Question 1

Stretching the payment period refers to the practice of trying to take a trade discount after the discount period.

Accepted Answer

A) True 
 B)False

Question 2

The simplest inventory financing method is a blanket inventory lien where items are not identified or tagged, and there is no physical transfer of control of the inventory from the borrower.

Accepted Answer

A) True 
 B)False

Question 3

Factoring accounts receivable, unlike pledging accounts receivable, typically passes the risk of loss on the receivable to the buyer.

Accepted Answer

A) True 
 B)False

Question 4

Commercial paper is an unsecured short-term IOU from a large financially secure company.

Accepted Answer

A) True 
 B)False

Question 5

The cost of not taking the discount on trade credit of 3/20, net 90 is equal to

Accepted Answer

A)  15.9% 
B)  16.3% 
C)  18.0% 
D)  17.4% 
A)  15.9% 
B)  16.3% 
C)  18.0% 
D)  17.4%

Question 6

Accounts receivable may be used as a source of financing by

Accepted Answer

A)  pledging the receivables as loan collateral. 
B)  factoring the receivables to a finance company. 
C)  selling securities backed by the receivables. 
D)  all of these. 
A)  pledging the receivables as loan collateral. 
B)  factoring the receivables to a finance company. 
C)  selling securities backed by the receivables. 
D)  all of these.

Question 7

The commercial paper market is available to all New York Stock Exchange companies.

Accepted Answer

A) True 
 B)False

Question 8

Compensating balances represent unfair hidden costs of borrowing.

Accepted Answer

A) True 
 B)False

Question 9

Commercial bank term loans

Accepted Answer

A)  usually carry fixed interest rates. 
B)  are very short-term in nature. 
C)  are offered to superior credit applicants. 
D)  both b and c. 
A)  usually carry fixed interest rates. 
B)  are very short-term in nature. 
C)  are offered to superior credit applicants. 
D)  both b and c.

Question 10

What is generally the largest source of short-term credit small firms?

Accepted Answer

A)  Bank loans 
B)  Commercial paper 
C)  Installment loans 
D)  Trade credit 
A)  Bank loans 
B)  Commercial paper 
C)  Installment loans 
D)  Trade credit

Question 11

A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from

Accepted Answer

A)  declining interest rates. 
B)  rising interest rates. 
C)  inflation. 
D)  changes in hedging activities. 
A)  declining interest rates. 
B)  rising interest rates. 
C)  inflation. 
D)  changes in hedging activities.

Question 12

The required compensating balance is usually computed as a

Accepted Answer

A)  percentage of customer loans outstanding. 
B)  factor of accounts receivable. 
C)  percentage of the bank's commitments toward future loans. 
D)  a and c are correct. 
A)  percentage of customer loans outstanding. 
B)  factor of accounts receivable. 
C)  percentage of the bank's commitments toward future loans. 
D)  a and c are correct.

Question 13

Large firms tend to be

Accepted Answer

A)  net users of trade credit. 
B)  net suppliers of trade credit. 
C)  firms with high levels of profitability. 
D)  firms with low levels of inventory turnover and accounts receivable turnover. 
A)  net users of trade credit. 
B)  net suppliers of trade credit. 
C)  firms with high levels of profitability. 
D)  firms with low levels of inventory turnover and accounts receivable turnover.

Question 14

When Ford Motor found that it couldn't utilize the asset-backed automobile receivables market, they turned to the commercial paper market for financing.

Accepted Answer

A) True 
 B)False

Question 15

One major disadvantage of commercial paper is that if the company's credit quality declines, refinancing existing commercial paper might be impossible to achieve through a new issue of commercial paper.

Accepted Answer

A) True 
 B)False

Question 16

One advantage to an issuer of commercial paper is that the issuer eliminates the need for maintaining compensating balances and credit lines with a commercial bank.

Accepted Answer

A) True 
 B)False

Question 17

Issuers of commercial paper can be divided into direct paper, dealer paper, and asset-backed commercial paper.

Accepted Answer

A) True 
 B)False

Question 18

The extent to which inventory financing may be used depends on

Accepted Answer

A)  marketability of pledged goods. 
B)  price stability of goods. 
C)  perishability of goods. 
D)  all of these. 
A)  marketability of pledged goods. 
B)  price stability of goods. 
C)  perishability of goods. 
D)  all of these.

Question 19

Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate.

Accepted Answer

A) True 
 B)False

Question 20

Friedman Roses, Inc. needs $65,000 in funds for expansion. With a compensating balance requirement of 20%, how much will the firm need to borrow?

Accepted Answer

A)  $16,000 
B)  $81,250 
C)  $100,000 
D)  None of these 
A)  $16,000 
B)  $81,250 
C)  $100,000 
D)  None of these

Exam 8: Sources of Short-Term Financing

Stretching the payment period refers to the practice of trying to take a trade discount after the discount period.

The simplest inventory financing method is a blanket inventory lien where items are not identified or tagged, and there is no physical transfer of control of the inventory from the borrower.

Factoring accounts receivable, unlike pledging accounts receivable, typically passes the risk of loss on the receivable to the buyer.

Commercial paper is an unsecured short-term IOU from a large financially secure company.

The cost of not taking the discount on trade credit of 3/20, net 90 is equal to

Accounts receivable may be used as a source of financing by

The commercial paper market is available to all New York Stock Exchange companies.

Compensating balances represent unfair hidden costs of borrowing.

Commercial bank term loans

What is generally the largest source of short-term credit small firms?

A firm has invested in corporate bonds; it may engage in a financial futures contract in order to protect itself from

The required compensating balance is usually computed as a

Large firms tend to be

When Ford Motor found that it couldn't utilize the asset-backed automobile receivables market, they turned to the commercial paper market for financing.

One major disadvantage of commercial paper is that if the company's credit quality declines, refinancing existing commercial paper might be impossible to achieve through a new issue of commercial paper.

One advantage to an issuer of commercial paper is that the issuer eliminates the need for maintaining compensating balances and credit lines with a commercial bank.

Issuers of commercial paper can be divided into direct paper, dealer paper, and asset-backed commercial paper.

The extent to which inventory financing may be used depends on

Even during slack loan periods, banks will never loan out money at an interest rate lower than the prime rate because the prime rate is their best rate.

Friedman Roses, Inc. needs $65,000 in funds for expansion. With a compensating balance requirement of 20%, how much will the firm need to borrow?

The Goals and Functions of Financial Management

Review of Accounting

Financial Analysis

Financial Forecasting

Operating and Financial Leverage

Working Capital and the Financing Decision

Current Asset Management

The Time Value of Money

Valuation and Rates of Return

Cost of Capital

The Capital Budgeting Decision

Risk and Capital Budgeting

Capital Markets

Investment Banking: Public and Private Placement

Long-Term Debt and Lease Financing

Common and Preferred Stock Financing

Dividend Policy and Retained Earnings

Convertibles, Warrants, and Derivatives

External Growth Through Mergers

International Financial Management

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