Question 1

Loans to purchase inventory are considered self-liquidating because ____.

Accepted Answer

A)  these types of loans have little risk 
B)  these loans are paid according to a set schedule 
C)  these loans are paid as soon as the inventory is sold 
D)  these loans have claims against the firm in general and not to a specific asset 
A)  these types of loans have little risk 
B)  these loans are paid according to a set schedule 
C)  these loans are paid as soon as the inventory is sold 
D)  these loans have claims against the firm in general and not to a specific asset

Question 2

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its customer's balance sheets is likely to be:

Accepted Answer

A)  decreased accounts receivable. 
B)  increased accounts receivable. 
C)  decreased accounts payable. 
D)  increased accounts payable. 
A)  decreased accounts receivable. 
B)  increased accounts receivable. 
C)  decreased accounts payable. 
D)  increased accounts payable.

Question 3

If a company decides to factor its receivables without recourse, it will:

Accepted Answer

A)  offer the receivables to a lending institution as collateral. 
B)  sell receivables to a lender and remain liable for uncollectible accounts. 
C)  sell the receivables at a discount. 
D)  offer receivables that are more than 120 days old to a collection agency. 
E)  none of the above defines factoring receivables. 
A)  offer the receivables to a lending institution as collateral. 
B)  sell receivables to a lender and remain liable for uncollectible accounts. 
C)  sell the receivables at a discount. 
D)  offer receivables that are more than 120 days old to a collection agency. 
E)  none of the above defines factoring receivables.

Question 4

Commercial paper:

Accepted Answer

A)  is normally issued by smaller firms that require cash for less than 270 days. 
B)  is normally purchased by insurance companies and mutual funds that have excess funds to invest for a short period. 
C)  is considered very safe and pays interest rates slightly below 3-month treasuries. 
D)  requires SEC registration. 
E)  All of the above are correct regarding commercial paper. 
A)  is normally issued by smaller firms that require cash for less than 270 days. 
B)  is normally purchased by insurance companies and mutual funds that have excess funds to invest for a short period. 
C)  is considered very safe and pays interest rates slightly below 3-month treasuries. 
D)  requires SEC registration. 
E)  All of the above are correct regarding commercial paper.

Question 5

If a firm issues $5 million of commercial paper with a maturity of three months at an annual interest rate of 8%, the proceeds of the issue are:

Accepted Answer

A)  $4,900,000. 
B)  $4,629,630. 
C)  $4,901,961. 
D)  $4,600,000. 
A)  $4,900,000. 
B)  $4,629,630. 
C)  $4,901,961. 
D)  $4,600,000.

Question 6

Working capital policy involves a tradeoff between easier operation and ____.

Accepted Answer

A)  more working capital 
B)  spontaneous liabilities 
C)  temporary financing 
D)  the cost of carrying short-term assets 
A)  more working capital 
B)  spontaneous liabilities 
C)  temporary financing 
D)  the cost of carrying short-term assets

Question 7

The services provided by an accounts receivable factor to the borrower may include:

Accepted Answer

A)  performing credit checks on potential customers. 
B)  collecting cash from customers. 
C)  assuming the bad debt risk when customers of factored accounts do not pay. 
D)  All of the above 
A)  performing credit checks on potential customers. 
B)  collecting cash from customers. 
C)  assuming the bad debt risk when customers of factored accounts do not pay. 
D)  All of the above

Question 8

Which of the following provides financing that can vary in size over the life of a loan?

Accepted Answer

A)  Revolving credit agreement 
B)  Commercial paper 
C)  Single payment note 
D)  a and b 
E)  None of the above 
A)  Revolving credit agreement 
B)  Commercial paper 
C)  Single payment note 
D)  a and b 
E)  None of the above

Question 9

Jensen Corporation uses the ABC system of inventory management. It has placed common bolts in a bin that is accessible to any employees needing these parts. When the bin gets low, an order is placed with the local hardware distributor to replace this item. The bolts would be a categorized as a(an) ____ item.

