Deck 16: Short-Term Business Financing

Question 1

The need for current funds increases when there is an upswing in the business cycle or the sales cycle of an industry.

Answer 1

True

Question 2

Firms using maturity matching will have current ratios equal to 1.0.

Answer 2

False

Question 3

An aggressive financing plan has a higher financing cost, but with lower risk of not being able to borrow when short-term funds are needed.

Answer 3

False

Question 4

A line of credit costs the firm only the normal interest for the period during which money is actually borrowed.

Question 5

An advantage of short-term borrowing is the need for frequent renewals.

Question 6

Discounting has the effect of reducing the available funds received by the borrower while raising the effective interest rate.

Question 7

The maturity matching approach is a financing strategy that attempts to match the maturities of assets with the maturities of the liabilities which they are financed.

Question 8

If net working capital is negative, current assets are partially financed by the firm's long-term debt.

Question 9

Compensating balances decrease the effective cost of borrowing.

Question 10

The prime rate is the interest rate the bank charges its most creditworthy customers.

Question 11

Working capital includes a firm's marketable securities, accounts receivable, inventories, and mortgage debt.

Question 12

A trust receipt is a claim against a customer's inventory when the individual items are indistinguishable.

Question 13

Inventory loans are less expensive than unsecured loans to business borrowers.

Question 14

A compensating balance requirement means that a lending institution will require a borrowing company to keep a certain percentage of the loaned amount on deposit with that institution.

Question 15

Permanent current assets reflect the minimum investment level in cash, accounts receivable, and inventories needed to support sales.

Question 16

Service industries tend to have larger proportions of fixed assets to current assets.

Question 17

Short-term financing sources include bank loans, trade credit, and commercial paper.

Question 18

Field warehouses are in operation throughout the United States but are concentrated in the central and East coast regions.
Not important

Question 19

A line of credit is a legal obligation of the bank to provide funds up to the agreed-upon borrowing limit for a period of time.

Question 20

Manufacturing companies tend to be the largest users of accounts receivable financing.
Not in the chapter

Question 21

A revolving credit agreement is a commitment in the form of a standby agreement for a guaranteed line of credit.

Question 22

Stocks and bonds are rarely used as collateral for short-term loans.

Question 23

A firm's choice of financing strategy depends on a number of factors including its operating characteristics, cost, flexibility, and the ease of obtaining future financing.

Question 24

To compute the effective cost of a revolving agreement, the joint effect of interest on borrowed funds and commitment fees must be considered.

Question 25

Using the conservative approach for financing a firm's assets, long term financing would be used only to finance fixed assets, while short term financing would be used to finance current assets including seasonal fluctuations.

Question 26

An acceptance is a receivable from the sale of merchandise on the basis of a draft or bill of exchange drawn against the buyer or the buyer's bank.

Question 27

Trade credit may be considered the least formal of all forms of financing.

Question 28

The choice of financing strategy involves a tradeoff between return and risk.

Question 29

A discounted loan is one in which the borrower receives the principal plus the interest at the time the loan is made.

Question 30

A discounted loan is one in which the borrower receives a discount on the interest rate.

Question 31

The aggressive financing approach is a strategy that attempts to match the maturities of assets with the maturities of the liabilities with which they are financed.

Question 32

Short-term financing offers greater flexibility than long-term financing.

Question 33

Industry characteristics can affect whether the firm chooses an aggressive, conservative, or maturity matching strategy for financing its assets.

Question 34

A commercial finance company typically purchases the accounts receivable outright and assumes all credit risks.

Question 35

An owner of a business may not assign life insurance as collateral for a short-term loan.

Question 36

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it eliminates the need for a credit investigation.

Question 37

If a borrowing firm does not qualify for an unsecured bank loan and pledges its accounts receivable as security, it must execute an assignment of these accounts to the bank.

Question 38

Short-term financing may come in the form of trade credit extended between businesses.

Question 39

The conservative financing approach is a strategy that attempts to match the maturities of assets with the maturities of the liabilities with which they are financed.

Question 40

Using aggressive approach for financing a firm's assets, long term financing would be used only to finance fixed assets, while short term financing would be used to finance current assets including seasonal fluctuations.

