Q&A Hero

Q: Use the following information to answer the following question(s). Quick Corp. makes its purchases under terms of 2/10 net 30. If Quick foregoes the discount but does not pay for its purchases until day 40, what is Quick's effective cost of using this source of credit? Assume that no penalty is incurred for late payment. A) 38.37% B) 36.73% C) 26.67% D) 24.49%

Q: Use the following information to answer the following question(s). Quick Corp. makes its purchases under terms of 2/10 net 30. If Quick Corp. foregoes the discount and pays for its purchases according to the terms of its trade credit, what is Quick's effective cost of using this source of credit? A) 26.67% B) 31.48% C) 36.73% D) 51.32%

Q: Which of the following is an advantage of trade credit? A) Trade credit is conveniently obtained as a normal part of the firm's operations. B) No formal agreements are generally involved in extending credit. C) The amount of credit extended expands and contracts with the needs of the firm. D) All of the above.

Q: The cost of trade credit varies with the: A) size of the cash discount. B) length of time between the end of the discount period and the final due date. C) length of time between the end of the discount period and when the firm purchased from the supplier. D) both A and C.

Q: The Omega Corp. plans to borrow $10,000 for a 2 months. At maturity, Omega will repay the $10,000 principal plus $100 interest. What is the annual percentage rate (APR) rate of interest on this loan? A) 6% B) 1% C) 4% D) 6.4%

Q: The primary advantage that factoring accounts receivable provides is: A) the flexibility it gives to the borrower. B) that the financial institution bears the risk of collection. C) the low cost as compared with other sources of short-term financing. D) that the financial institution services the accounts.

Q: Which of the following would NOT be considered an unsecured loan? A) Accrued tax payments B) Line of credit C) Transaction loans D) Factored accounts receivable

Q: Atlas Tire Irons, Inc. is considering borrowing $5,000 for a 3 month period. The firm will repay the $5,000 principal amount plus $150 in interest. What is the annual percentage rate (APR) rate of interest (use a 360-day year)? A) 3% B) 12% C) 15% D) 18%

Q: The annual cost of not taking advantage of the 3/10, net 30 terms offered by a supplier is (hint: use $1.00 as the invoice amount and a 360-day year): A) 55.7%. B) 45.4%. C) 32.3%. D) 28.2%.

Q: The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank. The bank will charge Stoney River 4.5 % on a discounted basis. What is the dollar amount of interest Stoney River will need to pay? Assume a 360 day year. A) $1,125,000 B) $1,099,688 C) $2,250,000 D) 41,074,375

Q: The Stoney River Textiles Company will borrow $50 million for 180 days from Merrimac Bank. The bank will charge Stoney River 4.5 % on a discounted basis. What is the annual percentage rate (APR) to Stoney River (round to the nearest .1 percent)? A) 2.25% B) 2.36% C) 4.71% D) 4.5%

Q: Which of the following comparisons between short-term bank loans is correct? A) Commercial paper interest rates are usually slightly higher than rates on bank loans. B) Commercial paper is only appropriate for firms requiring a limited amount of short-term financing, while banks can offer substantially larger amounts of funds. C) Banks demand that borrowers meet exacting credit-worthiness tests, while the lenders that purchase commercial paper are less strict. Only the most credit-worthy borrowers have access to bank loans. D) None of the above.

Q: Georgia Peaches Corporation (GPC) has a line of credit with Trust Company Bank that allows GPC to borrow up to $300,000 at an annual interest rate of 5.5%. However, GPC must keep a compensating balance of 20% of any amount borrowed on deposit at the Trust Company Bank. GPC does not normally have a cash balance account with the Trust Company. What is the effective annual cost of credit? A) 6.875% B) 6.975% C) 7.075% D) 7.775%

Q: Smith Enterprises has a line of credit with Fidelity National Bank that allows Smith to borrow up to $350,000 at an interest rate of 5%. However, Smith must keep a compensating balance of 10% of any amount borrowed on deposit at Fidelity. Smith does not normally keep a cash balance account with Fidelity. What is the effective annual cost of credit (round to nearest .01 percent)? A) 5.93% B) 5.84% C) 5.64% D) 5.56%

Q: The Stant Shoe Company established a line of credit with a local bank. The maximum amount that can be borrowed under the terms of the agreement is $100,000 at an annual rate of 5%. A compensating balance of 10% of the amount borrowed is required. What is the largest amount of money Stant will actually be able to use from the line of credit? A) $90,909 B) $90,000 C) $111,111 D) $100,000

Q: Bank Two extends a $3 million line of credit to Capital Corp. The stated rate of interest is 9.5%. Bank Two requires Capital to maintain compensating balances equal to 10% of the amount of the line. Assuming that Capital would not normally carry any deposits at the bank, what is the effective annual rate of interest on the loan? A) 9.5% B) 10.6% C) 11.6% D) 12.3%

Q: Once a cash discount period has passed: A) one should pay immediately. B) there is no financial incentive to pay before the final due date. C) one should pay after the final due date. D) cannot be determined from the information.

