Deck 14: Managing Short-Term Financing Liabilities

Question 1

The annual percentage rate incorporates interest compounding in the computation, but the effective annual rate does not. Both computations adjust the percentage cost per period so that it is stated on an annual basis.

Answer 1

False

Question 2

The following information relates to Zync Corporation. Current assets $200,000
Current liabilities $150,000
Long-term assets $600,000
Long-term liabilities $400,000
Based on this information, the net working capital of the company is:

A) $200,000.
B) $50,000.
C) $350,000.
D) $10,000,000.
E) $600,000.

Answer 2

B

Question 3

The inventory turnover of Long Corporation is 16, and its closing inventory is $20,000. Assuming there are 360 days in a year, the company's inventory conversion period is:

A) 22.50 days.
B) 24.25 days.
C) 32.50 days.
D) 42.75 days.
E) 50.75 days.

Answer 3

A

Question 4

The inventory conversion period refers to the average length of time required:

A) to convert raw materials into finished goods.
B) to sell all the finished goods.
C) to convert materials into finished goods and then to sell those goods.
D) to collect cash following the sale of inventory.
E) to provide payment in cash for the purchase of raw materials and labor.

Question 5

The following information relates to Lobo Corporation. Cash $20,000
Accounts receivable $50,000
Marketable securities $65,000
Notes payable $10,000
Accrued rent $5,000
Based on this information, the net working capital of the company is:

A) $130,000.
B) $105,000.
C) $115,000.
D) $120,000.
E) $100,000.

Question 6

Net working capital represents the amount of current assets that is financed with long-term funds.

Question 7

European firms follow much more conservative working capital policies than U.S. firms.

Question 8

Which of the following is the correct expression for the payables deferral period?

A) Payables turnover / 360
B) Payables turnover × 360
C) Daily credit purchases / Accounts payable
D) Accounts payable / Daily credit purchases
E) Cost of goods sold / Payables

Question 9

The following information relates to Rodeo Corporation. Current assets $70,000
Current liabilities $52,500
Long-term assets $210,000
Long-term liabilities $140,000
Based on this information, the amount of the current assets financed by the long-term liabilities is:

A) $12,500.
B) $52,500.
C) $102,500.
D) $70,000.
E) $17,500.

Question 10

The average liquidity measure (for example, current ratio) was significantly greater for U.S. firms than for European firms.

Question 11

The inventory conversion period of a firm is equivalent to the average age of its inventory.

Question 12

Compensating balances to be maintained with the bank decrease the effective rate on a loan.

Question 13

Commercial paper is similar to a discount interest loan.

Question 14

Net working capital is equal to:

A) current assets.
B) current liabilities.
C) current assets divided by current liabilities.
D) current assets minus current liabilities.
E) current assets plus current liabilities.

Question 15

The moderate approach to current asset financing is the least profitable but the safest of all the three approaches.

Question 16

Accruals are generally considered free debt in the sense that no explicit interest is paid on funds raised through them.

Question 17

A firm that makes use of the extreme form of the conservative approach will finance all of its seasonal needs with long-term financing alternatives, eliminating the need to use short-term financing. Such a firm will have extra permanent funds during off-peak periods, allowing it to store liquidity in the form of short-term investments during the off-season.

Question 18

The outright sale of receivables by firms to financial organizations is called factoring.

Question 19

The average cash conversion cycle of U.S. firms is more than twice the average cash conversion cycle of European firms.

Question 20

The cash conversion cycle refers to the:

A) length of time from the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of the product.
B) average length of time between the purchase of raw materials and labor and the payment of cash for them.
C) amount of time a product remains in inventory in various stages of completion.
D) time it takes to collect cash following a sale.
E) time taken to convert all long-term assets to cash.

Question 21

According to the conservative current asset financing policy, :

A) some of the fixed assets, all of the permanent current assets, and all of the temporary current assets of a firm are financed with long-term capital.
B) some of the fixed assets, some of the permanent current assets, and all of the temporary current assets of a firm are financed with long-term capital.
C) all of the fixed assets, all of the permanent current assets, and some of the temporary current assets of a firm are financed with long-term capital.
D) all of the fixed assets, some of the permanent current assets, and all of the temporary current assets of a firm are financed with long-term capital.
E) all of the fixed assets, some of the permanent current assets, and some of the temporary current assets of a firm are financed with long-term capital.

Question 22

Recurring short-term liabilities such as wages and taxes that change spontaneously with operations are known as:

A) trade credits.
B) accruals.
C) promissory notes.
D) lines of credit.
E) commercial paper.

Question 23

The following information relates to Musk Corporation. Inventory conversion period 15 days
Closing inventory $28,000
Assuming there are 360 days in a year, what is the company's total cost of goods sold during the year? (Round your answer to two decimal places.)

