Q&A Hero

Q: An order that gives instructions to cancel the order if the price conditions are not met by the end of the trading day is called a ____ order. a. Market b. Stop c. Limit d. Day e. Fill or kill

Q: An order that specifies the price at which a market order is initiated is called a ____ order. a. Fill or kill b. Stop c. Limit d. Day e. None of the above.

Q: An order to execute a trade at the best price available as soon as the transaction reaches the market is called a ____ order. a. Market b. Stop c. Limit d. Day e. Fill or kill

Q: A firm that offers clients only the basic services associated with trading securities is called a(n) a. Discount Brokerage Firm. b. Investment Banker. c. Financial Intermediary. d. Full-service brokerage firm. e. None of the above.

Q: A brokerage firm that offers a variety of services to its clients, including research information about stocks and bonds, monthly publications that contain investment recommendations, and investment advisory services is called a(n) a. Discount Brokerage Firm. b. Investment Banker. c. Financial Intermediary. d. Full-service brokerage firm. e. None of the above.

Q: Organizations that help investors trade securities created by corporations and the government are called a. Financial intermediaries. b. Brokerage firms. c. Federal Reserve Boards. d. Banks. e. None of the above.

Q: A middleman, or agent, who helps investors trade financial instruments such as stocks, bonds, and derivatives is called a(n) a. Analyst. b. Broker. c. Investment banker. d. Speculator. e. None of the above.

Q: All of the following are reasons to monitor your investment portfolio except to a. Ensure the goals are being met. b. Take advantage of changes in economic and legal conditions. c. Adjust the portfolio with respect to a change in risk attitude. d. Capture additional transaction costs. e. None of the above.

Q: All of the following are basic categories of financial assets except a. Money market securities. b. Stocks (equity). c. Deeds (titles). d. Bonds (debt). e. All of the above represent financial assets.

Q: The proportion of funds invested in various categories of assets, such as money market instruments, long-term debt, stocks, and real estate is referred to as a. Investment portfolio summation. b. Asset allocation. c. Risk tolerance level. d. Expected return. e. None of the above.

Q: The costs associated with trading securities, which include the costs of time, effort, and phone calls, as well as brokered commissions are called a. Arbitrage. b. Economies of scale. c. Transaction costs. d. Portfolio management. e. Taxes.

Q: An investor's ability and willingness to accept risk is termed: a. Risk aversion. b. Risk seeking. c. Risk tolerance level. d. Risk-free rate of return. e. None of the above.

Q: Income securities are used primarily to a. Invest in retirement planning. b. Supplement current income. c. Shelter current income from taxes. d. Defer interest income to a later date. e. None of the above.

Q: Which of the following is not a common reason given for investing? a. Retirement planning. b. Supplement current income. c. Shelter current income from taxes. d. Eliminate slack from current budget. e. To achieve future goals, such as purchasing a house.

Q: Individuals who try to make a quick profit based on short-term market adjustments are referred to as a. Speculators. b. Investors. c. Brokers. d. Analysts. e. None of the above.

Q: People who view investments as instruments that produce growth over a long period of time are referred to as a. Speculators. b. Investors. c. Brokers. d. Analysts. e. None of the above.

Q: Factoring involves the outright sale of accounts receivable. a. True b. False

Q: The risk of default on pledged accounts receivable is borne by the lender to whom the receivables are pledged. a. True b. False

Q: Under a revolving credit agreement the risk to the firm of being unable to obtain funds when needed is lower than with a line of credit. a. True b. False

Q: A line of credit can be either a formal or informal agreement between borrower and bank regarding the maximum amount of credit the bank will extend to the borrower subject to certain conditions. a. True b. False

Q: A promissory note is the document signed when a bank loan is executed and it specifies financial aspects of the loan, and items such as collateral and other terms and conditions. a. True b. False

Q: A line of credit and a revolving credit agreement are similar except that a line of credit creates a legal obligation for the bank. a. True b. False

Q: Short-term loans generally are obtained faster than long-term loans because when lenders consider long-term loans they insist on a more thorough evaluation of the borrower's financial health and because the loan agreement is more complex. a. True b. False

Q: One of the advantages of short-term debt financing is that firms can expand or contract their short-term credit more easily than their long-term credit. a. True b. False

Q: Short-term financing might be riskier than long-term financing because, during periods of tight credit, the firm might not be able to rollover (renew) its debt. a. True b. False

Q: Trade credit and accrual accounts are always costless sources of spontaneous financing for the firm. a. True b. False

