Question 1

Factoring involves the outright sale of accounts receivable.

Accepted Answer

A) True 
 B)False

Question 2

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

Accepted Answer

A) True 
 B)False

Question 3

If you borrow R2,000 from a bank for one year at a stated annual interest rate of 14 percent, but interest is prepaid (a discounted loan), then what is your effective annual rate?

Accepted Answer

A)  14.00% 
B)  8.57% 
C)  16.28% 
D)  21.21% 
E)  28.00% 
A)  14.00% 
B)  8.57% 
C)  16.28% 
D)  21.21% 
E)  28.00%

Question 4

Coverall Carpets Inc.is planning to borrow R12,000 from the bank.The bank offers the choice of a 12 percent discounted interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments.What is the approximate effective rate of interest on the 10.19 percent add-on loan?

Accepted Answer

A)  5.095% 
B)  10.19% 
C)  12.00% 
D)  20.38% 
E)  30.57% 
A)  5.095% 
B)  10.19% 
C)  12.00% 
D)  20.38% 
E)  30.57%

Question 5

The three main working capital strategies discussed in the text, aggressive, conservative, and moderate, differ primarily in the

Accepted Answer

A)  Relative amount of short-term debt used. 
B)  Minimum level of permanent current assets. 
C)  Relative amount of long-term debt versus equity used to finance permanent current assets. 
D)  Average level of temporary current assets. 
E)  Amount of trade credit used. 
A)  Relative amount of short-term debt used. 
B)  Minimum level of permanent current assets. 
C)  Relative amount of long-term debt versus equity used to finance permanent current assets. 
D)  Average level of temporary current assets. 
E)  Amount of trade credit used.

Question 6

Exhibit 16-1
You have just taken out a loan for R75,000.The stated (simple) interest rate on this loan is 10 percent, and the bank requires you to maintain a compensating balance equal to 15 percent of the initial face amount of the loan.You currently have R20,000 in your checking account, and you plan to maintain this balance.The loan is an add-on installment loan which you will repay in 12 equal monthly installments, beginning at the end of the first month.
-Refer to Exhibit 16-1.What is the approximate annual interest rate on this loan?

Accepted Answer

A)  10.00% 
B)  16.47% 
C)  18.83% 
D)  20.00% 
E)  24.00% 
A)  10.00% 
B)  16.47% 
C)  18.83% 
D)  20.00% 
E)  24.00%

Question 7

Trade credit can be separated into two components: free trade credit, which involves credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

Accepted Answer

A) True 
 B)False

Question 8

A promissory note is the document signed when a bank loan is executed and it specifies financial aspects of the loan.The separate indenture note will specify items such as collateral and other terms and conditions.

Accepted Answer

A) True 
 B)False

Question 9

Suppose the credit terms offered to your firm by your suppliers are 2/10, net 30 days.Out of convenience, your firm is not taking discounts, but is paying after 20 days, instead of waiting until day 30.You point out that the approximate cost of not taking the discount and paying on day 30 is around 37 percent.But since your firm is not taking discounts and is paying on day 20, what is the effective annual percentage cost (not approximate) of your firm's current practice, using a 360-day year?

Accepted Answer

A)  36.7% 
B)  105.4% 
C)  73.4% 
D)  43.6% 
E)  106.9% 
A)  36.7% 
B)  105.4% 
C)  73.4% 
D)  43.6% 
E)  106.9%

Question 10

Your firm buys on credit terms of 2/10, net 45, and it always pays on day 45.If you calculate that this policy effectively costs your firm R157,500 each year, what is the firm's average accounts payable balance?

Accepted Answer

A)  R1,234,000 
B)  R75,000 
C)  R157,500 
D)  R625,000 
E)  R750,000 
A)  R1,234,000 
B)  R75,000 
C)  R157,500 
D)  R625,000 
E)  R750,000

Question 11

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

Accepted Answer

A) True 
 B)False

Question 12

If a firm is offered credit terms of 2/10, net 30, it is in the firm's financial interest to pay as early during the discount period as possible.

Accepted Answer

A) True 
 B)False

Question 13

The maturity of most bank loans is short-term.Bank to business loans are frequently 90-day notes which are often rolled over, or renewed, at the end of their maturity.

Accepted Answer

A) True 
 B)False

Question 14

One of the disadvantages of not taking trade credit discounts when offered is that the firm's investment in accounts payable rises.

Accepted Answer

A) True 
 B)False

Question 15

"Stretching" accounts payable is a widely accepted and costless financing technique.

Accepted Answer

A) True 
 B)False

Question 16

Commercial paper is a type of secured promissory issued by large, strong financial firms.

Accepted Answer

A) True 
 B)False

Question 17

Liabilities such as wages and taxes that increase spontaneously with operations are called accruals.

Accepted Answer

A) True 
 B)False

Question 18

In this problem, use the approximation formula to find the cost of trade credit.A firm's payments policy calls for stretching payments to its supplier, who sells on terms of 3/20, net 60.Payment is made in 90 days, and the cash saved is invested in a money market mutual fund paying 12 percent interest.This policy is __________ because the firm has a net __________.

