Exam 16: Managing Short-Term Liabilities Financing

Accounts receivable financing,especially the factoring of accounts,is a very flexible source of funds.Once the factoring procedure has been established,funds from this type of financing will automatically increase as the firm increases its sales.

As a rule,managers should try to always use the free component of trade credit but should use the costly component only after comparing its costs to the costs of similar credit from other sources.

A bank with fluctuating deposit liabilities in a static community will tend to follow creative banking practices when approving loans.

Quickbow Company currently uses maximum trade credit by not taking discounts on its purchases.Quickbow is considering borrowing from its bank,using notes payable,in order to take trade discounts.The firm wants to determine the effect of this policy change on its net income.The standard industry credit terms offered by all its suppliers are 2/10,net 30 days,and Quickbow pays in 30 days.Its net purchases are $11,760 per day,using a 360-day year.The rate on the notes payable is 10 percent and the firm's tax rate is 40 percent.If the firm implements the plan,what is the expected change in Quickbow's net income?

Which of the following is not one of primary purchasers of commercial paper?

When a firm has accounts payable that are greater than the level of its receivables,the firm is actually receiving net trade credit.

All else equal,a firm that purchases raw materials on credit will have an __________ in trade credit with a given __________ in purchases.

Which of the following statements is correct?

Short-term financing might be riskier than long-term financing because,during periods of tight credit,the firm might not be able to rollover (renew)its debt.

The risk of default on pledged accounts receivable is borne by the lender to whom the receivables are pledged.

When a firm factors its accounts receivable,the factor normally performs the functions of risk bearing,credit checking,and lending.

Which of the following aspects is not important to business when choosing a bank?

Inventory financing can take the form of a

If one of your firm's customers is "stretching" its accounts payable,this may be a nuisance but does not represent a real financial cost to your firm as long as the firm periodically pays off its entire balance.

The calculated cost of trade credit for a firm that buys on terms of 2/10,net 30,is lower (other things held constant)if the firm pays in 40 days than if it pays in 30 days.

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.

On a 1-year loan for $10,000,a firm would be better off borrowing at a rate of 9.5 percent discounted interest than 9 percent simple interest.

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

Inland Oil arranged a $10,000,000 revolving credit agreement with a group of small banks.The firm paid an annual commitment fee of one-half of one percent of the unused balance of the loan commitment.On the used portion of the loan,Inland paid 1.5 percent above prime for the funds actually borrowed on an annual simple interest basis.The prime rate was at 9 percent for the year.If Inland borrowed $6,000,000 immediately after the agreement was signed and repaid the loan at the end of one year,what was the total dollar cost of the loan agreement for one year?

Firms generally choose to finance temporary assets with short-term debt because