Question 1

Commercial paper is similar to a bond, except that it is sold at a discount rather than having coupon payments and has a maturity of 9 months or less.

Accepted Answer

A) True 
 B)False

Question 2

In a pledging agreement the borrower is obligated for default on any account receivable.

Accepted Answer

A) True 
 B)False

Question 3

A firm can increase the size of the cash discount received by paying on the first day of the discount period rather than on the last day.

Accepted Answer

A) True 
 B)False

Question 4

Loans are said to be self-liquidating if the project the funds support automatically generates the cash to repay the loan.

Accepted Answer

A) True 
 B)False

Question 5

When accounts receivable are pledged as collateral rather than factored, the lender assumes the default risk on the receivables.

Accepted Answer

A) True 
 B)False

Question 6

The only negative consequence of slow paying is that the particular vendor involved may refuse to make additional credit sales. If that happens the customer firm can always go to other vendors and get credit.

Accepted Answer

A) True 
 B)False

Question 7

The optimum credit policy is one at which the incremental profits and expenses connected with a policy change exactly offset each other.

Accepted Answer

A) True 
 B)False

Question 8

Payables financing is costless during the prompt payment discount period.

Accepted Answer

A) True 
 B)False

Question 9

Trade credit information is frequently exchanged among firms selling to the same customer through credit bureaus.

Accepted Answer

A) True 
 B)False

Question 10

The economic order quantity model attempts to minimize total inventory cost by recognizing the tradeoff between carrying and ordering costs.

Accepted Answer

A) True 
 B)False

Question 11

Relaxation of credit policy normally involves an expansion of investment in accounts receivable.

Accepted Answer

A) True 
 B)False

Question 12

Due to administrative costs, warehousing is an expensive source of financing.

Accepted Answer

A) True 
 B)False

Question 13

The three broad issues involved in receivables policy are (1) which customers should receive credit and how much, (2) what terms of sale (due dates and discounts) should be extended to customers, and (3) how should customers who don't pay on time be handled.

Accepted Answer

A) True 
 B)False

Question 14

A firm's cash includes currency, coins, demand deposit accounts in banks, and may include marketable securities.

Accepted Answer

A) True 
 B)False

Question 15

The level of a firm's receivables is influenced solely by factors outside the financial managers' control.

Accepted Answer

A) True 
 B)False

Question 16

In the course of normal operations, firms incur short-term liabilities that partially offset the need to fund working capital assets. This is generally called automatic financing.

Accepted Answer

A) True 
 B)False

Question 17

By foregoing the prompt payment discount offered in terms of 2/10, net 30, the customer is effectively borrowing at rate of 36.5%.

Accepted Answer

A) True 
 B)False

Question 18

Cash reserved to make payments to vendors is an example of precautionary demand.

Accepted Answer

A) True 
 B)False

Question 19

The availability of funds under a line of credit is not guaranteed by the lender.

Accepted Answer

A) True 
 B)False

Question 20

A bank line of credit usually requires both interest payments and a commitment fee.

Accepted Answer

A) True 
 B)False

Exam 17: The Management of Working Capital

Commercial paper is similar to a bond, except that it is sold at a discount rather than having coupon payments and has a maturity of 9 months or less.

In a pledging agreement the borrower is obligated for default on any account receivable.

A firm can increase the size of the cash discount received by paying on the first day of the discount period rather than on the last day.

Loans are said to be self-liquidating if the project the funds support automatically generates the cash to repay the loan.

When accounts receivable are pledged as collateral rather than factored, the lender assumes the default risk on the receivables.

The only negative consequence of slow paying is that the particular vendor involved may refuse to make additional credit sales. If that happens the customer firm can always go to other vendors and get credit.

The optimum credit policy is one at which the incremental profits and expenses connected with a policy change exactly offset each other.

Payables financing is costless during the prompt payment discount period.

Trade credit information is frequently exchanged among firms selling to the same customer through credit bureaus.

The economic order quantity model attempts to minimize total inventory cost by recognizing the tradeoff between carrying and ordering costs.

Relaxation of credit policy normally involves an expansion of investment in accounts receivable.

Due to administrative costs, warehousing is an expensive source of financing.

The three broad issues involved in receivables policy are (1) which customers should receive credit and how much, (2) what terms of sale (due dates and discounts) should be extended to customers, and (3) how should customers who don't pay on time be handled.

A firm's cash includes currency, coins, demand deposit accounts in banks, and may include marketable securities.

The level of a firm's receivables is influenced solely by factors outside the financial managers' control.

In the course of normal operations, firms incur short-term liabilities that partially offset the need to fund working capital assets. This is generally called automatic financing.

By foregoing the prompt payment discount offered in terms of 2/10, net 30, the customer is effectively borrowing at rate of 36.5%.

Cash reserved to make payments to vendors is an example of precautionary demand.

The availability of funds under a line of credit is not guaranteed by the lender.

A bank line of credit usually requires both interest payments and a commitment fee.