Q: When deciding whether or not to take a trade discount, the cost of borrowing funds should be compared to the cost of trade credit to determine if the cash discount should be taken. a. True b. False

Q: Trade credit is an inexpensive source of short-term financing if no discounts are offered. a. True b. False

Q: As a rule, managers should try to always use the free component of trade credit but should use the costly component only after comparing its costs to the costs of similar credit from other sources. a. True b. False

Q: Trade credit can be separated into two components: free trade credit, which involves credit received after the discount period ends, and costly trade credit, which is the cost of discounts not taken. a. True b. False

Q: If a firm is offered credit terms of 2/10, net 30, it is in the firm's financial interest to pay as early during the discount period as possible. a. True b. False

Q: Accruals represent a spontaneous source of funding but, unfortunately, due to economic forces, firms have little control over the level of these accounts. a. True b. False

Q: Accruals represent a source of "free" financing in the sense that no explicit interest is paid on these funds. a. True b. False

Q: A conservative approach to working capital will result in all permanent assets being financed using long-term securities. a. True b. False

Q: Temporary current assets are assets used specifically to finance particular projects in the firm's capital budget. a. True b. False

Q: Permanent current assets reflect the fact that current assets do not shrink to zero even when business is at a seasonal or cyclical low. Thus, permanent current assets represent a minimum level of current assets the firm must finance. a. True b. False

Q: Determining the appropriate amount of total current assets and the amount in specific asset accounts, as well as their financing, are basic elements of working capital policy. a. True b. False

Q: Determination of a firm's investment in current assets and how that investment is financed are elements of working capital policy. a. True b. False

Q: Although short-term interest rates have historically averaged less than long-term rates, the heavy use of short-term debt is considered to be an aggressive working capital strategy because of the inherent risks of using short-term financing. a. True b. False

Q: Long-term debt which is coming due in the next accounting period is defined as a current liability but is not considered a working capital decision variable. a. True b. False

Q: An increase in a current asset account must be accompanied by a corresponding increase in a liability account. a. True b. False

Q: Net working capital is defined as current assets divided by current liabilities. a. True b. False

Q: Net working capital is defined as current assets minus current liabilities. This also defines the current ratio. a. True b. False

Q: What is the inventory conversion period for a firm that has inventory of $1.5 million, a tax rate of 35 percent, daily cost of goods sold of $300,000, and profit margin of 12 percent? a. 3.25 days b. 0.60 days c. 5.00 days d. 6.75 days

Q: If the current ratio is equal to four and we double the current liabilities and half the current assets, what will the new current ratio equal? a. 1 b. 2 c. 8 d. 16

Q: Net working capital is defined as a. current assets plus current liabilities b. current liabilities c. current assets d. current assets minus current liabilities

Q: Working capital management involves decisions related to a. labor contracts b. current assets and liabilities c. fixed asset acquisition d. long term debt

Q: The amount of safety stocks held by a firm generally a. increases with greater uncertainty of demand forecasts. b. increases with higher costs (in terms of lost sales and lost goodwill) of stockouts. c. increases with a greater chance that delays will occur in receiving shipments. d. decreases as the cost of carrying additional inventory increases. e. All of the above

Q: The ____ is the average length of time between the purchase of raw materials and labor and the payment of cash for them. a. inventory conversion period b. receivables collection period c. payables deferral period d. cash conversion cycle

Q: The ____ is the average length of time to convert the firm's receivables into cash. a. payables deferral period b. receivables collection period c. cash conversion period d. inventory conversion period

Q: The ____ is the average length of time required to convert materials into finished goods and then to sell those goods. a. payables deferral period b. receivables collection period c. cash conversion period d. inventory conversion period

Q: The cash conversion cycle is the length of time from a. the payment of accrued wages to manufacture a product until the sale of that product. b. the payment of accrued wages to manufacture a product until the collection of accounts receivable associated with the sale of that product. c. the payment for the purchase of raw materials to manufacture a product until the sale of that product. d. the payment for the purchase of raw materials to manufacture a product until the collection of accounts receivable associated with the sale of that product.

Q: When the current ratio is ____ than one and current liabilities ____ by the same dollar amount as current assets, the current ratio ____. a. less; decrease; increases b. greater; increase; increases c. greater; increase; decreases d. less; increase; decreases

Q: Which of the following is a net working capital decision variable in the current period? a. The current maturities of long-term debt. b. Financing associated with a construction program that will be funded with the proceeds of a long-term security issue after the project is completed. c. The use of short-term debt to finance long-term assets. d. Purchasing inventory needed to meet current demand on credit. e. None of the above.

