Exam 8: Sources of Short-Term Financing

Myrdal Boots can take a cash discount but has to borrow money from the bank to do so. The bank offers a 12% interest rate. The terms of the cash discount are 3/10, net 90. Because of this, Myrdal Boots should borrow from the bank to take the discount.

Mr. Jones borrows $4,500 for 90 days and pays $75 interest. What is his approximate effective rate of interest?

Factoring accounts receivable, unlike pledging accounts receivable, typically passes the risk of loss on the accounts receivable to the buyer.

General Rent-All's officers arrange a $50,000 loan for the company. The company is required to maintain a minimum checking account balance of 10% of the outstanding loan. This practice is called

Von Hayek's Kayaks can borrow $12,500 for 60 days at a cost of $220 interest. What is the effective rate of interest?

The higher the cost of bank financing, the more beneficial it is to take the cash discount.

Trade credit is considered what type of loan?

If a firm has invested in corporate bonds, it may engage in a financial futures contract in order to protect itself from

The London Interbank Offered Rate (LIBOR)

Accounts payable is a spontaneous source of funds that usually grows as the business expands.

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

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.

Leontief's Wigs can take a cash discount but has to borrow money from the bank to do so. The bank offers a 16% interest rate. The terms of the cash discount are 2/10, net 60. Because of this; Leontief's should borrow from the bank to take the discount.

If Analog Computers can borrow at 8% annually for three years, what is the effective rate of interest on a $1,000,000 loan where a 15% compensating balance is required?

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

At historically low interest rate levels, compensating balances increase.

Which of the following is NOT a method for lenders to control pledged inventory?

One advantage to an issuer of commercial paper is that the issuer eliminates the need for maintaining compensating balances and credit lines with a commercial bank.

Koopman s Chickens, Inc. plans to borrow $275,000 from its bank for one year. The annual rate of interest is 9%, but a compensating balance of 20% is required. What is the effective rate of interest?

Commercial paper is an unsecured short-term IOU from a large financially secure company.