Exam 16: Managing Short-Term Liabilities Financing

Picard Orchards requires a $100,000 annual loan in order to pay laborers to tend and harvest its fruit crop.Picard borrows on a discount interest basis at a simple annual rate of 11 percent.If Picard must actually receive $100,000 net proceeds to finance its crop,then what must be the face value of the note?

A revolving credit agreement is a formal line of credit usually used by large firms.The firm will pay a fee on the unused balance of the committed funds to compensate the bank for the commitment to extend those funds.

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.

Under the terms of trade found in most industries,the costly component of trade credit

Wentworth Greenery harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped.However,the firm must plant,irrigate,and harvest on a near continual schedule.The firm uses 90-day bank notes to finance its operations.The firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually.What is the effective annual rate of these discount loans?

Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex.

You go to three different banks to borrow $10,000 for one year.Each says it will lend you the money at 10 percent,but their terms differ as follows: Banks A and C require a single payment at the end of the year.Bank B requires 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rate in this case?

If a firm fails to take trade credit discounts it may cost the firm money,but generally such a policy has a negligible effect on the firm's income statement and no effect on the firm's balance sheet.

A firm constructing a new manufacturing plant and financing it with short-term loans that are scheduled to be converted to bonds when the plant is completed,would want to separate the construction loan from other current liabilities associated with working capital management.

Phillips Glass Company buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 30 days after the invoice date.Net purchases amount to $720,000 per year.On average,how much "free" trade credit does Phillips receive during the year?

Which of the following is not a common type of short term financing?

Trade credit and accrual accounts are always costless sources of spontaneous financing for the firm.

Dixie Tours Inc.buys on terms of 2/15,net 30.It does not take discounts,and it typically pays 35 days after the invoice date.Net purchases amount to $720,000 per year.What is the approximate percentage cost of its non-free trade credit?

The uniform commercial code is a system of standards that simplifies procedures for establishing loan security.

When deciding whether or not to take a trade discount,the cost of borrowing funds should be compared to the cost of trade credit to determine if the cash discount should be taken.

You need to borrow $25,000 for one year.Your bank offers to make the loan,and it offers you three choices: (1)15 percent simple interest,annual compounding; (2)13 percent simple interest,daily compounding (360-day year); (3)9 percent add-on interest,12 end-of-month payments.The first two loans would require a single payment at the end of the year,the third would require 12 equal monthly payments beginning at the end of the first month.What is the difference between the highest and lowest effective annual rate?

Your company has been offered credit terms on its purchases of 4/30,net 90.What will be the approximate cost of trade credit if your company pays on the 35th day after receiving the invoice?

Jarrett Enterprises is considering whether to pursue a restricted or relaxed current asset investment policy.The firm's annual sales are $400,000; its fixed assets are $100,000; debt and equity are each 50 percent of total assets.EBIT is $36,000,the interest rate on the firm's debt is 10 percent,and the firm's tax rate is 40 percent.With a restricted policy,current assets will be 15 percent of sales.Under a relaxed policy,current assets will be 25 percent of sales.What is the difference in the projected ROEs between the restricted and relaxed policies?

Do not use the approximation formula for this problem.Coverall Carpets Inc.is planning to borrow $12,000 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 effective rate of interest on the 10.19 percent add-on loan?

Which of the following statements is correct?