Deck 11: Debt and Other Forms of Financing

Question 1

Building up inventory typically reduces cash levels.

Answer 1

True

Question 2

Net working capital is difficult to calculate; the method of taking the difference between current assets and current liabilities leaves the entrepreneur with ambiguous figures.

Answer 2

False

Question 3

The credit terms of "10/15, net 30" mean that the payment is due within 15 days, but if paid within 10 days, there is a net 30% discount.

Answer 3

False

Question 4

From a microeconomic perspective, a company operating below its optimal output should always offer generous credit terms in order to stimulate demand.

Question 5

The vast majority of organizations experience a gap between the time when they have to pay suppliers and when they receive payment from customers.This gap is known as the cost cycle.

Question 6

Accounts receivable represents liquid working capital that can be obtained prematurely without cost

Question 7

Techniques for forecasting future sales are limited to methods that use external or economic information.

Question 8

Working capital requirements can fall short periodically as long as the company remains profitable.

Question 9

Entrepreneurs requiring initial startup funding, generally seek capital from internal sources.

Question 10

Corporate insolvency usually results when the firm fails to service its debt obligations on time.

Question 11

An entrepreneur may only cash in his accounts receivable by going to a finance company for a loan.

Question 12

When paying for working capital shortfalls, entrepreneurs look for short-term cash at the lowest possible rates.

Question 13

Home equity lines of credit are the only way in which entrepreneurs provide funding for their businesses.

Question 14

One way for entrepreneurs to stretch their payables (to take longer to pay bills)is to take discounts.

Question 15

The two major determinants of the credit decision are the character of the creditor firm and the capacity of the debtor company to repay the loan.

Question 16

Only a handful of very large firms have access to funding sources such as asset-backed debt securitizations, A-l commercial paper ratings, and below-prime lending rates.

Question 17

The business operating cycle for a traditional manufacturer begins with the purchase of raw materials and ends with collections from the customer.

Question 18

From an ongoing perspective, the company's new ratio might be more indicative of liquidity than either the current ratio or the quick ratio.

Question 19

If an entrepreneur wants more credit and would like to stretch out her payables, she can negotiate with her suppliers for more generous credit terms.

Question 20

Companies with a negative cash conversion cycle will see their working capital requirements increase with growth.

Question 21

The relative proportions of cash sales and credit sales make an important difference to which of the following?

A)Expected sales.
B)Expected cost.
C)Expected inventory.
D)Expected cash flows.
E)Expected accounts receivable.

Question 22

Which of the following assets represent the most important current asset of many manufacturing companies?

A)Cash
B)Accounts receivable
C)Inventories
D)Property, plant, and equipment
E)Short-term investments

Question 23

A chattel mortgage is a loan secured by specific assets.

Question 24

The basis of all receivables and collections is actual net sales, which is equal to ______.

A)sales minus any returns.
B)sales plus any returns.
C)sales minus returns only if they are 90 days late.
D)sales plus returns only if they are 90 days late.
E)None of the above

Question 25

Which of the following is NOT one of the Five Cs of credit?

A)Character
B)Capacity
C)Capital
D)Collateral
E)Customers

Question 26

An entrepreneur only requires enough cash to cover needs under the most likely scenario he/she has forecasted.
s

Question 27

The magnitude of a company's accounts receivable obviously depends upon a number of factors, except _________.

A)the level and the pattern of sales
B)the breakdown between cash and credit sales
C)the difference between current assets and current liabilities
D)the nominal credit terms offered
E)the enforcement of credit terms

Question 28

The term, factoring, refers to selling accounts receivable at a discount to a finance company known as the factor.

Question 29

An entrepreneur's inventory is an asset that legally cannot serve as collateral for a loan.

Question 30

Pledging means using accounts payable as collateral for a loan from a finance company or bank.

Question 31

Which of the following should be (if available)the entrepreneurs most economical choice for short term cash

A)Inventory backed loan
B)Credit card
C)Home equity line of credit
D)Sell receivables
E)Receivables backed loan

Question 32

When using a public warehousing arrangement for a bank loan, the entrepreneur surrenders access to his/her inventory.

Question 33

When a borrower instructs its customers to pay their invoices directly to the lender, the arrangement is called, "Pledging with notification."

Question 34

Methods of forecasting environmental change fall into two broad groups.One group is primarily concerned with forecasting the future performance of the economy as a whole; the other group is more concerned with forecasting ______ for individual industries and products.

A)sales
B)cost
C)inventory
D)weather patterns
E)None of above

Question 35

Factoring with recourse implies that if a company does not pay its bill, the factor must absorb the loss.

Question 36

The ______ of receivables collection and payment of accounts payable are key determinants in whether a firm is cash rich or cash poor.

A)quantity
B)cost
C)difference
D)interest
E)timing

Question 37

Although the opportunity costs for accounts receivable may be quite large, the largest current asset balances are usually in______.

A)cash
B)accounts receivable
C)inventories
D)property, plant, and equipment
E)short-term investments

Question 38

By paying bills more slowly, an entrepreneur will hurt his or her business.