Q: What factors should we consider when selecting a source of short-term credit? A) Effective cost and availability B) Liquidity and profitability C) Historical trend analysis and liquidity D) None of the above

Q: A company that foregoes a discount of 1/7 net 30 is essentially borrowing money from the vendor at: A) 1%. B) 12.29%. C) 16%. D) 52.7%.

Q: A company which foregoes the discount when credit terms are 4/15 net 70 is essentially borrowing money from his supplier for an additional: A) 40 days. B) 55 days. C) 70 days. D) 85 days.

Q: The First Webster Bank requires borrowers to maintain a balance of 10% of the line of credit in a non-interest paying account as compensation for providing the line of credit. If the borrower would not normally have deposits in such an account, the APR will be: A) the amount borrowed will be higher than the amount needed. B) the APR will be less than the stated rate. C) the amount borrowed will be lower than the amount needed. D) neither the amount borrowed nor the APR will be affected by the required balance.

Q: Which of the following is an advantage of using commercial paper for short-term credit? A) The ability of some firms to obtain large amounts of credit B) A readily available source of credit for most firms C) It is a type of free credit D) It can be issued for very small amounts

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 item would constitute poor collateral for an inventory loan? A) Lumber B) Vegetables C) Copper D) Chemicals

Q: The correct equation for calculating the cost of short-term credit is: A) rate = interest/(principal x time). B) rate = (principal x time)/interest. C) rate = principal/(time x interest). D) rate = principal x interest x time.

Q: A firm buys on terms of 3/10, net 30. What is the cost of trade credit under these terms? A) 55.7% B) 47.4% C) 31.5% D) 23.2%

Q: A& B Global's annual credit sales are $18 million; the accounts receivable balance is $1.5 million; the cost of goods sold is $12.6 million; the inventory balance is $350,000, and the balance in accounts payable is $700,000. a. Compute A&B's operating cycle. b. Compute A&B's cash conversion cycle.

Q: Increasing the accounts payable deferral period also increases the cash conversion cycle.

Q: As the inventory turnover ratio decreases, the inventory conversion cycle increases.

Q: The operating cycle can never be longer than the cash conversion cycle.

Q: It is not possible to have a negative cash conversion cycle.

Q: ViteS Equipment Company has increased its inventory turnover ratio from 12 to 18. By how many days has it reduced the operating cycle? A) 20 days B) 6 days C) 10 days D) 1.5 days

Q: Becker.com has an inventory turnover ratio of 52, an accounts receivable balance of $365,000, average daily credit sales of $36,500, accounts payable of $182,500 and cost of goods sold of $7,993,500. What is Becker's cash conversion cycle to the nearest day? A) 17 days B) 61 days C) 27 days D) -27 days

Q: Becker.com has an inventory turnover ratio of 52, an accounts receivable balance of $365,000, average daily credit sales of $36,500, accounts payable of $182,500 and cost of goods sold of $7,993,500. What is Becker's operating cycle to the nearest day? A) 17 days B) 61 days C) 27 days D) -27 days

Q: Clark Corporation has an average collection period of 7 days, an inventory conversion period of 30 days, and a payables deferrable period of 60 days. What is Clark's cash conversion cycle? A) 97 days B) 37 days C) 23 days D) -23 days

Q: Clark Corporation has an average collection period of 7 days, an inventory conversion period of 30 days, and a payables deferrable period of 60 days. What is Clark's operating cycle? A) 97 days B) 37 days C) 23 days D) -23 days

Q: Abbot Corporation has an average collection period of 49 days, an inventory conversion period of 83 days, and a payables deferrable period of 36 days. What is Abbott's operating cycle? A) 96 days B) 70 days C) 85 days D) 132 days

Q: Abbot Corporation has an average collection period of 49 days, an inventory conversion period of 83 days, and a payables deferrable period of 36 days. What is Abbott's cash conversion cycle? A) 96 days B) 70 days C) 85 days D) 132 days

Q: Currier & Ive's Lithography has a Cost of Goods Sold of $60.8 million. The company's accounts payable balance is $7.5 million. It's accounts payable deferral period is: A) 81 days. B) 45 days. C) 8.11 days. D) 48.7 days.