Question 41

A revolving credit agreement is a:

A)banker's agreement to extend the maturity of a loan
B)banker's standby agreement to provide a guaranteed line of credit for a specified period of time
C)large loan supported by a group of banks on an alternating basis
D)loan arrangement with a bank whereby secured and unsecured loans are alternately used

Question 42

When accounts receivable are factored: the borrower sells the receivable; accounts receivable balances are removed from the balance sheet; the customer payment is made to the factor; and interest is charged on the funds advanced.

Question 43

When accounts receivable are pledged: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the balance sheet; the customer payment is made to the firm, which then submits the payment to the bank; and interest is charged on the loan.

Question 44

Commercial finance companies:

A)make riskier unsecured business loans but charge higher interest rates
B)specialize in loans secured by inventories and real estate
C)concentrate their lending activity to firms pledging the notes receivable of their customers
D)are primarily interested in loans secured by a business customer's accounts receivable and inventories

Question 45

The factoring of receivables:

A)had its origins in the textile industry but now extends over a wide range of industriestypically has the factor becoming the firm's credit department
B)is especially suited to the heavy durable goods industries
C)has now been largely replaced with other types of financing
D)places special risk on the firm whose receivables are being factored

Question 46

A business that needs short-term credit in excess of its regular line of bank credit may:

A)sell common stock to the bank with a repurchase agreement
B)subordinate the interests of the owners to the bank's additional loans
C)make limited use of overdrafts
D)pledge accounts receivable as specific collateral for an additional loan

Question 47

When a bank takes a business' inventory as collateral for additional loans, it:

A)places the inventory under bond
B)transports the inventory to a warehouse not necessarily on bank property
C)requires insurance and weekly audits of the inventory
D)usually establishes a field warehouse
Not in the chapter

Question 48

The cost of trade credit involving cash discounts as a form of short-term financing is:

A) usually greater than the cost of commercial bank credit
B) the lowest of any form of short-term financing
C) Neither of these is correct

Question 49

A factor engages in accounts receivable financing for business by purchasing accounts outright and assuming all credit risks.

Question 50

Commercial paper dealers:

A)lend to small and large businesses on the basis of their receivables outstanding
B)restrict their paper dealings to negotiable certificates of commercial banks
C)distribute to investors the promissory notes of successful businesses
D)distribute to investors the promissory notes of small but rapidly developing businesses

Question 51

Advance factoring is where the firm selling its accounts receivable is paid on the normal collection date or net due date of the account.

Question 52

A line of credit is also often referred to as a revolving credit agreement.

Question 53

The Small Business Administration:

A)lends exclusively to small business investment companies that in turn lend to small businesses
B)makes only working capital loans
C)lends to businesses with reasonable prospects of repayment but which cannot obtain credit through private channels
D)none of the above

Question 54

A factor engages in accounts receivable financing for business by taking accounts receivable as collateral for making short-term loans.

Question 55

Compensating balances at a commercial bank are:

A)net differentials of balances with correspondent banks
B)maintained by Federal Reserve for services rendered
C)account balances required in connection with unsecured business loans under bank lines of credit
D)required vault-held reserves as an alternative to reserves held by Federal Reserve Banks

Question 56

Maturity factoring is where the firm selling its accounts receivable is paid on the normal collection date or net due date of the account.

Question 57

The bank line of credit is:

A)the type of business activity on which a particular bank concentrates its lending
B)the maximum amount of credit extended to a business customer during a period of one year
C)the average of loans made to a business customer during a year
D)the loan limit that a bank has established for a business customer

Question 58

Commercial finance companies obtain loanable funds:

A)to a lesser extent than commercial banks through equity capital
B)through both long- and short-term borrowing
C)from the Small Business Administration
D)primarily from the sale of preferred stock

Question 59

When accounts receivable are factored: money is advanced to the borrower as a loan against accounts receivable; accounts receivable balances remain on the balance sheet; the customer payment is made to the firm, which then submits the payment to the bank; and interest is charged on the loan.

Question 60

Trade credit is the single most important form of short-term business financing.

