Exam 8: Financing a Business 1: Sources of Funds

If Trundell Co. Ltd. issued 12-year debt by way of a zero coupon (strip) bond with a nominal value of $15,000,000 and received $6,660,200 at issue, what interest rate did Trundell pay on its bond?

What has been the most popular way of obtaining new financing by Canadian businesses in recent years?

What is the most common purpose for which junk bonds are used?

What is an advantage of a loan covenant to the borrower?

Which of the following is an internal source of financing?

Binder Inc's credit sales are projected to be $11,680,000 for the year. The company collects its receivables over an average period of 50 days and finances them by borrowing on its bank line of credit at an interest rate of 9%. Management has determined that if it hires another clerk in the receivables department at $32,000 per year, it can reduce average days outstanding for the receivables to 30, the industry average. What should Binder Inc do?

Saskatchewan Potash Ltd. has $20 million in credit sales per year and on average they are outstanding for 55 days. Potash sells for $1,000 per ton and results in a 20% contribution margin. Receivables are financed at a 10% interest rate. Bad debts total $600,000 annually. The accounting department has a new plan by which it estimates it can eliminate three-quarters of the bad debts and reduce the collection period by 25 days if it is permitted to hire one collections specialists at a cost of $105,000 per year. Some sales would be lost due to credit tightening under the new plan. By what percentage would sales have to decline to leave Saskatchewan Potash Ltd. indifferent between the two alternatives.?

AAA Ltd. has borrowed $15 million dollars at a fixed rate of 8% for seven years to purchase large industrial presses. Last year, BBB Ltd. negotiated a variable rate loan, at a similar amount, currently at 7.5%, for somewhat smaller presses with enhanced finishing features. If the two companies enter into an interest rate swap agreement, which of the following best describes the effects?

Which of the following investments would investors generally view as the riskiness?

Doreland Corp. borrowed $3.5 million seven years ago at a floating rate of 5% compounded annual with annual interest payments and principle payable in full at maturity. It also purchased, as part of the loan package, a hedge for $80,000 that limited their rate movement exposure to 2%. Two years after the loan was initiated, interest rates rose by one percent and went up a further one percent, a year later. Rates then stayed the same until 12 months before maturity when they went up by 2%. At the time Doreland took out the loan it chose not to take the alternative of a fixed rate of financing at 7% for the full term of the loan. Ignoring the time value of money, what was the net effect of Doreland's choice of financing compared to locking in a 7% fixed rate of interest?

What is the equivalent annual interest rate for purchase made with discount terms of 1/10/n75?

Which of the following can a business use a credit note to advantage rather than increasing accounts receivable?

Which form of long-term financing, if available, is usually used before any other?

Comfort Ltd. offers customers payment terms on invoices of 2/10, n30. A customer is unable to pay the invoice when received but will have the funds by month end. The customer has the option of borrowing on its 12% line of credit and paying off the invoice or waiting until the end of the 30 days. What should the customer do?

What is an advantage to a business when financing through an issue of preferred shares rather than bonds?

Outstanding warrants for the Buell Corp. have an exercise price of $1.50. The current market price for Bull shares is $1.75. How much would it cost a purchaser to buy 3,000 warrants?

Which of the following actions represents the best way to improve a company's finances in the short term?

On April 15, with the Canadian dollar (CAN) trading at $1.016 to one US dollar (USD), Lethbridge Saddlery Ltd. took delivery of $250,000(USD) worth of saddles and tack from a Montana supplier which Lethbridge paid through an operating loan at 5% in US currency. Lethbridge planned to repay the loan out of sales revenue 90 days later. If the exchange rate went to $0.980 CAN to one USD when the loan matured, how much did Lethbridge Saddlery Ltd. pay in interest in Canadian dollars?

Which of the following best describes recourse factoring?

Cameron Financial Corporation provides auto dealerships in its region with a direct loan program to be made available to the purchasers of cars and trucks. In addition to normal consumer loan obligations, each loan also has a lien against the purchased vehicle which serves as collateral for the loan. The loans which Cameron provides are then packaged together and are sold to investors. What is the name for the sale of this type of investment package?