Exam 16: Managing Short-Term Liabilities Financing

A loan that is backed by collateral is a(n)__________ loan.

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 approximate effective rate of interest on the 10.19 percent add-on loan?

Trade credit is an inexpensive source of short-term financing if no discounts are offered.

Long-term loan agreements always contain provisions,or covenants,which constrain the firm's future actions.Short-term credit agreements are just as restrictive in order to protect the interests of the lender.

Suppose you borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent,with interest prepaid (a discounted loan).Also assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value.What effective annual interest rate are you being charged?

The factor (lender)purchasing accounts receivable from borrower has recourse against the borrower if the accounts receivable can not be collected.

Financial managers should always use the free component of the trade credit,but they should use the costly component only after analyzing this source of financing to make sure

A line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank.

The pledging of receivables differs from factoring in that,under pledging,the lender normally has recourse against the borrower.

Commercial paper is a type of secured promissory issued by large,strong financial firms.

A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions.

Exhibit 16-1 You have just taken out a loan for $75,000. The stated (simple) interest rate on this loan is 10 percent, and the bank requires you to maintain a compensating balance equal to 15 percent of the initial face amount of the loan. You currently have $20,000 in your checking account, and you plan to maintain this balance. The loan is an add-on installment loan which you will repay in 12 equal monthly installments, beginning at the end of the first month. -Refer to Exhibit 16-1.What is the approximate annual interest rate on this loan?

Trade credit is seldom used by firms and is an insignificant component of short-term debt for most firms.

Factoring involves the outright sale of accounts receivable.

A document specifying the terms and conditions of a bank loan,including the amount,interest rate,repayment schedule,and any other terms or conditions of the loan is a

Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit.

Your firm buys on credit terms of 2/10,net 45,and it always pays on day 45.If you calculate that this policy effectively costs your firm $157,500 each year,what is the firm's average accounts payable balance?

Liabilities such as wages and taxes that increase spontaneously with operations are called accruals.

Firms having difficulty borrowing short-term funds from banks can raise short-term funds by issuing commercial paper.

A firm that "stretches" its accounts payable rather than paying on net terms is actually increasing its calculated cost of credit given that it already does not take discounts when offered,other things held constant.