Q: Frosty's Frozen Food Inc.'s inventory balance is $1.22 million. Frosty's Cost of Good's Sold is $30.4 million. It's inventory conversion period: A) 12 days. B) 24.92 days. C) 14.65 days. D) 299.2 days.

Q: Queen Co.'s balance in accounts receivable is $240,000. Annual credit sales are $2,880,000. Queen's average collection period is: A) 12 days. B) 30.4 days. C) 2.5 days. D) There is not enough information.

Q: Prince Co.'s inventory turnover ratio is 30.4. It's inventory conversion period is: A) 12 days. B) 30.4 days. C) 2.5 days. D) There is not enough information.

Q: King Co.'s inventory turnover ratio is 12. It's inventory conversion period is: A) 12 days. B) 30.4 days. C) 2.5 days. D) There is not enough information.

Q: L. Stevens Inc. uses long-term to cover its peak level of current assets. When it does not need the money to finance inventories and accounts receivable, it invests the excess funds in short-term certificates of deposit. What are the advantages and disadvantages of this policy?

Q: Summary data from the quarterly balance sheets of ACH Air Conditioners are shown below.Quarter 1Quarter 2Quarter 3Quarter 4Current Assets$50,000$90,000$75,000$30,000Fixed Assets$60,000$60,000$60,000$60,000Liabilities$70,000$110,00$95,000$50,000Equity$40,000$40,000$40,000$40,000a. If ACH follows the self liquidating debt principle, how much long-term debt will be used to finance current assets? Explain your answer briefly.b. What would be the highest and lowest levels of temporary debt?

Q: Trade credit is a source of spontaneous financing.

Q: Short-term debt is frequently less expensive because it provides the borrower more security.

Q: Notes payable is a spontaneous source of financing.

Q: Increasing the use of short-term debt versus long-term debt financing will increase profit.

Q: A firm can reduce net working capital by substituting long-term financing, such as bonds, with short-term financing, such as a one-year notes payable.

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

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

Q: Accrued wages are considered an unsecured, non-spontaneous source of financing.

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

Q: The use of short-term debt provides flexibility in financing since the firm is only paying interest when it is actually using the borrowed funds.

Q: Which of the following types of financing offers the firm the greatest degree of flexibility? A) Bonds B) Preferred stock C) Short-term lines of credit D) Long-term notes payable

Q: All else equal, which of the following is the most likely to occur if actual sales are much less than forecasted sales? A) The company will be in a better position to pay down most of its debt. B) The firm's actual investment in inventory will be unchanged from the amount forecasted. C) Accounts receivable will rise significantly above the forecast. D) The company might face a cash flow crunch.

Q: If management expects interest rates to rise and credit to tighten in the near future, it should consider: A) increasing its use of commercial paper and loans secured by current assets. B) decreasing the use of spontaneous financing. C) decreasing the level of permanent financing. D) increasing the level of permanent financing.

Q: Trade credit is an example of which of the following sources of financing? A) Spontaneous B) Temporary C) Permanent D) Both A and B

Q: Which of the following is a spontaneous source of financing? A) Accrued wages B) Preferred stock C) Trade credit D) Both A and C

Q: A quite risky working capital management policy would have a high ratio of: A) short-term debt to bonds and equity. B) short-term debt to total debt. C) bonds to property, plant, and equipment. D) short-term debt to equity.

Q: Which of the following is NOT a spontaneous source of financing? A) Accrued salaries payable B) Loans secured by accounts receivable C) Accrued taxes payable D) Accounts payable

Q: Spontaneous sources of financing include: A) marketable securities. B) accruals. C) bonds. D) commercial paper.

Q: With regard to the self-liquidating debt, which of the following assets should be financed with permanent sources of financing? A) Machinery B) Expansion of inventory to meet seasonal demands C) Machinery and expansion of inventory to meet seasonal demands D) Minimum level of accounts receivable required year round, machinery, and minimum level of cash required for year-round operations

Q: Which of the following is most consistent with the self-liquidating debt principle in working capital management? A) Fixed assets should be financed with short-term notes payable. B) Inventory should be financed with preferred stock. C) Accounts receivable should be financed with short-term lines of credit. D) Borrow on a floating rate basis to finance investments in permanent assets.

Q: According to the self-liquidating debt principle permanent assets should be financed with ________ liabilities. A) permanent B) spontaneous C) current D) fixed

Q: Disadvantages of using current liabilities as opposed to long-term debt include: A) greater risk of illiquidity. B) uncertainty of interest costs. C) higher cash flow exposure. D) both A and B.