Accepted Answer

A)  Profitable; gain of about 9 percent on the funds involved. 
B)  Profitable; gain of about 12 percent on the funds involved. 
C)  Unprofitable; loss of about 4 percent on the funds involved. 
D)  Unprofitable; loss of about 9 percent on the funds involved. 
E)  Insufficient information to solve. 
A)  Profitable; gain of about 9 percent on the funds involved. 
B)  Profitable; gain of about 12 percent on the funds involved. 
C)  Unprofitable; loss of about 4 percent on the funds involved. 
D)  Unprofitable; loss of about 9 percent on the funds involved. 
E)  Insufficient information to solve.

Question 19

Exhibit 16-1
You have just taken out a loan for R75,000.The stated (simple) interest rate on this loan is 10 percent, and the bank requires you to maintain a compensating balance equal to 15 percent of the initial face amount of the loan.You currently have R20,000 in your checking account, and you plan to maintain this balance.The loan is an add-on installment loan which you will repay in 12 equal monthly installments, beginning at the end of the first month.
-Refer to Exhibit 16-1.How large are your monthly payments?

Accepted Answer

A)  R6,250 
B)  R7,000 
C)  R7,500 
D)  R5,250 
E)  R6,875 
A)  R6,250 
B)  R7,000 
C)  R7,500 
D)  R5,250 
E)  R6,875

Question 20

An important difference between revolving credit and a general line of credit is

Accepted Answer

A)  that a bank has a legal obligation to honor a general line of credit. 
B)  that a bank receives a commitment fee for guaranteeing the funds under a general line of credit. 
C)  the commitment fees on a general line of credit are generally higher than the commitment fees on a revolving line of credit. 
D)  that a bank has a legal obligation to honor a revolving line of credit. 
E)  that there are no differences between a general line of credit and a revolving line of credit. 
A)  that a bank has a legal obligation to honor a general line of credit. 
B)  that a bank receives a commitment fee for guaranteeing the funds under a general line of credit. 
C)  the commitment fees on a general line of credit are generally higher than the commitment fees on a revolving line of credit. 
D)  that a bank has a legal obligation to honor a revolving line of credit. 
E)  that there are no differences between a general line of credit and a revolving line of credit.

Factoring involves the outright sale of accounts receivable.

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

If you borrow R2,000 from a bank for one year at a stated annual interest rate of 14 percent, but interest is prepaid (a discounted loan), then what is your effective annual rate?

The three main working capital strategies discussed in the text, aggressive, conservative, and moderate, differ primarily in the

Trade credit can be separated into two components: free trade credit, which involves credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

A promissory note is the document signed when a bank loan is executed and it specifies financial aspects of the loan.The separate indenture note will specify items such as collateral and other terms and conditions.

Your firm buys on credit terms of 2/10, net 45, and it always pays on day 45.If you calculate that this policy effectively costs your firm R157,500 each year, what is the firm's average accounts payable balance?

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

If a firm is offered credit terms of 2/10, net 30, it is in the firm's financial interest to pay as early during the discount period as possible.

The maturity of most bank loans is short-term.Bank to business loans are frequently 90-day notes which are often rolled over, or renewed, at the end of their maturity.

One of the disadvantages of not taking trade credit discounts when offered is that the firm's investment in accounts payable rises.

"Stretching" accounts payable is a widely accepted and costless financing technique.

Commercial paper is a type of secured promissory issued by large, strong financial firms.

Liabilities such as wages and taxes that increase spontaneously with operations are called accruals.

An important difference between revolving credit and a general line of credit is

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

The Time Value of Money

The Cost of Money

Bonds Debt-Characteristics and Valuation

Shares Equity-Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Share Repurchases

Working Capital Policy

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 16: Managing Short-Term Liabilities Financing

Factoring involves the outright sale of accounts receivable.

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

If you borrow R2,000 from a bank for one year at a stated annual interest rate of 14 percent, but interest is prepaid (a discounted loan), then what is your effective annual rate?

The three main working capital strategies discussed in the text, aggressive, conservative, and moderate, differ primarily in the

Trade credit can be separated into two components: free trade credit, which involves credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken.

A promissory note is the document signed when a bank loan is executed and it specifies financial aspects of the loan.The separate indenture note will specify items such as collateral and other terms and conditions.

Your firm buys on credit terms of 2/10, net 45, and it always pays on day 45.If you calculate that this policy effectively costs your firm R157,500 each year, what is the firm's average accounts payable balance?

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

If a firm is offered credit terms of 2/10, net 30, it is in the firm's financial interest to pay as early during the discount period as possible.

The maturity of most bank loans is short-term.Bank to business loans are frequently 90-day notes which are often rolled over, or renewed, at the end of their maturity.

One of the disadvantages of not taking trade credit discounts when offered is that the firm's investment in accounts payable rises.

"Stretching" accounts payable is a widely accepted and costless financing technique.

Commercial paper is a type of secured promissory issued by large, strong financial firms.

Liabilities such as wages and taxes that increase spontaneously with operations are called accruals.

An important difference between revolving credit and a general line of credit is

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

The Time Value of Money

The Cost of Money

Bonds Debt-Characteristics and Valuation

Shares Equity-Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Share Repurchases

Working Capital Policy

Managing Short-Term Assets

Financial Planning and Control

Filters