Question 39

Which of the following sources of short term funding offer the highest degree of security to the lender

A)Chattel Mortgages
B)Floating Liens
C)Non-bank equipment financing
D)Factor loan without recourse

Question 40

Some suppliers use generous terms on trade credit as a form of sales promotion.This is always less effective than an intensive advertising campaign or a high-pressure sales team.

Question 41

What economic factor concerning the entrepreneur's product is the most significant for the company's credit policy?

A)Elasticity of demand
B)Elasticity of supply
C)Margin of profit
D)Margin of utility
E)None of above

Question 42

Typically, a company can borrow what percent of its accounts receivable's face value if it has a good credit rating and its customers have excellent credit ratings.

A)15% to 25%
B)25% to 50%
C)50% to 75%
D)75% to 90%
E)90%to 100%

Question 43

Which of the following is NOT a factor that influences the interest borrowers pay?

A)the dollar amount of the loan
B)the length of time involved
C)the nominal rate of interest
D)the repayment location
E)the method used to calculate the interest

Question 44

Why do entrepreneurs usually want to keep inventory levels as low as possible? What are the challenges facing entrepreneurs who want to reduce their inventory levels?

Question 45

Which of the following is not suitable for using field warehousing?

A)Especially bulky inventory.
B)Especially valuable inventory.
C)Structural steel
D)An inventory of chemicals
E)None of the above.

Question 46

Short of demanding payments, what sales terms could an entrepreneur choose in order to collect cash more quickly?

Question 47

It's safe to say that collection procedures are expensive and justifiable only when the expected results ______.

A)are lower than the cost.
B)exceed the cost.
C)are equal to the cost.
D)are at least 40% lower than the cost.
E)None of the above.

Question 48

A routine condition which could cause an entrepreneur to regularly factor his/her accounts receivables could be ____

A)To buy out an existing partner's equity
B)To compensate for large, predictable, fluctuations in seasonal demand.
C)To reduce current assets on the balance sheet
D)None of the above.

Question 49

Which of the following is a method of pursuing payment from a customer whom the entrepreneur believes able to pay?

A)Refusing any further supplies, or supplying only for cash
B)Threatening legal action
C)Actually undertaking legal proceedings, using a specialized collection agency
D)All of the above
E)None of the above

Question 50

Banks and finance companies usually lend ______, in writing a floating lien.

A)only a small fraction of the inventory's book value
B)only a small fraction of the inventory's market value
C)the total amount as the inventory's book value
D)a small fraction of the sales of the last year
E)a large fraction of the sales of the last year

Question 51

What kind of information will the loan officer be interested in, when entrepreneurs are looking for a bank loan?

Question 52

Net working capital is often thought of as the balance of completely liquid assets and liabilities.However, this is not completely true.Please explain why parts of working capital can become stagnant and hurt cash levels, even if a firm is growing and profitable.

Question 53

Banks prefer 90-day maturities on short term loans in order to

A)Charge additional fees
B)Hedge against changes in the LIBOR rate
C)Have a chance to regularly check an entrepreneurs financial statements
D)None of the above

Question 54

The bank discount method is common in ______.

A)short-term business loans
B)long-term business loans
C)financing from customer prepayments
D)collateral appraisal
E)insurance

Question 55

What does a trade-credit effectively amount to?

A)Higher accounts payable.
B)Higher trust among companies in the same industry.
C)A loan to the entrepreneur's working capital.
D)Debt swaps.
E)None of the above

Question 56

A method of reducing overdue accounts and limiting bad debts is setting limits to the credit allowed on______.

A)corporate buyers
B)individual accounts
C)high-cost goods
D)low-cost goods
E)none of the above

Question 57

Is it a mistake for a company to offer credit terms to its customers for early payment?

Question 58

Which of the following requirements apply with an SBA loan

A)The loan must purchase items made in the USA
B)The venture's debt to equity ratio must be less than or equal to 3:1 post loan
C)The loan cannot be used for leasehold improvements
D)None of the above.

Question 59

Which of the following is NOT a way to use inventory as security for a loan?

A)A chattel mortgage.
B)A floating lien.
C)Field warehousing.
D)Public warehousing.
E)Outside project financing.

Question 60

What are the advantages of trade credit over other sources of financing?

Question 61

List two examples of Routine Provisions.

Question 62

What are the three categories of restrictive covenants mentioned in the chapter, in relation to loan agreements?

Question 63

Discuss the importance of forecasting cash flow requirements as it pertains to working capital.

Question 64

What actions towards the ventures' cash collection cycle, should an entrepreneur take before seeking ways to prematurely extract short term cash from his/her operating assets?

Question 65

Give an example of a Specific Provision that an entrepreneur might encounter in a loan agreement.

Question 66

To qualify for assistance from the Small Business Administration, the proceeds of an SBA-guaranteed loan must be used for what purpose?

Question 67

When choosing to use internal funds as means to support growth, discuss to what ends this growth must be ultimately focused on (in terms of financing considerations).

Question 68

Discuss the importance of the cash collection cycle in terms of your ventures growth model.

Question 69

Discuss the distinction between profitability and solvency.