A) $550,000
B) $475,000
C) $750,000
D) $672,000
E) $580,000

Question 24

A revolving credit agreement is:

A) created because of recurring short-term liabilities such as wages and taxes that change spontaneously with operations.
B) the credit created when one firm buys on credit from another firm.
C) an outright sale of receivables.
D) an unsecured, short-term promissory note issued by large, financially sound firms to raise funds.
E) a formal, committed arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.

Question 25

The following information relates to LoGo Corporation. Accounts payable $650,000
Credit purchases $21,000,000
Assuming there are 360 days in a year, the payables deferral period for the company is:

A) 21.45 days.
B) 11.14 days.
C) 18.56 days.
D) 25.42 days.
E) 15.89 days.

Question 26

The following information relates to Dane Corporation. Inventory conversion period 55.8 days
Days sales outstanding 23.9 days
Days payables outstanding 32.5 days
The cash conversion cycle of the company is:

A) 56.4 days.
B) 112.2 days.
C) 79.7 days.
D) 64.4 days.
E) 47.2 days.

Question 27

Which of the following types of short-term credits increases (decreases) automatically, or spontaneously, as a firm's operations expand (contract)?

A) Promissory notes
B) Lines of credit
C) Commercial paper
D) Trade credits
E) Accruals

Question 28

The current asset financing policy that calls for matching the maturities of assets and liabilities is known as the:

A) moderate approach.
B) conservative approach.
C) aggressive approach.
D) permanent approach.
E) temporary approach.

Question 29

A document specifying the terms and conditions of a loan, including the amount, interest rate, and repayment schedule is called a(n):

A) promissory note.
B) factoring agreement.
C) commercial paper agreement.
D) trade credit note.
E) unsecured note.

Question 30

An arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period is called:

A) a line of credit.
B) commercial paper.
C) trade credit.
D) a promissory note.
E) a factoring arrangement.

Question 31

Which of the following sources of short-term credit is also known as accounts payable?

A) Trade credit
B) Revolving credit
C) Promissory notes
D) Lines of credit
E) Commercial paper

Question 32

A spontaneous source of financing that arises from ordinary business transactions is called:

A) commercial paper.
B) a promissory note.
C) a line of credit.
D) trade credit.
E) revolving credit.

Question 33

The maturity matching approach calls for matching the maturities of:

A) long-term liabilities and equity.
B) long-term liabilities and short-term liabilities.
C) long-term assets and short-term assets.
D) assets and equity.
E) assets and liabilities.

Question 34

The following information relates to Gear Corporation. Inventory conversion period 68.2 days
Receivables collection period 35.8 days
Payables deferral period 24.6 days
The cash conversion cycle of the company is:

A) 128.6 days.
B) 79.4 days.
C) 57.0 days.
D) 79.2 days.
E) 60.4 days.

Question 35

The following information relates to RAM Corporation. Accounts receivable $160,000
Total credit sales $2,500,000
Assuming there are 360 days in a year, the receivables collection period of the company is:

A) 23.04 days.
B) 21.56 days.
C) 25.42 days.
D) 22.59 days.
E) 24.60 days.

Question 36

In a general line of credit:

A) the bank does not charge a commitment fee.
B) the bank charges a commitment fee on the total amount.
C) the bank charges a commitment fee on the used balance.
D) the bank charges a commitment fee on the unused balance.
E) the commitment fee charged is the same as that in a revolving credit agreement.

Question 37

For a firm, the receivables turnover is 33.5, the closing inventory is $120,000, and the accounts payable balance is $52,000. Assuming there are 360 days in a year, the receivables collection period is:

A) 19.23 days.
B) 13.77 days.
C) 14.56 days.
D) 12.25 days.
E) 10.75 days.

Question 38

The three main working capital strategies, namely aggressive, conservative, and moderate, differ primarily in the:

A) relative amounts of short-term debt used.
B) minimum level of permanent current assets.
C) relative amount of long-term debt versus equity used to finance permanent current assets.
D) average level of temporary current assets.
E) amount of trade credit used.

Question 39

All else equal, a firm that purchases raw materials on credit will experience:

A) a decrease in trade credit with a given increase in purchases.
B) no change in trade credit with a given increase in purchases.
C) an increase in trade credit with a given increase in purchases.
D) no change in trade credit with a given decrease in purchases.
E) an increase in trade credit with a given decrease in purchases.

Question 40

Which of the following statements is true of the different types of short-term credits?

A) The fact that no explicit interest cost is paid on accruals and that the firm can exercise considerable control over their level makes accruals an attractive source of additional funding.
B) Commercial paper is a type of secured promissory note issued by large, financially strong firms.
C) Banks generally charge a commitment fee on the used balances of credit lines to compensate for guaranteeing the availability of revolving credit.
D) The funds used by a firm to maintain a compensating balance with the bank cannot be used by the firm to pay its bills or to invest and can earn no interest.
E) The credit created when one firm buys on credit from another firm is known as accounts receivable.

