Question 1

One of the disadvantages of not taking trade credit discounts when offered is that the firm's investment in accounts payable rises.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following statements is correct?

Accepted Answer

A)  The factoring of accounts receivable consists of a series of individual cycles as opposed to a continuous process. 
B)  Once a factoring agreement is in force, funds from this source are spontaneous in the sense that an increase in sales will automatically generate additional credit from the factor. 
C)  One of the main disadvantages of pledging or factoring is the significant lack of flexibility. 
D)  One disadvantage of factoring is that it reduces the need of the selling firm to maintain a credit department. 
E)  The cost of pledging and factoring generally is very low and the risk bearing fee is incorporated into the interest rate charged on the unpaid balance of the funds advanced by the factor, which is usually one half of one percent above the prime rate. 
A)  The factoring of accounts receivable consists of a series of individual cycles as opposed to a continuous process. 
B)  Once a factoring agreement is in force, funds from this source are spontaneous in the sense that an increase in sales will automatically generate additional credit from the factor. 
C)  One of the main disadvantages of pledging or factoring is the significant lack of flexibility. 
D)  One disadvantage of factoring is that it reduces the need of the selling firm to maintain a credit department. 
E)  The cost of pledging and factoring generally is very low and the risk bearing fee is incorporated into the interest rate charged on the unpaid balance of the funds advanced by the factor, which is usually one half of one percent above the prime rate.

Question 3

Suppose the credit terms offered to your firm by your suppliers are 2/10,net 30 days.Out of convenience,your firm is not taking discounts,but is paying after 20 days,instead of waiting until day 30.You point out that the approximate cost of not taking the discount and paying on day 30 is around 37 percent.But since your firm is not taking discounts and is paying on day 20,what is the effective annual percentage cost (not approximate)of your firm's current practice,using a 360-day year?

Accepted Answer

A)  36.7% 
B)  105.4% 
C)  73.4% 
D)  43.6% 
E)  106.9% 
A)  36.7% 
B)  105.4% 
C)  73.4% 
D)  43.6% 
E)  106.9%

Question 4

An arrangement in which a bank agrees to lend up to a specified maximum of funds as needed over a specified time period is a

Accepted Answer

A)  compensating balance. 
B)  line of credit. 
C)  commercial paper. 
D)  trade credit. 
E)  promissory note. 
A)  compensating balance. 
B)  line of credit. 
C)  commercial paper. 
D)  trade credit. 
E)  promissory note.

Question 5

The Lasser Company needs to finance an increase in its working capital for the coming year.Lasser is reviewing the following three options: (1)The firm can borrow from its bank on a simple interest basis for one year at 13 percent.(2)It can borrow on a 3-month,but renewable,loan at a 12 percent simple rate.The loan is a simple interest loan,completely paid off at the end of each quarter,then renewed for another quarter.(3)The firm can increase its accounts payable by not taking discounts.Lasser buys on credit terms of 1/30,net 60 days.What is the effective annual cost (not the approximate cost)of the least expensive type of credit,assuming 360 days per year?

Accepted Answer

A)  13.0% 
B)  12.82% 
C)  11.46% 
D)  12.12% 
E)  12.55% 
A)  13.0% 
B)  12.82% 
C)  11.46% 
D)  12.12% 
E)  12.55%

Question 6

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 12 percent discounted loan?

Accepted Answer

A)  10.7% 
B)  12.0% 
C)  12.5% 
D)  13.6% 
E)  14.1% 
A)  10.7% 
B)  12.0% 
C)  12.5% 
D)  13.6% 
E)  14.1%

Question 7

A compensating balance is an arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following statements is correct?

Accepted Answer

A)  In a factoring arrangement, the factor always performs three functions: (1) credit checking, (2) lending, and (3) receivables collection. 
B)  The pledging of accounts receivable involves a transfer of the risk associated with accounts receivable from the borrower to the lender. 
C)  In a factoring arrangement, the seller can select various combinations of credit checking, lending, and risk bearing the factor performs by changing provisions in the factoring agreement. 
D)  In a factoring agreement, the factor would not perform the credit checking and risk taking functions without performing the lending function, because the former are required before the factor can lend to the seller. 
E)  The financing of accounts receivable involves an agreement which is informal and non-binding, which makes it difficult for the factor to protect itself. 
A)  In a factoring arrangement, the factor always performs three functions: (1) credit checking, (2) lending, and (3) receivables collection. 
B)  The pledging of accounts receivable involves a transfer of the risk associated with accounts receivable from the borrower to the lender. 
C)  In a factoring arrangement, the seller can select various combinations of credit checking, lending, and risk bearing the factor performs by changing provisions in the factoring agreement. 
D)  In a factoring agreement, the factor would not perform the credit checking and risk taking functions without performing the lending function, because the former are required before the factor can lend to the seller. 
E)  The financing of accounts receivable involves an agreement which is informal and non-binding, which makes it difficult for the factor to protect itself.

