other inventory and placed under the control of a third-party is called A) a floating lien agreement. B) a chattel mortgage agreement. C) a field warehouse agreement. D) a securitized inventory loan arrangement.

Q: Terminal warehouse agreements A) are particularly useful where large bulky items are used as collateral. B) give the lender a lien against all inventories while only removing representative items. C) remove control of the inventory from the borrower. D) are less costly than field warehouse agreements.

Q: The prime rate of interest is A) the rate the bank charges its most creditworthy borrowers. B) the rate the bank charges for money it borrows from the Federal Reserve Board. C) the rate the bank charges its average borrower. D) the rate the bank charges on home mortgages.

Q: The inventory loan agreement in which the lender can increase his or her security interest by having specific items of inventory identified in the loan agreement is called A) a floating lien agreement. B) a chattel mortgage agreement. C) a field warehouse agreement. D) inventory identification agreement.

Q: The inventory loan arrangement in which all of the borrower's inventories are used as collateral is termed a A) terminal warehouse agreement. B) floating lien agreement. C) chattel mortgage agreement. D) field warehouse financial agreement.

Q: Which item would constitute poor collateral for an inventory loan? A) lumber B) vegetables C) grain D) chemicals

Q: Which of the following statements regarding a line of credit is true? A) The purpose for which the money is being borrowed must be stated by the borrower. B) A line of credit agreement usually fixes the interest rate that will be applied to any extensions of credit. C) A line of credit agreement is a legal commitment on the part of the bank to provide the stated credit. D) Such agreements usually cover the borrower's fiscal year.

Q: Which of the following is NOT an advantage of trade credit? A) The amount of extended credit expands and contracts with the needs of the firm. B) The cost of forgoing the discount is less than the prime rate. C) Generally no formal agreements are involved in the extension of trade credit. D) Trade credit is very flexible.

Q: Which of the following sources of short-term financing is likely to have the highest interest rate? A) accounts receivable loan (pledging of accounts receivable) B) line of credit C) line of credit with a compensating balance D) commercial paper

Q: Hyper Retail Outlets sell goods on terms of net 40. The store's average monthly sales (all on credit) are $70,000. Hyper pledges all of its receivables to the bank, which advances 80% of the face value of the receivables at a rate of 2.5% above prime. The bank also charges a 1% processing fee on all receivables pledged. Hyper borrows the full amount possible, and the current prime rate is 5%. What is the annual percentage rate (APR) of using this source of financing for one full year? A) 23.5% B) 22.5% C) 21.8% D) 19.1%

Q: Which of the following sources of short-term financing is likely to have the lowest interest rate? A) accounts receivable loan (pledging of accounts receivable) B) line of credit C) line of credit with a compensating balance D) commercial paper

Q: Marley Financial plans to sell $50,000,000 of 120-day commercial paper, on which it expects to pay discounted interest at a rate of 5% per year. Dealer fees are expected to be $30,000. The effective cost of credit to Marley Financial is A) 5.27%. B) 5.64%. C) 6.22%. D) 7.53%.

Q: All of the following are potential advantages of commercial paper EXCEPT A) flexible repayment terms. B) lower interest rates than comparable sources of short-term financing. C) no compensating balance requirements. D) ability to borrow very large amounts.

Q: Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. What is the annual percentage rate for this financing assuming discounted interest? A) 14.29% B) 12.98% C) 11.67% D) 10.53%

Q: Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. What will be the annual percentage rate, or APR, for this financing? A) 10.00% B) 12.12% C) 10.67% D) 13.33%

Q: Brown Inc. needs to borrow $250,000 for the next 6 months. The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance. Currently, Brown Inc. has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs. How much will Brown Inc. need to borrow? A) $270,000 B) $300,000 C) $312,500 D) $347,222

Q: All of the following are likely to increase the cost of a company's short-term financing EXCEPT A) an increase in the bank's prime lending rate. B) an increase in the compensating balance required. C) taking a loan on a discount basis. D) an increase in the company's debt rating by Moody's or Standard and Poors.

Q: You are working on your company's cash budget for the coming year and you believe there may be short periods of time where financing is required. Which of the following sources of short-term financing is most certain to be available when needed? A) trade credit B) line of credit with a bank C) revolving credit agreement with a bank D) accounts receivable

Q: As a company accounts payable manager, which of the following credit terms are most likely to entice you to take the cash discount? A) 1/10 net 45 B) 2/10 net 60 C) 1/10 net 30 D) 2/10 net 90

Q: Your company buys supplies on credit terms of 2/10 net 45. Suppose the company makes a purchase of $20,000 today. Which of the following payment options makes the most sense as a general rule? A) Pay the bill as soon as possible to keep the supplier happy. B) Pay the bill on day 45 due to the time value of money. C) Pay the bill on day 10 to get the discount. D) Either pay the bill on day 10 to get the discount, or wait until day 45.