Question 41

Gripp Corporation is planning to borrow $780,000 from its bank to pay one of its suppliers. The bank requires a compensating balance of 15%. Since Gripp currently holds no funds at the lending bank, it has borrowed enough to cover for the compensating balance as well. To pay its suppliers, Gripp actually needs:

A) $750,000.
B) $720,000.
C) $665,000.
D) $663,000.
E) $723,000.

Question 42

Kerry Corporation is planning to get a 270-day $500,000 simple interest loan from its bank at a quoted interest rate of 12 percent. If the bank has a 20% compensating balance requirement and Kerry currently holds no funds at the lending bank, what is the effective annual rate (eEAR) of the loan? (Assume there are 360 days in a year. Round your answer to two decimal places.)

A) 11.52%
B) 13.78%
C) 14.25%
D) 15.27%
E) 12.55%

Question 43

Maturities of commercial paper range from:

A) one month to nine months.
B) one month to twelve months.
C) one year to three years.
D) one year to ten years.
E) five years to ten years.

Question 44

A firm offers credit terms of 3/15, net 20 to its customers, which means the firm allows its customers to:

A) take a 15 percent discount on the invoice price if payment is made on or before Day 20 of the billing cycle; after that, only a 3 percent discount will be available.
B) take a 20 percent discount on the invoice price if payment is made on or before Day 15 of the billing cycle; after that, only a 3 percent discount will be available.
C) take a 3 percent discount on the invoice price if payment is made on or before Day 15 of the billing cycle; otherwise, the entire bill is due by Day 20.
D) take a 15 percent discount on the invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 20.
E) take a 20 percent discount on the invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 15.

Question 45

Bravo Corporation recently issued 270-day commercial paper with a face value of $2,000,000 and a simple interest rate of 11 percent. The company paid a transaction fee equal to 0.4 percent of the issue, which was taken out of the issue amount before the company received any funds. Assuming there are 360 days in a year, what is the commercial paper's effective annual rate (rEAR)? (Round your answer to two decimal places.)

A) 12.85%
B) 11.89%
C) 11.58%
D) 12.02%
E) 12.22%

Question 46

Musk Corporation needs $200,000 to pay its bills, and requires a 25% compensating balance to be maintained with the bank. Assuming that Musk currently holds no funds at the lending bank, Musk has to borrow:

A) $250,000.
B) $266,667.
C) $278,889.
D) $275,000.
E) $150,000.

Question 47

McGrath Corporation recently issued 210-day commercial paper with a face value of $1,500,000 and a simple interest rate of 13 percent. The company paid a transaction fee equal to 0.3 percent of the issue, which was taken out of the issue amount before the company received any funds. Assuming there are 360 days in a year, what are the commercial paper's annual percentage rate (APR) and effective annual rate (rEAR), respectively? (Round your answer to two decimal places.)

A) 13.75% and 14.04%
B) 14.20% and 14.74%
C) 13.97% and 14.23%
D) 14.11% and 14.52%
E) 14.01% and 14.35%

Question 48

A type of unsecured promissory note issued by large, financially strong firms is called:

A) trade credit.
B) commercial paper.
C) a compensating balance.
D) revolving credit.
E) a promissory note.

Question 49

Which of the following types of inventory financing is generally used for goods that are relatively high priced, slow moving, and easy to identify individually using serial numbers or other distinguishing characteristics?

A) Warehouse receipt
B) Trust receipts
C) Blanket liens
D) Factoring
E) Recourse

Question 50

Tivo Corporation purchases its raw materials on credit terms of 3/15, net 30. Assuming there are 360 days in a year, the annual percentage rate of non-free trade credit if the firm did not take discounts but did pay on the due date is:

A) 67.68%.
B) 34.25%.
C) 58.92%.
D) 74.16%.
E) 82.55%.

Question 51

Gale Corporation recently issued 270-day commercial paper with a face value of $100,000 and a simple interest rate of 11 percent per annum. Assuming there are 360 days in a year, what is the commercial paper's annual percentage rate (APR)? (Round your answer to two decimal places.)

A) 11.99%
B) 12.25%
C) 11.72%
D) 12.51%
E) 13.02%

Question 52

Banks often require borrowers to maintain an average amount in their checking accounts as a requirement of getting a loan. This is known as:

A) a general line of credit.
B) guaranteed credit.
C) commercial paper.
D) a compensating balance.
E) a pledged receivable.

Question 53

Suppose a firm purchases goods on credit terms of 3/10, net 15, and the firm always takes discounts. The cost of using the funds for six days is:

A) 3.09%.
B) 3.92%.
C) 3.00%.
D) 0%.
E) 4.18%.