Question 9

A firm is offered trade credit terms of 2/8,net 45.The firm does not take the discount,and it pays after 58 days.What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost.)

Accepted Answer

A)  21.63% 
B)  13.35% 
C)  22.95% 
D)  15.65% 
E)  18.70% 
A)  21.63% 
B)  13.35% 
C)  22.95% 
D)  15.65% 
E)  18.70%

Question 10

Every 10 days you receive $5,000 worth of raw materials from your suppliers.The credit terms for these purchases are 3/20,net 30,and thus far you have been paying on the 30th day after each delivery because you are short of cash.You have been contemplating taking out a one-year bank loan for $4,850 (97 percent of the invoice amount).If the effective annual interest rate on this loan is 20 percent,what will be your net dollar savings over the year by borrowing and then taking the discount? That is,what is the difference between the dollars saved if you take the discount and the dollars spent on interest expense for the loan?

Accepted Answer

A)  $650 
B)  $1,240 
C)  $4,430 
D)  $2,645 
E)  -$820 
A)  $650 
B)  $1,240 
C)  $4,430 
D)  $2,645 
E)  -$820

Question 11

Seagar Corporation provides monofilament fishing line to its customers.Seagar gives its customers a three percent discount if the invoice payment is paid within 10 days of the billing date.If the discount is not taken then the balance must paid in full within 45 days of the billing date.Any unpaid balances over 45 days beyond the billing date will be assessed a five percent penalty every 30 days,beginning 46 days after the billing date.Seagar is said to sell on credit with terms of what?

Accepted Answer

A)  5/30, net 45 
B)  3/45, net 60 
C)  3/10, net 45 
D)  3/10, net 30 
E)  5/10, net 30 
A)  5/30, net 45 
B)  3/45, net 60 
C)  3/10, net 45 
D)  3/10, net 30 
E)  5/10, net 30

Question 12

The three main working capital strategies discussed in the text,aggressive,conservative,and moderate,differ primarily in the

Accepted Answer

A)  Relative amount of short-term debt used. 
B)  Minimum level of permanent current assets. 
C)  Relative amount of long-term debt versus equity used to finance permanent current assets. 
D)  Average level of temporary current assets. 
E)  Amount of trade credit used. 
A)  Relative amount of short-term debt used. 
B)  Minimum level of permanent current assets. 
C)  Relative amount of long-term debt versus equity used to finance permanent current assets. 
D)  Average level of temporary current assets. 
E)  Amount of trade credit used.

Question 13

If you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent,but interest is prepaid (a discounted loan),then what is your effective annual rate?

Accepted Answer

A)  14.00% 
B)  8.57% 
C)  16.28% 
D)  21.21% 
E)  28.00% 
A)  14.00% 
B)  8.57% 
C)  16.28% 
D)  21.21% 
E)  28.00%

Question 14

Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

Accepted Answer

A)  Convenience of location. 
B)  Competitive cost of services provided. 
C)  Size of the bank's deposits. 
D)  Experience of personnel. 
E)  Loyalty and willingness to assume lending risks. 
A)  Convenience of location. 
B)  Competitive cost of services provided. 
C)  Size of the bank's deposits. 
D)  Experience of personnel. 
E)  Loyalty and willingness to assume lending risks.

Question 15

Small,undercapitalized firms

Accepted Answer

A)  Are generally users of net trade credit. 
B)  Are major users of banker's acceptances. 
C)  Generally do not issue commercial paper. 
D)  Typically have a high cost of debt capital. 
E)  Are described by all of the above statements. 
A)  Are generally users of net trade credit. 
B)  Are major users of banker's acceptances. 
C)  Generally do not issue commercial paper. 
D)  Typically have a high cost of debt capital. 
E)  Are described by all of the above statements.

Question 16

A commitment fee is a fee charged on unused balance of a revolving credit agreement to compensate the bank for guaranteeing that the funds will be available when needed by the borrower.