Q: Parsons Company has a cash flow problem. The company owes its suppliers $300,000 on credit terms of 2/10 net 40, but Parsons doesn't have the cash to pay during the discount period. Parsons, however, can borrow the $300,000 at annual rate of 24%. Should Parsons borrow the money to pay its accounts payable? A) No, additional borrowing will cost more for interest ($60,000 per year) than the discount is worth. B) Yes, the effective cost of forgoing the discount is greater than 24%. C) No, the effective cost of forgoing the discount is equal to 24%, and there are transactions costs associated with borrowing. D) It doesn't matter because the present value of the cost of borrowing is exactly equal to the amount of the discount for paying within 10 days.

Q: Because only the largest and most creditworthy companies are able to use commercial paper, the interest rate on commercial paper is generally lower than the prime rate.

Q: Both compensating balances and discounting interest increase the effective interest rate on a loan.

Q: The inclusion of a compensating balance requirement in a line of credit will reduce the effective annual cost of credit since the bank has additional collateral for the borrowing.

Q: A bank is legally obligated to provide credit under a revolving credit agreement, but not under a line of credit.

Q: In a chattel mortgage, specific items of inventory are identified in the security agreement.

Q: Commercial paper is an unsecured form of credit.

Q: The primary sources of collateral for secured loans are accounts receivable and inventory.

Q: Issuers of commercial paper usually maintain lines of credit with banks to back up their short-term financing needs.

Q: A revolving credit agreement is a legally binding agreement between a borrower and lender.

Q: Trade credit appears on a company's balance sheet as accounts payable.

Q: Under terms of a field warehouse financing agreement, the collateral inventories are physically separated from the borrower's other inventories but remain under the borrower's control.

Q: When the accounts receivable of a firm have been factored, bad debt losses remain the responsibility of the borrowing firm and must be made good.

Q: The amount that can be obtained on an inventory loan depends on both the marketability and perishability of the items in the inventory.

Q: A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.

Q: The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.

Q: The cost of trade credit varies directly with the size of the cash discount and inversely with the length of time between the end of the discount period and the final due date.

Q: Major sources of secured credit include commercial banks, finance companies, and factors.

Q: Credit terms of 1/10 net 30 means that the buyer may take a 10% discount (1/10)if the bill in paid within 30 days.

Q: Factoring accounts receivable is the sale of a firm's receivables while pledging accounts receivable is the use of accounts receivable as collateral for a loan.

Q: Floating lien agreements are the least secure form of inventory collateral.

Q: Credit terms of 2/10, net 30 have a lower effective cost than credit terms of 2/10, net 60 because in the first case the loan will be repaid sooner.

Q: Accrued wages and taxes are secured sources of financing because companies are obligated to make these payments before they make payments on any other loans or pay dividends.

Q: A secured loan should have a higher interest rate because the lender has less risk and therefore values the loan more highly.

Q: To ensure that a borrower is not using short-term bank credit to finance a part of its permanent needs for funds, banks often require borrowers to clean up their short-term loans for a 30-45 day period during the year.

Q: Idaho Mining, Inc. borrows at prime plus 1.5% on its line of credit. The line requires a 15% compensating balance. If the prime rate is 9% and Idaho Mining plans on borrowing for a period of one year, what is the nominal APR of the line of credit?A) 9.0%B) 6.0%C) 10.6%D) 12.4%

Q: Assume that Montana Mining, Inc. borrows $5,000,000 for 120 days. The total interest paid is $150,000. What is the APY, or Effective Annual Rate of interest that Billings pays? A) 3.00% B) 9.00% C) 9.27% D) 9.77%

Q: Blastdale Corp. is considering borrowing $15,000 for a 60-day period. The firm will repay the $15,000 principal amount plus $200 in interest. What is the effective annual rate of interest? Use a 360-day year. A) 7.2% B) 8.0% C) 8.2% D) 10.5%

Q: A company that forgoes the discount when credit terms are 2/10 net 60 due to insufficient cash flow would be better off to borrow funds and take the discount as long the company could borrow the funds at any rate A) less than 16.33%. B) less than 15.47%. C) less than 14.69%. D) less than 12.00%.

Q: Your company is able to arrange financing at either a rate of 12.75% annually, or at a rate of 12% compounded monthly. Assuming financing is needed for one year, which rate is the best? A) 12% compounded monthly, because the annual percentage yield is 12.68%. B) 12.75% annually, because the annual percentage yield for 12% compounded monthly is greater than 12.75%. C) 12.75% annually, because even though the annual percentage yield is higher, interest if paid only once per year at year end. D) Both rates are effectively the same, so your company should be indifferent between the two.

Q: Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APY, or annual percentage yield, calculation? A) 4.33% B) 10.34% C) 12.25% D) 12.46%

Q: Simpson Conglomerates borrows $12,000 for a short-term purpose. The loan will be repaid after 120 days, with Simpson paying a total of $12,400. What is the approximate cost of credit using the APR, or annual percentage rate, calculation? A) 3.33% B) 4.00% C) 10.00% D) 11.75%

Q: Compounding effectively raises the cost of short-term credit.

Q: What three actions can a firm take to minimize its net working capital?

Q: If a company offers a cash discount for early payment, this will most likely increase its cash conversion cycle since it will have to pay out more cash to its customers.

Q: One way to improve a company's cash conversion cycle is to increase its days sales outstanding.

