Question 1

The cost of not taking the discount on trade credit of 3/10, net 30 is equal to:

Accepted Answer

A)  57.75%. 
B)  55.67%. 
C)  56.44%. 
D)  36.50%. 
A)  57.75%. 
B)  55.67%. 
C)  56.44%. 
D)  36.50%.

Question 2

A cash discount calls for a reduction in price if payment cannot be made within a specified time period.

Accepted Answer

A) True 
 B)False

Question 3

A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from:

Accepted Answer

A)  declining interest rates. 
B)  rising interest rates. 
C)  inflation. 
D)  changes in hedging activities. 
A)  declining interest rates. 
B)  rising interest rates. 
C)  inflation. 
D)  changes in hedging activities.

Question 4

Francis Construction Co. has an outstanding 180-day bank loan of $600,000 at an annual interest rate of 8%. The company is required to maintain a 20% compensating balance in its chequing account. What is the annual interest cost on the loan? Assume the company would not normally maintain this average amount.

Accepted Answer

A)  8.0% 
B)  9.5% 
C)  10.0% 
D)  6.40% 
A)  8.0% 
B)  9.5% 
C)  10.0% 
D)  6.40%

Question 5

Commercial paper represents secured short-term borrowing by large companies.

Accepted Answer

A) True 
 B)False

Question 6

The required compensating balance is usually computed as a:

Accepted Answer

A)  percentage of customer loans outstanding. 
B)  factor of accounts receivable. 
C)  the bank's commitment to LIBOR. 
D)  pledge of inventory value. 
A)  percentage of customer loans outstanding. 
B)  factor of accounts receivable. 
C)  the bank's commitment to LIBOR. 
D)  pledge of inventory value.

Question 7

In determining the cost of bank financing, which is the important factor?

Accepted Answer

A)  Prime rate. 
B)  Nominal rate. 
C)  Annual rate. 
D)  Discount rate. 
A)  Prime rate. 
B)  Nominal rate. 
C)  Annual rate. 
D)  Discount rate.

Question 8

Ms. Smith borrowed $1,250 at an 11% stated rate of interest and was to pay back the installment loan in 24 monthly payments. What is her annual rate of interest?

Accepted Answer

A)  10.56% 
B)  11.60%. 
C)  18.96% 
D)  22.00% 
A)  10.56% 
B)  11.60%. 
C)  18.96% 
D)  22.00%

Question 9

Monthly instalment loans usually increase the effective rate of borrowing by approximately 2 times the stated rate.

Accepted Answer

A) True 
 B)False

Question 10

Brand Advertising is offered a 3/10 net 40 trade discount by its supplier. In the past Brand has been able to get away with paying for supplies on credit in 60 days. Since it doesn't have money on hand to take advantage of the discount, it tries to negotiate a loan with Second Canadian Bank. The amount of $375,000 with a 15% compensating balance and a $5,500 interest charge has been negotiated for the month of May. Brand already maintains a $16,250 balance at the bank. Compute the annual rate of interest on the loan, and the cost of not taking the discount. Which one should Brand take?

Accepted Answer

The answer of Brand Advertising is offered a 3/10 net...

Question 11

Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate.

Accepted Answer

A) True 
 B)False

Question 12

Trade credit is usually extended for periods of one year or more.

Accepted Answer

A) True 
 B)False

Question 13

Firms using commercial paper are generally required to maintain bank lines of credit equal to the amount of paper outstanding.

Accepted Answer

A) True 
 B)False

Question 14

Large firms tend to be:

Accepted Answer

A)  net users of trade credit. 
B)  net suppliers of trade credit. 
C)  firms with high levels of profitability. 
D)  firms with low levels of inventory turnover and accounts receivable turnover. 
A)  net users of trade credit. 
B)  net suppliers of trade credit. 
C)  firms with high levels of profitability. 
D)  firms with low levels of inventory turnover and accounts receivable turnover.

Question 15

The extent to which inventory financing may be used depends on:

Accepted Answer

A)  prime rate of interest. 
B)  cost of goods. 
C)  how fragile the goods are. 
D)  how perishable the goods are. 
A)  prime rate of interest. 
B)  cost of goods. 
C)  how fragile the goods are. 
D)  how perishable the goods are.

Question 16

Which of the following is not a true statement about commercial paper?

Accepted Answer

A)  Finance paper is sold directly to the lender by the finance company. 
B)  Finance paper is also referred to as direct paper. 
C)  Dealer paper is sold directly to the lender by a finance company. 
D)  Industrial companies, utility firms, or finance companies too small to sell direct paper will sell dealer paper. 
A)  Finance paper is sold directly to the lender by the finance company. 
B)  Finance paper is also referred to as direct paper. 
C)  Dealer paper is sold directly to the lender by a finance company. 
D)  Industrial companies, utility firms, or finance companies too small to sell direct paper will sell dealer paper.