Q: The best way to get a comprehensive picture of a firm's liquidity position is to examine its ____, which forecasts cash inflows and outflows. a. cash and marketable securities b. net working capital c. current ratio d. cash budget

Q: ____ is the management of short-term assets and liabilities. a. Trend analysis b. Ratio analysis c. Capital budgeting d. Working capital management

Q: Do not use the APR formula for this problem. Coverall Carpets Inc. is planning to borrow $12,000 from the bank. The bank offers the choice of a 12 percent discounted interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the effective rate of interest on the 10.19 percent add-on loan? a. 9.50% b. 10.19% c. 15.22% d. 16.99%

Q: You go to three different banks to borrow $10,000 for one year. Each says it will lend you the money at 10 percent, but their terms differ as follows: Bank A: Simple interest Bank B: Add-on interest Bank C: Discounted interest Banks A and C require a single payment at the end of the year. Bank B requires 12 equal monthly payments beginning at the end of the first month. What is the difference between the highest and lowest effective annual rate in this case? a. 13.0% b. 9.5% c. 9.0% d. 8.5% e. 8.0%

Q: You need to borrow $25,000 for one year. Your bank offers to make the loan, and it offers you three choices: (1) 15 percent simple interest, annual compounding; (2) 13 percent simple interest, daily compounding (360-day year); (3) 9 percent add-on interest, 12 end-of-month payments. The first two loans would require a single payment at the end of the year, the third would require 12 equal monthly payments beginning at the end of the first month. What is the difference between the highest and lowest effective annual rate? a. 1.12% b. 2.48% c. 3.60% d. 4.25% e. 5.00%

Q: The Lasser Company needs to finance an increase in its working capital for the coming year. Lasser is reviewing the following three options: (1) The firm can borrow from its bank on a simple interest basis for one year at 13 percent. (2) It can borrow on a 3-month, but renewable, loan at a 12 percent simple rate. The loan is a simple interest loan, completely paid off at the end of each quarter, then renewed for another quarter. (3) The firm can increase its accounts payable by not taking discounts. Lasser buys on credit terms of 1/30, net 60 days. What is the effective annual cost (not the approximate cost) of the least expensive type of credit, assuming 360 days per year? a. 13.0% b. 12.82% c. 11.46% d. 12.12% e. 12.55%

Q: A firm is offered trade credit terms of 2/8, net 45. The firm does not take the discount, and it pays after 58 days. What is the effective annual cost of not taking this discount? (Note: Do not use the approximate cost.) a. 21.63% b. 13.35% c. 22.95% d. 15.65% e. 18.70%

Q: Refer to Fashion Clothiers Inc. What is Fashion Clothiers' minimum cost of ordering and holding inventory? a. $6,254 b. $10,733 c. $11,560 d. $13,563 e. $19,825

Q: Refer to Fashion Clothiers Inc. What is the firm's EOQ? a. 26,833 b. 30,040 c. 43,987 d. 15,218 e. 21,456

Q: Refer to Aberwald Corporation. At the EOQ, what is Aberwald's cost of ordering and carrying inventory? a. $23,820 b. $7,940 c. $15,940 d. $34,220 e. $47,693

Q: Refer to Aberwald Corporation. How many orders should Aberwald place during the year? a. 12 b. 25 c. 30 d. 40 e. 60

Q: Refer to Aberwald Corporation. What is its average inventory level? a. 1,588 b. 3,175 c. 1,123 d. 13,675 e. 8,124

Q: Refer to Aberwald Corporation. What is the economic ordering quantity for chips? a. 12,088 b. 3,175 c. 6,243 d. 13,675 e. 2,245

Q: Refer to Berkeley Prints. What are the incremental pre-tax profits from this proposal? a. $283,750 b. $250,500 c. $303,250 d. $493,750 e. $288,250

Q: Refer to Berkeley Prints. What would be the incremental cost of carrying receivables if the change were made? a. u2212$108,750 (carrying costs would decline) b. $116,250 c. $157,900 d. u2212$225,000 (carrying costs would decline) e. $260,500

Q: Refer to Berkeley Prints. What would be the incremental bad debt losses if the change were made? a. $130,000 b. $250,000 c. u2212$250,000 (bad debt losses would decline) d. u2212$130,000 (bad debt losses would decline) e. $620,000

Q: Refer to Berkeley Prints. What would be the cost to Berkeley of the discounts taken? a. $116,750 b. u2212$108,750 c. $155,000 d. $225,000 e. $260,500