Q: The cash conversion cycle cannot be negative.

Q: If a company's inventory turnover increases from 8 to 10, then its cash conversion cycle will also increase, i.e., get longer.

Q: The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.

Q: The cash conversion cycle is equal to the days of sales outstanding plus the days of sales in inventory plus the days of payables outstanding.

Q: A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 days.

Q: What are some examples of permanent and temporary investments in current assets?

Q: What is the hedging principle or principle of self-liquidating debt?

Q: Which of the following is considered a spontaneous source of financing? A) short-term notes payable B) accounts payable C) long-term notes payable D) preferred stock

Q: In the context of managing working capital, the hedging principle refers to which of the following? A) speculation regarding the direction of short-term interest rates B) the usage of interest rate swaps C) matching the maturity of the source of financing to the cash flow generating characteristics of the asset being financed D) protecting the firm against the risk of rising interest rates

Q: Which of the following is most likely to be a temporary source of financing? A) commercial paper B) preferred stock C) long-term debt D) common stock

Q: Trade credit is an example of which of the following sources of financing? A) spontaneous B) temporary C) permanent D) discretionary

Q: With regard to the hedging principle, which of the following assets should be financed with current liabilities? A) minimum level of cash required for year round operations B) expansion of accounts receivable to meet seasonal demand C) machinery D) buildings

Q: With regard to the hedging principle, which of the following would be an appropriate method to finance a minimum level of current assets required for year round operations? A) short-term notes payable B) trade credit C) common stock D) revolving credit agreements that must be repaid in a period less than 1 year

Q: According to the hedging principle, which of the following assets should be financed with permanent sources of financing? A) seasonal expansions of inventory B) seasonal increases in accounts receivable C) levels of inventory and accounts receivable the firm maintains throughout the year D) none of the above

Q: A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with A) common equity to avoid interest on a recurring annual need. B) selling equipment. C) trade credit. D) long-term bonds since this is a recurring financing need.

Q: According to the hedging principle, plant and equipment should be financed with A) commercial paper. B) long-term funds. C) short-term bank loans. D) spontaneous financing.

Q: Permanent sources of financing include all but A) corporate bonds. B) common stock. C) preferred stock. D) commercial paper.

Q: CBD Computer Inc. is attempting to estimate its needs for funds during each of the months covering the third quarter of 20XX. Pertinent information is given below:a. Past and estimated future sales for 20XX:April $80,000 July $90,000May 95,000 August 130,000June 70,000 September 110,000October 140,000b. Rent expense is $2,500 per month.c. A quarterly interest payment on $100,000 in 7% notes payable is to be paid during September, 20XX.d. Wages and salaries are estimated as follows:July $8,000August 10,000September 12,000Payments are made within the month in which the wages are earned.e. Sixty percent of sales are for cash, with the remaining 40% collected in the month following the sale.f. CBD pays 80% of the sales price for merchandise and makes payment in the same month in which the sales occur, although purchases are made in the month prior to the anticipated sales.g. CBD plans to pay $7,500 in cash for a new forklift truck in July.h. Short-term loans can be obtained at the end of each month at 13% annual interest with interest paid during each month for which the loan is outstanding.i. CBD's ending cash balance for June 30, 200X is $67,000:the minimum balance the firm wishes to have in any month is $35,000.Required: Set up a cash budget for CBD for the quarter ended September 30, 20XX.

Q: The treasurer for Chic Man Clothing must decide how much money the company needs to borrow in July. The balance sheet for June 30, 2010 is presented below:Chic Man Clothing Balance SheetJune 30, 2010Cash$87,000Accounts payable$550,000Marketable securities123,000Long-term debt350,000Accounts receivable360,000Common stock130,000Inventory300,000Retained earnings270,000Total current assets870,000Total liabilities and stockholders' equity1,300,000Fixed assets430,000Total assets$1,300,000The company expects sales of $400,000 for July. The company has observed that 25% of its sales is for cash and that the remaining 75% is collected in the following month. The company plans to purchase $345,000 of new clothing. Usually 70% of purchases is for cash and the remaining 30% of purchases is paid in the following month. Salaries are $135,000 per month, lease payments are $35,000 per month, and depreciation charges are $20,000 per month. The company plans to purchase a new van for $60,000 in July and sell its marketable securities for $123,000. If the company must maintain a minimum cash balance of $25,000, how much money must the company borrow in July?

Q: A budget A) records the amount and timing of the firm's past financing needs. B) provides a basis for taking corrective action in the event that budgeted figures do not match actual or realized figures. C) remains independent of the human resource performance evaluation task. D) only makes sense for annual periods of time.

Q: In what way does a cash budget provide management with better information about financing requirements than a pro forma balance sheet? A) A pro forma cash budget gives greater details about the depreciation of fixed assets. B) A pro forma cash budget not only delineates the financing that is needed but it also pinpoints in greater detail when the financing is needed. C) A pro forma cash budget utilizes superior methods in determining a firm's income tax liability for the planned period. D) A pro forma cash budget does not offer better information to management regarding financing than a pro forma balance sheet.