Question 17

From the banker's point of view, short-term bank credit is an excellent way of financing:

Accepted Answer

A)  capital assets. 
B)  permanent working capital needs. 
C)  repayment of long-term debt. 
D)  seasonal bulges in inventory and receivables. 
A)  capital assets. 
B)  permanent working capital needs. 
C)  repayment of long-term debt. 
D)  seasonal bulges in inventory and receivables.

Question 18

The cost of forgoing the discount on trade credit of 4/10, net 90 is equal to:

Accepted Answer

A)  18.25%. 
B)  19.01%. 
C)  20.52%. 
D)  12.13%. 
A)  18.25%. 
B)  19.01%. 
C)  20.52%. 
D)  12.13%.

Question 19

One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures.

Accepted Answer

A) True 
 B)False

Question 20

Hedging refers to:

Accepted Answer

A)  avoiding high-risk investment opportunities. 
B)  a transaction that reduces risk exposure. 
C)  the same thing as asset diversification. 
D)  avoiding the financial futures market. 
A)  avoiding high-risk investment opportunities. 
B)  a transaction that reduces risk exposure. 
C)  the same thing as asset diversification. 
D)  avoiding the financial futures market.

The cost of not taking the discount on trade credit of 3/10, net 30 is equal to:

A cash discount calls for a reduction in price if payment cannot be made within a specified time period.

A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from:

Commercial paper represents secured short-term borrowing by large companies.

The required compensating balance is usually computed as a:

In determining the cost of bank financing, which is the important factor?

Ms. Smith borrowed $1,250 at an 11% stated rate of interest and was to pay back the installment loan in 24 monthly payments. What is her annual rate of interest?

Monthly instalment loans usually increase the effective rate of borrowing by approximately 2 times the stated rate.

Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate.

Trade credit is usually extended for periods of one year or more.

Firms using commercial paper are generally required to maintain bank lines of credit equal to the amount of paper outstanding.

Large firms tend to be:

The extent to which inventory financing may be used depends on:

Which of the following is not a true statement about commercial paper?

From the banker's point of view, short-term bank credit is an excellent way of financing:

The cost of forgoing the discount on trade credit of 4/10, net 90 is equal to:

One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures.

Hedging refers to:

The Goals and Functions of Financial Management

Review of Accounting

Financial Analysis

Financial Forecasting

Operating and Financial Leverage

Working Capital and the Financing Decision

Current Asset Management

The Time Value of Money

Valuation and Rates of Return

Cost of Capital

The Capital Budgeting Decision

Risk and Capital Budgeting

Capital Markets

Investment Underwriting

Long-Term Debt and Lease Financing

Common and Preferred Stock Financing

Dividend Policy and Retained Earnings

Derivative Securities

External Growth Through Mergers

International Financial Management

Filters

Exam 8: Sources of Short-Term Financing

The cost of not taking the discount on trade credit of 3/10, net 30 is equal to:

A cash discount calls for a reduction in price if payment cannot be made within a specified time period.

A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from:

Commercial paper represents secured short-term borrowing by large companies.

The required compensating balance is usually computed as a:

In determining the cost of bank financing, which is the important factor?

Ms. Smith borrowed $1,250 at an 11% stated rate of interest and was to pay back the installment loan in 24 monthly payments. What is her annual rate of interest?

Monthly instalment loans usually increase the effective rate of borrowing by approximately 2 times the stated rate.

Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate.

Trade credit is usually extended for periods of one year or more.

Firms using commercial paper are generally required to maintain bank lines of credit equal to the amount of paper outstanding.

Large firms tend to be:

The extent to which inventory financing may be used depends on:

Which of the following is not a true statement about commercial paper?

From the banker's point of view, short-term bank credit is an excellent way of financing:

The cost of forgoing the discount on trade credit of 4/10, net 90 is equal to:

One major advantage of commercial paper is that it can always be "rolled over" (reissued) when it matures.

Hedging refers to:

The Goals and Functions of Financial Management

Review of Accounting

Financial Analysis

Financial Forecasting

Operating and Financial Leverage

Working Capital and the Financing Decision

Current Asset Management

The Time Value of Money

Valuation and Rates of Return

Cost of Capital

The Capital Budgeting Decision

Risk and Capital Budgeting

Capital Markets

Investment Underwriting

Long-Term Debt and Lease Financing

Common and Preferred Stock Financing

Dividend Policy and Retained Earnings

Derivative Securities

External Growth Through Mergers

International Financial Management

Filters