Accepted Answer

A) True 
 B)False

Question 17

Assume that Sunshine Products Inc.has an agreement with Shady Finance Company to factor its receivables.Shady charges a flat commission of 2 percent of the receivables factored,plus 6 percent a year interest on the outstanding balance.It also deducts a reserve of 10 percent for returned and damaged materials.Interest and commission are paid in advance.No interest is charged on the reserve or the commission.If the average level of outstanding receivables is $700,000,and if they are turned over 4 times a year (hence the commission is paid 4 times a year),then what is the effective quarterly interest rate charged by Shady for this arrangement?

Accepted Answer

A)  6.05% 
B)  3.83% 
C)  7.52% 
D)  9.31% 
E)  10.56% 
A)  6.05% 
B)  3.83% 
C)  7.52% 
D)  9.31% 
E)  10.56%

Question 18

In this problem,use the approximation formula to find the cost of trade credit.A firm's payments policy calls for stretching payments to its supplier,who sells on terms of 3/20,net 60.Payment is made in 90 days,and the cash saved is invested in a money market mutual fund paying 12 percent interest.This policy is __________ because the firm has a net __________.

Accepted Answer

A)  Profitable; gain of about 9 percent on the funds involved. 
B)  Profitable; gain of about 12 percent on the funds involved. 
C)  Unprofitable; loss of about 4 percent on the funds involved. 
D)  Unprofitable; loss of about 9 percent on the funds involved. 
E)  Insufficient information to solve. 
A)  Profitable; gain of about 9 percent on the funds involved. 
B)  Profitable; gain of about 12 percent on the funds involved. 
C)  Unprofitable; loss of about 4 percent on the funds involved. 
D)  Unprofitable; loss of about 9 percent on the funds involved. 
E)  Insufficient information to solve.

Question 19

A firm is said to be extending net trade credit when its accounts receivable are less than its accounts payable.

Accepted Answer

A) True 
 B)False

Question 20

A promissory note is a document specifying the terms and conditions of a loan,including the amount,interest rate,and repayment schedule.

Accepted Answer

A) True 
 B)False

One of the disadvantages of not taking trade credit discounts when offered is that the firm's investment in accounts payable rises.

Which of the following statements is correct?

An arrangement in which a bank agrees to lend up to a specified maximum of funds as needed over a specified time period is a

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 12 percent discounted loan?

A compensating balance is an arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.

Which of the following statements is correct?

A firm is offered trade credit terms of 2/8,net 45.The firm does not take the discount,and it pays after 58 days.What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost.)

The three main working capital strategies discussed in the text,aggressive,conservative,and moderate,differ primarily in the

If you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent,but interest is prepaid (a discounted loan),then what is your effective annual rate?

Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

Small,undercapitalized firms

A commitment fee is a fee charged on unused balance of a revolving credit agreement to compensate the bank for guaranteeing that the funds will be available when needed by the borrower.

A firm is said to be extending net trade credit when its accounts receivable are less than its accounts payable.

A promissory note is a document specifying the terms and conditions of a loan,including the amount,interest rate,and repayment schedule.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, institutions, and Investment Banking

The Time Value of Money

The Cost of Money

Bonds Debt-Characteristics and Valuation

Stocks Equity-Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Working Capital Policy

Managing Short-Term Assets

Financial Planning and Control

project Cash Flows and Risk

Filters

Exam 16: Managing Short-Term Liabilities Financing

One of the disadvantages of not taking trade credit discounts when offered is that the firm's investment in accounts payable rises.

Which of the following statements is correct?

An arrangement in which a bank agrees to lend up to a specified maximum of funds as needed over a specified time period is a

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 12 percent discounted loan?

A compensating balance is an arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.

Which of the following statements is correct?

A firm is offered trade credit terms of 2/8,net 45.The firm does not take the discount,and it pays after 58 days.What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost.)

The three main working capital strategies discussed in the text,aggressive,conservative,and moderate,differ primarily in the

If you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent,but interest is prepaid (a discounted loan),then what is your effective annual rate?

Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?

Small,undercapitalized firms

A commitment fee is a fee charged on unused balance of a revolving credit agreement to compensate the bank for guaranteeing that the funds will be available when needed by the borrower.

A firm is said to be extending net trade credit when its accounts receivable are less than its accounts payable.

A promissory note is a document specifying the terms and conditions of a loan,including the amount,interest rate,and repayment schedule.

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, institutions, and Investment Banking

The Time Value of Money

The Cost of Money

Bonds Debt-Characteristics and Valuation

Stocks Equity-Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Working Capital Policy

Managing Short-Term Assets

Financial Planning and Control

project Cash Flows and Risk

Filters