Question 61

A receivable from the sale of merchandise on the basis of a draft or bill of exchange drawn against the buyer or the buyer's bank is termed a (n):

A)acceptance
B)assignment
C)comaker loan
D)warehouse loan

Question 62

For most lines of business the basic source of short-term loan financing is:

A)commercial banks
B)finance companies
C)the commercial paper market
D)factors

Question 63

Firms who wish to obtain short-term secured loans generally have two major current assets available as collateral in the form of:

A)cash and marketable securities
B)receivables and inventory
C)receivables and factoring
D)inventory and floor planning

Question 64

The purchaser may deduct 2% from the purchase price if payment is made within 10 days; but if not paid within 10 days, the net amount of the purchase is due within 30 days.The sale is made on what terms?

A)10/30, net/2
B)2/10, net/30
C)2/30, net/10
D)10/2, net/30

Question 65

The largest providers of short-term financing are:

A)commercial banks
B)commercial finance companies
C)factors
D)none of the above

Question 66

Which of the following is a characteristic of commercial paper dealers?

A)provide greater convenience for their clients than bank borrowing but at rates somewhat higher than bank rates
B)set rates at the beginning of the month
C)recall notes that have been placed with investors if rates change dramatically
D)none of the above is a characteristic of commercial paper dealers

Question 67

Find the annualized cost of a commercial paper issue the has a $1,000,000 face value, matures in 180 days, has a placement fee of 1.5% and an interest charge of 8.5% over the 6 month period it is outstanding.

A)10%
B)11.1%
C)23.5%
D)none of the above

Question 68

The approximate effective cost (EC) of financing the discount price of trade credit under terms 2/10, net/30 using a 360 day year is:

A)25%
B)30.1%
C)36.737.2%
D)42.5%

Question 69

Which of the following short-term sources of funds is available only to the financially strongest concerns?

A)trade credit
B)commercial bank loans
C)finance company loans
D)commercial paper

Question 70

Which of the following might be a characteristic of a field warehouse?

A)it serves a single customer
B)it exists only until the loan is repaid
C)a lease on that portion of the property which is to be used for warehousing purposes must be obtained
D)all the above
E)none of the above

Question 71

The Small Business Administration cannot assist in the financing of small enterprises by:

A)making direct loans to businesses
B)participating jointly with private banks in extending loans to businesses
C)engaging in accounts receivable financingfactoring
D)agreeing to guarantee a bank loan

Question 72

Which of the following is not a characteristic of a commercial finance company?

A) advances funds to business concerns by discounting accounts receivable
B) makes loans secured by chattel mortgages on machinery
C) finances deferred-payment sales of commercial and industrial equipment
D) holds a bank charter

Question 73

Which of the following is not a reason to use factoring services?

A)it is a form of credit insuranceguaranteed payment
B)it eliminates overhead
C)management is freed from concern with financial matters
D)lower cost

Question 74

Which of the following is not an important source of short-term funds to small businesses?

A)commercial banks
B)commercial paper
C)accounts receivable secured loans and/or use of factors
D)the Small Business Administration

Question 75

The most frequently cited justification for requiring a compensating balance is:

A)for a commission; to cover the costs of loaning the money
B)to be reassured of some recovery in the event of bankruptcy of the firm
C)to make bank borrowers also be depositors
D)to pay interest for the use of the money

Question 76

What is the most important overall source of short-term business financing both in the U.S.and worldwide?

A)lines of credit
B)trade credit
C)notes
D)commercial paper

Question 77

A commercial finance company:

A)has a bank charter
B)may not discount accounts receivable
C)may make loans secured by chattel mortgages
D)none of the above

Question 78

If a firm actually sells its accounts receivable, the process is known as:

A)wholesale financing
B)floor planningpledging
C)field crediting
D)factoring

Question 79

If life insurance is pledged as collateral for a loan, how much can be borrowed?

A)face value of the policy
B)cash surrender of the policy
C)an amount equal to the annual premium
D)none of the above

Question 80

The factor, unlike the commercial finance company:

A)engages in accounts receivable financing
B)purchases the accounts receivable outright
C)assumes limited credit risks
D)is not responsible for the collection of accounts