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  JIT 
A)  A 
B)  B 
C)  C 
D)  JIT

Question 10

The size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except:

Accepted Answer

A)  how efficiently the firm manages its fixed assets. 
B)  the length of the cash conversion. 
C)  the sales level. 
D)  credit policies. 
A)  how efficiently the firm manages its fixed assets. 
B)  the length of the cash conversion. 
C)  the sales level. 
D)  credit policies.

Question 11

A bank's ____ is the rate it charges its largest and most creditworthy corporate customers.

Accepted Answer

A)  risk-free rate 
B)  commitment fee 
C)  prime rate 
D)  nominal rate 
A)  risk-free rate 
B)  commitment fee 
C)  prime rate 
D)  nominal rate

Question 12

A firm has a $5 million revolving credit agreement with its bank at 1.5% over prime with a commitment fee of .5% unborrowed balance. What is the total cost of borrowing in a month when the prime rate is 8% if the firm borrowed $2 million prior to the beginning of the month and takes down an additional $1 million two thirds through the month on the 21st? (Correct answers may differ due to rounding.)

Accepted Answer

A)  $21,875 
B)  $20,833 
C)  $20,417 
D)  $19,583 
A)  $21,875 
B)  $20,833 
C)  $20,417 
D)  $19,583

Question 13

Holding cash for which of the following reasons is an example of transactions demand?

Accepted Answer

A)  Purchase of inputs in response to an abrupt price drop 
B)  Acquisition of raw material for an emergency demand 
C)  Immediately producing a new batch of product to replace goods damaged by a flood 
D)  Payments to tax authorities 
A)  Purchase of inputs in response to an abrupt price drop 
B)  Acquisition of raw material for an emergency demand 
C)  Immediately producing a new batch of product to replace goods damaged by a flood 
D)  Payments to tax authorities

Question 14

Which of the following is not an inventory carrying cost?

Accepted Answer

A)  The cost of storage 
B)  The cost of borrowing to acquire inventory 
C)  The costs of spoilage, shrinkage, and breakage 
D)  The cost of customer complaints about unavailable product 
A)  The cost of storage 
B)  The cost of borrowing to acquire inventory 
C)  The costs of spoilage, shrinkage, and breakage 
D)  The cost of customer complaints about unavailable product

Question 15

If a firm issues $5 million of commercial paper with a maturity of six months at an annual interest rate of 8%, the proceeds of the issue are:

Accepted Answer

A)  $5,000,000. 
B)  $4,629,629. 
C)  $4,800,000. 
D)  $4,807,692. 
A)  $5,000,000. 
B)  $4,629,629. 
C)  $4,800,000. 
D)  $4,807,692.

Question 16

Which of the following forms of compensating balance has a less severe effect on the borrower?

Accepted Answer

A)  Line of credit 
B)  Average balance 
C)  Minimum balance 
D)  Revolving credit 
A)  Line of credit 
B)  Average balance 
C)  Minimum balance 
D)  Revolving credit

Question 17

The term ____ refers to the assets and liabilities required to operate a business on a day-to-day basis.

Accepted Answer

A)  capital management 
B)  working capital 
C)  operating capital 
D)  operating management 
A)  capital management 
B)  working capital 
C)  operating capital 
D)  operating management

Question 18

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its own balance sheet is likely to be:

Accepted Answer

A)  decreased accounts receivable. 
B)  increased accounts receivable. 
C)  decreased accounts payable. 
D)  increased accounts payable. 
A)  decreased accounts receivable. 
B)  increased accounts receivable. 
C)  decreased accounts payable. 
D)  increased accounts payable.

Question 19

Holding cash for which of the following reasons is an example of speculative demand?

Accepted Answer

A)  Purchase of an input when there is an abrupt drop in the price 
B)  Quick acquisition of new raw materials for an emergency demand 
C)  A new shipment that has to be produced immediately because of product damage 
D)  Payments made to tax authorities 
A)  Purchase of an input when there is an abrupt drop in the price 
B)  Quick acquisition of new raw materials for an emergency demand 
C)  A new shipment that has to be produced immediately because of product damage 
D)  Payments made to tax authorities

Question 20

The aggressive approach to the financing of a firm's current assets uses a ____ proportion of short-term debt and a ____ proportion of long-term debt.