Question 54

Which of the following is the correct expression for the effective annual rate (EAR)?

A) (1 / Periodic rate of interest)number of borrowing (interest) periods in one year - 1
B) (1 + Periodic rate of interest)number of borrowing (interest) periods in one year - 1
C) (1 - Periodic rate of interest)number of borrowing (interest) periods in one year - 1
D) (1 + Periodic rate of interest)number of borrowing (interest) periods in one year + 1
E) (1 - Periodic rate of interest)number of borrowing (interest) periods in one year + 1

Question 55

Lima Corporation makes purchases on credit, and its suppliers grant it credit terms of 2/15, net 30. Assuming there are 360 days in a year, the effective annual rate of non-free trade credit if the firm did not take discounts but did pay on the due date is:

A) 17.53%.
B) 78.87%.
C) 52.78%.
D) 27.42%.
E) 62.36%.

Question 56

Grant Technologies is planning to get a 210-day $300,000 simple interest loan from its bank with a quoted interest rate of 11 percent and a 20% compensating balance requirement. Assuming there are 360 days in a year and Grant currently holds no funds at the lending bank, what is the annual percentage rate (APR) of the loan? (Round your answer to two decimal places.)

A) 13.05%
B) 13.35%
C) 12.85%
D) 13.75%
E) 12.55%

Question 57

Pelican Corporation receives a ten-month $200,000 discount interest loan with a 14 percent quoted (simple) interest rate. What is the annual percentage interest rate for the loan? (Round your answer to two decimal places.)

A) 15.54%
B) 14.96%
C) 15.85%
D) 16.08%
E) 14.75%

Question 58

Which of the following types of inventory financing is generally used when the inventory put up as collateral is relatively low priced, fast moving, and difficult to identify individually?

A) Recourse
B) Factoring
C) Trust receipts
D) Warehouse receipt
E) Blanket liens

Question 59

MoJo Corporation purchases goods on credit terms of 4.5/15, net 40. The cost of non-free trade credit for the 25-day period if the firm did not take discounts but did pay on the due date is:

A) 4.5%.
B) 4.71%.
C) 0%.
D) 4.93%.
E) 5.02%.

Question 60

Accruals are considered:

A) adjustable rate debt since a varying rate of interest is paid on them.
B) expensive debt since high rates of interest are paid on them.
C) cheap debt since low rates of interest are paid on them.
D) free debt since no interest is paid on them.
E) fixed-rate debt since a constant rate of interest is paid on them.

Question 61

Venus Inc. recently borrowed $750,000 from its bank at a simple interest rate of 10 percent. The loan is for six months and, according to the loan agreement, the interest should be added to the amount borrowed and the total amount to be repaid in monthly installments. The loan's effective annual rate (EAR) is:

A) 12.51%.
B) 16.58%.
C) 18.32%.
D) 20.33%.
E) 24.75%.

Question 62

Which of the following statements is true of U.S. firms, financial institutions, and banking organizations?

A) U.S. firms had much higher growth rates than their European counterparts.
B) U.S. firms follow less conservative working capital policies than European firms.
C) Corporations in the U.S. use significantly greater proportions of long-term financing than European firms.
D) U.S. financial institutions traditionally have been subject to less restrictions and regulations than banking organizations in other countries.
E) U.S. banking organizations often have very close relationships with the firms that borrow from them, which generally results in a greater willingness to provide more short-term, risky debt than we observe in European banks.

Question 63

BarLey Inc. recently borrowed $125,000 from its bank at a simple interest rate of 12 percent. The loan is for one year and, according to the loan agreement, the interest should be added to the amount borrowed and the total amount to be repaid in monthly installments. The loan's monthly payments are:

A) $11,667.
B) $12,222.
C) $11,111.
D) $11,997.
E) $12,677.

Question 64

Mars Inc. recently borrowed $220,000 from its bank at a simple interest rate of 11 percent. The loan is for nine months and, according to the loan agreement, the interest should be added to the amount borrowed and the total amount to be repaid in monthly installments. The loan's annual percentage rate (APR) is:

A) 32.51%.
B) 28.50%.
C) 22.00%.
D) 33.05%.
E) 25.00%.

Question 65

Fast Corporation recently borrowed $625,000 from its bank at a simple interest rate of 14 percent. The loan is for 10 months and, according to the loan agreement, the interest should be added to the amount borrowed and the total amount to be repaid in monthly installments. The loan's monthly payments and the annual percentage rate (APR) are, respectively:

A) $65,677.56 and 26.23%.
B) $69,791.67 and 28.00%.
C) $67,245.75 and 28.00%.
D) $67,245.75 and 24.23%.
E) $69,791.67 and 22.75%.