Exam 16: Managing Short-Term Liabilities Financing

The maturity of most bank loans is short-term.Bank to business loans are frequently 90-day notes which are often rolled over,or renewed,at the end of their maturity.

Which of the following statements concerning commercial paper is false?

A firm is offered trade credit terms of 3/15,net 45.The firm does not take the discount,and it pays after 67 days.What is the approximate annual cost of not taking the discount?

Most secured short-term business borrowings involves the use of __________ as collateral.

Judy's Fashions Inc.purchases supplies from a single supplier on terms of 1/10,net 20.Currently,Judy takes the discount,but she believes she could extend the payment to 40 days without any adverse effects if she decided not to take the discount.Judy needs an additional $50,000 to support an expansion of fixed assets.This amount could be raised by making greater use of trade credit or by arranging a bank loan.The banker has offered to loan the money at 12 percent discount interest.Additionally,the bank requires an average compensating balance of 20 percent of the loan amount.Judy already has a commercial checking account at this bank which could be counted toward the compensating balance,but the required compensating balance amount is twice the amount that Judy would otherwise keep in the account.Which of the following statements is most correct?

Many firms borrow by using banker's acceptances (i.e.,getting a bank to guarantee the firm's debt)when they are too small or too risky to use the commercial paper market.

C+ Notes' business is booming,and it needs to raise more capital.The company purchases supplies from a single supplier on terms of 1/10,net 20,and it currently takes the discount.One way of getting the needed funds would be to forgo the discount,and C+'s owner believes she could delay payment to 40 days without adverse effects.As an alternative,C+ could borrow from its bank at a rate of 12 percent,annual compounding,but with discount interest.Additionally,the bank would require a compensating balance of 20 percent of the loan amount.What is the difference between the EARs of the two financing sources?

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.How large are your monthly payments?

Trade credit can be separated into two components: free trade credit,which involves credit received after the discount period ends,and costly trade credit,which is the cost of discounts not taken.

Assume a firm takes out a discounted loan with its local bank.By the very nature of a discount loan,a compensating balance requirement will exist,and this will lead to a higher effective rate on this loan versus the loan's simple,or stated,rate.

The calculated cost of trade credit is reduced by paying late.

If a firm is involuntarily "stretching" its accounts payable then this is one sign that it is undercapitalized; that is,that it needs more working capital for operations.

Which of the following functions does the factor (lender)purchasing accounts receivable normally perform?

Wicker Corporation is determining whether to support $100,000 of its permanent current assets with a bank note or a short-term bond.The firm's bank offers a two-year note where the firm will receive $100,000 and repay $118,810 at the end of two years.The firm has the option to renew the loan at market rates.As an alternative,the firm can sell its own 8.5 percent annual coupon bonds,with $1,000 face value and 2-year maturity,at a price of $973.97.Comparing the cost of the two alternatives,how many percentage points lower is the interest rate on the less expensive debt instrument?

Accruals are generally considered __________ debt since __________ interest is paid on accruals.

"Stretching" accounts payable is a widely accepted and costless financing technique.

The prime rate charged by big money center banks can vary greatly (for example,as much as 2 to 4 percentage points)across banks due to banks' ability to differentiate themselves and because particular banks develop particular clienteles,such as mainly making loans to small firms.

Viking Farms harvests crops in roughly 90-day cycles based on a 360-day year.The firm receives payment from its harvests sometime after shipment.Due in part to the firm's rapid growth,it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest.If the firm requires $60,000 in proceeds from each note,what must be the face value of each note?

When a firm pledges its accounts receivable,if a customer that purchased goods from the firm does not pay,the selling firm must take the loss.

One of the advantages of short-term debt financing is that firms can expand or contract their short-term credit more easily than their long-term credit.