Accepted Answer

A)  low, high 
B)  relatively high, relatively low 
C)  high interest, low interest 
D)  None of the above 
A)  low, high 
B)  relatively high, relatively low 
C)  high interest, low interest 
D)  None of the above

Loans to purchase inventory are considered self-liquidating because ____.

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its customer's balance sheets is likely to be:

If a company decides to factor its receivables without recourse, it will:

Commercial paper:

If a firm issues $5 million of commercial paper with a maturity of three months at an annual interest rate of 8%, the proceeds of the issue are:

Working capital policy involves a tradeoff between easier operation and ____.

The services provided by an accounts receivable factor to the borrower may include:

Which of the following provides financing that can vary in size over the life of a loan?

The size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except:

A bank's ____ is the rate it charges its largest and most creditworthy corporate customers.

Holding cash for which of the following reasons is an example of transactions demand?

Which of the following is not an inventory carrying cost?

If a firm issues $5 million of commercial paper with a maturity of six months at an annual interest rate of 8%, the proceeds of the issue are:

Which of the following forms of compensating balance has a less severe effect on the borrower?

The term ____ refers to the assets and liabilities required to operate a business on a day-to-day basis.

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its own balance sheet is likely to be:

Holding cash for which of the following reasons is an example of speculative demand?

The aggressive approach to the financing of a firm's current assets uses a proportion of short-term debt and a proportion of long-term debt.

Foundations

Financial Background: a Review of Accounting, Financial Statements, and Taxes

Cash Flows and Financial Analysis

Financial Planning

The Financial System, Corporate Governance, and Interest

Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

Risk and Return

Capital Budgeting

Cash Flow Estimation

Risk Topics and Real Options in Capital Budgeting

Cost of Capital

Capital Structure and Leverage

Dividends

The Management of Working Capital

Corporate Restructuring

International Finance

Filters

Exam 16: The Management of Working Capital Multiple Choice Questions

Loans to purchase inventory are considered self-liquidating because ____.

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its customer's balance sheets is likely to be:

If a company decides to factor its receivables without recourse, it will:

Commercial paper:

If a firm issues $5 million of commercial paper with a maturity of three months at an annual interest rate of 8%, the proceeds of the issue are:

Working capital policy involves a tradeoff between easier operation and ____.

The services provided by an accounts receivable factor to the borrower may include:

Which of the following provides financing that can vary in size over the life of a loan?

The size and nature of a firm's investment in current assets is a function of a number of different factors including all of the following except:

A bank's ____ is the rate it charges its largest and most creditworthy corporate customers.

Holding cash for which of the following reasons is an example of transactions demand?

Which of the following is not an inventory carrying cost?

If a firm issues $5 million of commercial paper with a maturity of six months at an annual interest rate of 8%, the proceeds of the issue are:

Which of the following forms of compensating balance has a less severe effect on the borrower?

The term ____ refers to the assets and liabilities required to operate a business on a day-to-day basis.

The effect of a change in a firm's credit terms from "net 30" to "2/10, net 30" on its own balance sheet is likely to be:

Holding cash for which of the following reasons is an example of speculative demand?

The aggressive approach to the financing of a firm's current assets uses a ____ proportion of short-term debt and a ____ proportion of long-term debt.

Foundations

Financial Background: a Review of Accounting, Financial Statements, and Taxes

Cash Flows and Financial Analysis

Financial Planning

The Financial System, Corporate Governance, and Interest

Time Value of Money

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

Risk and Return

Capital Budgeting

Cash Flow Estimation

Risk Topics and Real Options in Capital Budgeting

Cost of Capital

Capital Structure and Leverage

Dividends

The Management of Working Capital

Corporate Restructuring

International Finance

Filters

The aggressive approach to the financing of a firm's current assets uses a proportion of short-term debt and a proportion of long-term debt.