Question 1

What is generally the largest source of short-term credit for small firms?

Accepted Answer

A)  Bank loans 
B)  Commercial paper 
C)  Installment loans 
D)  Trade credit 
A)  Bank loans 
B)  Commercial paper 
C)  Installment loans 
D)  Trade credit D

Question 2

A self-liquidating loan is preferable to a bank because it generally provides them with a higher return.

Accepted Answer

A) True 
 B)False  False

Question 3

Commercial bank term loans

Accepted Answer

A)  usually carry fixed interest rates. 
B)  are very short-term in nature. 
C)  are offered to superior credit applicants. 
D)  are very short-term in nature and are offered to superior credit applicants. 
A)  usually carry fixed interest rates. 
B)  are very short-term in nature. 
C)  are offered to superior credit applicants. 
D)  are very short-term in nature and are offered to superior credit applicants. C

Question 4

LIBOR is

Accepted Answer

A)  a resource used in production. 
B)  an interest rate paid on Eurodollar loans in the London market. 
C)  an interest rate paid by European firms when they borrow Eurodollar deposits from U.S. banks. 
D)  the interest rate paid by the British government on its long-term bonds. 
A)  a resource used in production. 
B)  an interest rate paid on Eurodollar loans in the London market. 
C)  an interest rate paid by European firms when they borrow Eurodollar deposits from U.S. banks. 
D)  the interest rate paid by the British government on its long-term bonds.

Question 5

The cost of not taking the discount on trade credit of 2/10, net 30 is approximately ______.

Accepted Answer

A)  44.54% 
B)  43.20% 
C)  36.73% 
D)  None of these options are true 
A)  44.54% 
B)  43.20% 
C)  36.73% 
D)  None of these options are true

Question 6

Compensating balances

Accepted Answer

A)  are used by banks as a substitute for charging service fees. 
B)  are created by having a sweep account. 
C)  generate returns to customers from interest-bearing accounts. 
D)  are used to reward new accounts. 
A)  are used by banks as a substitute for charging service fees. 
B)  are created by having a sweep account. 
C)  generate returns to customers from interest-bearing accounts. 
D)  are used to reward new accounts.

Question 7

The movement of the exchange rate between two currencies can increase the total cost of a loan by making the principal repayment require more money than the original amount of the loan.

Accepted Answer

A) True 
 B)False

Question 8

Accounts receivable may be used as a source of financing by

Accepted Answer

A)  pledging the receivables as loan collateral. 
B)  "factoring" the receivables to a finance company. 
C)  selling securities backed by the receivables. 
D)  All of these options are correct. 
A)  pledging the receivables as loan collateral. 
B)  "factoring" the receivables to a finance company. 
C)  selling securities backed by the receivables. 
D)  All of these options are correct.

Question 9

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.

Question 10

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 sell dealer paper instead. 
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 sell dealer paper instead.

Question 11

The lender's primary concern is whether the borrower's capacity to generate accounts receivables is sufficient to liquidate the loan as it comes due.

Accepted Answer

A) True 
 B)False

Question 12

One major advantage of factoring accounts receivable is that the selling firm receives money from its accounts receivable faster than if it waited until the customers paid.

Accepted Answer

A) True 
 B)False

Question 13

The term "credit crunch" refers to a period in which the interest rate on credit is so high that firms cannot afford to borrow money.

Accepted Answer

A) True 
 B)False

Question 14

Small companies finance a relatively greater proportion of their assets through trade credit than do larger firms.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following is NOT evident during a credit crunch?

Accepted Answer

A)  The Fed tightens the money supply. 
B)  There are higher business requirements for funds. 
C)  A decrease in interest rates occurs. 
D)  Massive withdrawals from savings deposits occur 
A)  The Fed tightens the money supply. 
B)  There are higher business requirements for funds. 
C)  A decrease in interest rates occurs. 
D)  Massive withdrawals from savings deposits occur

Question 16

General Motors Acceptance Corporation (GMAC) is one of the biggest issuers of asset-backed securities.

Accepted Answer

A) True 
 B)False

Question 17

The cost of not taking the discount on trade credit of 3/20, net 90 is approximately ______.

Accepted Answer

A)  15.9% 
B)  16.3% 
C)  18.0% 
D)  17.4% 
A)  15.9% 
B)  16.3% 
C)  18.0% 
D)  17.4%

Question 18

Commercial paper offers which of the following advantages to the issuer?

Accepted Answer

A)  It may be issued below the prime rate. 
B)  It requires no compensating balances. 
C)  It is secured by corporate assets to protect the buyer. 
D)  It may be issued below the prime rate and requires no compensating balances. 
A)  It may be issued below the prime rate. 
B)  It requires no compensating balances. 
C)  It is secured by corporate assets to protect the buyer. 
D)  It may be issued below the prime rate and requires no compensating balances.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Multinational firms have found that they can lower borrowing costs

Accepted Answer

A)  by borrowing Eurodollars at a lower rate than the U.S. Prime Rate. 
B)  by borrowing foreign currencies through foreign subsidiaries at rates lower than the U.S. prime rate and then converting these foreign loans into dollars. 
C)  by using more bankers' acceptances. 
D)  by borrowing Eurodollars at a lower rate than the U.S. prime rate and by borrowing foreign currencies through foreign subsidiaries at rates lower than the U.S. prime rate and then converting these foreign loans into dollars. 
A)  by borrowing Eurodollars at a lower rate than the U.S. Prime Rate. 
B)  by borrowing foreign currencies through foreign subsidiaries at rates lower than the U.S. prime rate and then converting these foreign loans into dollars. 
C)  by using more bankers' acceptances. 
D)  by borrowing Eurodollars at a lower rate than the U.S. prime rate and by borrowing foreign currencies through foreign subsidiaries at rates lower than the U.S. prime rate and then converting these foreign loans into dollars.

Exam 8: Sources of Short-Term Financing

What is generally the largest source of short-term credit for small firms?

A self-liquidating loan is preferable to a bank because it generally provides them with a higher return.

Commercial bank term loans

LIBOR is

The cost of not taking the discount on trade credit of 2/10, net 30 is approximately ______.

Compensating balances

The movement of the exchange rate between two currencies can increase the total cost of a loan by making the principal repayment require more money than the original amount of the loan.

Accounts receivable may be used as a source of financing by

Hedging refers to

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

The lender's primary concern is whether the borrower's capacity to generate accounts receivables is sufficient to liquidate the loan as it comes due.

One major advantage of factoring accounts receivable is that the selling firm receives money from its accounts receivable faster than if it waited until the customers paid.

The term "credit crunch" refers to a period in which the interest rate on credit is so high that firms cannot afford to borrow money.

Small companies finance a relatively greater proportion of their assets through trade credit than do larger firms.

Which of the following is NOT evident during a credit crunch?

General Motors Acceptance Corporation (GMAC) is one of the biggest issuers of asset-backed securities.

The cost of not taking the discount on trade credit of 3/20, net 90 is approximately ______.

Commercial paper offers which of the following advantages to the issuer?

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

Multinational firms have found that they can lower borrowing costs

The Goals and Activities 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 Banking

Long-Term Debt and Lease Financing

Common and Preferred Stock Financing

Dividend Policy and Retained Earnings

Convertibles, Warrants, and Derivatives

External Growth Through Mergers

International Financial Management

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