Deck 12: Debt and Other Forms of Financing

Question 1

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 1

False

Question 2

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.

Answer 2

True

Question 3

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.

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

Building up inventory typically reduces cash levels.

Question 13

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 14

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

Question 15

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

Question 16

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 17

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 18

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

Question 19

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

Question 20

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.

Question 21

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

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

Question 22

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 23

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

Question 24

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

Question 25

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 26

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 27

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 28

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 29

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

Question 30

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

Question 31

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 32

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

Question 33

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 34

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 35

A chattel mortgage is a loan secured by specific assets.

Question 36

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 37

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 38

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

Question 39

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

Question 40

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

Question 41

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 4:1 post loan
C) The loan cannot be used for leasehold improvements
D) None of the above.

Question 42

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 43

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 44

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 45

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 46

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 47

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 48

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 49

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 50

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 51

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 52

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