Q: Refer to East Lansing Appliances. What are the incremental pre-tax profits from this proposal? a. $181,250 b. $271,750 c. $256,250 d. $206,500 e. $231,250

Q: Refer to East Lansing Appliances. What would be the incremental cost of carrying receivables if this change were made? a. $108,750 b. −$116,250 (carrying costs would decline) c. $157,900 d. −$225,000 (carrying costs would decline) e. $260,500

Q: Refer to East Lansing Appliances. What would be the incremental bad debt losses if the change were made? a. $315,000 b. $260,500 c. u2212$260,500 (bad debt losses would decline) d. u2212$315,000 (bad debt losses would decline) e. $0 (no change would occur)

Q: Reston Inc. has expected sales of $17,000,000. While 10 percent of its customers pay cash, the remaining 90 percent pay on credit with 40 percent paying on Day 10, 30 percent paying on Day 20, 15 percent paying on Day 25, and 15 percent paying on Day 30. Assume that the cost of funds invested in receivables is 10 percent. Suppose that the firm's customers begin paying later, such that the new DSO increases to 24 days, that the firm uses a 360-day year, and that the firm's variable cost ratio is 80 percent. What is the additional interest cost to Reston of the additional investment in A/R caused by the delay in payment by its customers? a. $19,550 b. $24,438 c. $42,500 d. $78,625 e. $102,000

Q: Bass Boats Inc. currently has sales of $1,000,000, and its days sales outstanding is 30 days. The financial manager estimates that offering longer credit terms would (1) increase the days sales outstanding to 50 days and (2) increase sales to $1,200,000. However, bad debt losses, which were 2 percent on the old sales, would amount to 5 percent on the incremental sales only (bad debts on the old sales would stay at 2 percent). Variable costs are 80 percent of sales, and Bass has a 15 percent receivables financing cost. What would the annual incremental pre-tax profit be if Bass extended its credit period? a. −$20,000 b. −$10,000 c. $0 d. $10,000 e. $20,000

Q: Quickbow Company currently uses maximum trade credit by not taking discounts on its purchases. Quickbow is considering borrowing from its bank, using notes payable, in order to take trade discounts. The firm wants to determine the effect of this policy change on its net income. The standard industry credit terms offered by all its suppliers are 2/10, net 30 days, and Quickbow pays in 30 days. Its net purchases are $11,760 per day, using a 360-day year. The rate on the notes payable is 10 percent and the firm's tax rate is 40 percent. If the firm implements the plan, what is the expected change in Quickbow's net income? a. −$23,520 b. −$32,160 c. +$23,520 d. +$37,728 e. +$62,880

Q: Jordan Air Inc. has average inventory of $1,000,000. Its estimated annual sales are 15 million and the firm estimates its receivables collection period to be twice as long as its inventory conversion period. The firm pays its trade credit on time; its terms are net 30. The firm wants to decrease its cash conversion cycle by 10 days. It believes that it can reduce its average inventory to $900,000. Assume a 360-day year and that sales will not change. Cost of goods sold equal 80 percent of sales. By how much must the firm also reduce its accounts receivable to meet its goal of a 10 day reduction? a. $101,900 b. $1,000,000 c. $291,667 d. $333,520 e. $0

Q: Fullerton Wine Company is a retailer which sells vintage wines. The company has established a policy of reordering inventory every 30 days. A recently employed MBA has considered Fullerton's inventory problem from the EOQ model viewpoint. If the following constitute the relevant data, how does the current policy compare with the optimal policy? Ordering cost = $10 per order Carrying cost = 20% of purchase price Purchase price = $10 per unit Total sales for year = 1,000 units a. Total costs will be the same, since the current policy is optimal. b. Total costs under the current policy will be less than total costs under the EOQ by $10. c. Total costs under the current policy exceed those under the EOQ by $3. d. Total costs under the current policy exceed those under the EOQ by $10. e. Cannot be determined due to insufficient information.

Q: Crystal Clear Company purchases 50,000 gallons of distilled water each year. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to CCC is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. The supplier is now offering a quantity discount of $0.03 per gallon if CCC orders 10,000 gallons at a time. Should CCC take the discount? a. From a cost standpoint, CCC is indifferent. b. No, the cost exceeds the benefit by $500. c. No, the cost exceeds the benefit by $1,000. d. Yes, the benefit exceeds the cost by $500. e. Yes, the benefit exceeds the cost by $1,120.