Q: Current assets of NorthPole.com at the end of each quarter were: 1st quarter $1.3 million, 2nd quarter $1.7 million, 3rd quarter $1.5 million and 4th quarter $2.2 million. The best estimate for North Pole's permanent current assets is: A) $2.2 million. B) $1.675 million. C) $1.3 million. D) $0.9 million.

Q: Which of the following is considered to be a spontaneous source of financing? A) Operating leases B) Accounts receivable C) Inventory D) Accounts payable

Q: A toy manufacturer following the self-liquidating debt. principle will generally finance seasonal inventory build-up prior to the Christmas season with: A) common stock. B) selling equipment. C) trade credit. D) preferred stock.

Q: With respect to working capital policy, firms most often employ: A) a cautious approach which finances short-term assets with long-term financing. B) the principle of self-liquidating debt. C) an aggressive approach which finances long-term assets with short-term financing. D) the principle of liquidity optimization.

Q: Gamma, Inc. plans to sell $1 million in 270-day-maturity commercial paper on which it will pay discounted interest at an annual rate of 12%. In addition, Gamma expects to incur a cost of $1,000 in dealer placement fees and other expenses to issue the paper. What is the effective cost of the paper to Gamma? A) 12.22% B) 12.78% C) 13.20% D) 13.35%

Q: Commercial paper: A) rates are generally higher than rates on bank loans and comparable sources of short-term financing. B) generally has a minimum compensating balance requirement. C) offers the firm with very large credit needs a single source for all its short-term financing. D) has all of the properties stated above.

Q: What is the conventional method for financing permanent levels of accounts receivable and inventory? A) Bonds and equity B) Short-term loans C) Accounts payable and accrued expenses D) Equity only

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) All of the above

Q: Which of the following is NOT considered a permanent source of financing? A) Corporate bonds B) Common stock C) Preferred stock D) Commercial paper

Q: Accounts payable is considered a: A) spontaneous liability. B) temporary financing source. C) permanent financing source. D) both A and B.

Q: On June 30, 19X1, the Alexander Bosh Coffee Co.'s balance sheet and income statement are as follows:Balance SheetIncome StatementJune 30, 19X1June 30, 19X1Current assets$800,000Net operating income$600,000Net fixed assets700,000Less: interest expense(108,000)Total assets$1,500,000Earnings before taxes492,000Accounts payable$300,000Less: taxes (34%)(167,280)S-T notes payable (15%)500,000Net income$324,720Total current liabilities$800,000Long-term debt (11%)$300,000Common equity400,000Total$1,500,000a. Calculate the current ratio and net working capital for Alexander Bosh.b. Recalculate the ratios from (a) and assess the change in the firm's liquidity if the firm plans to issue $500,000 in common stock and use the proceeds to retire the firm's notes payable.c. What effect would the change proposed in question b have on return on common equity (net income/common equity)?

Q: The December 31, 1995 balance sheet for Spitco, Inc. is presented below.Spitco, Inc.Balance Sheet31-Dec-10Current assets$40,000Net fixed assets20,000Total$60,000Accounts payable11,000Notes payable12,000Total$23,000Long-term debt (10%)12,000Common equity25,000Total$60,000a. Calculate Spitco's current ratio, and net working capital.b. Spitco feels that its current ratio is too far below the industry average of 2.40. To improve their liquidity, the treasurer of Spitco has devised a plan to issue $12,000 in long-term debt at 12% and pay off its notes payable. The funds would be invested in marketable securities at 7% interest when not needed to finance the firm's seasonal asset needs. The notes payable would remain outstanding through the year. Assume this plan had been implemented for 2010. Calculate what the firm's current ratio, and net working capital would have been.c. Did Spitco improve their liquidity? What do you think happened to Spitco's return on investment?

Q: The balance sheet for Peterson Manufacturing Company is presented below.Peterson Mfg. Co.Balance Sheet31-Dec-95Cash$32,000Current liabilities$72,000Accounts receivable40,000Long-term liabilities48,000Inventories48,000Common equity120,000Total current assets$120,000Net fixed assets120,000Total$240,000Total$240,000During 2009, the firm earned $28,000 after taxes based on net sales of $480,000.a. Calculate Peterson's current ratio and net working capital.b. Assume that Peterson's uses $20,000 of its cash to reduce current liabilities. Recompute the current ratio and net working capital.c. What effect, if any, does the change proposed in question b have on Peterson's liquidity.