Q&A Hero

Q: What is the annual financing cost of a 1-year (365 day), $120,000 discounted bank loan at a stated annual interest rate of 10.25 percent? a. 11.42% b. 11.64% c. 10.25% d. 8.76%

Q: Northwest Container Company is considering selling an issue of commercial paper to finance its seasonal needs. A commercial paper dealer has offered to sell a $10 million issue maturing in 90 days at an interest rate of 10 percent per annum (deducted in advance). The dealer's fee for selling the commercial paper would be $10,000. Determine the annual financing cost of commercial paper financing to Northwest. a. 10.7% b. 10.3% c. 10.0% d. 9.3%

Q: Gooden Foods, Inc. has a revolving credit agreement with its bank under which it can borrow up to $10 million at an annual interest rate of 12 percent. The firm is required to maintain a 10 percent compensating balance on any funds borrowed under this agreement and to pay a 0.5 percent commitment fee on the unused portion of the credit line. Determine the annual financing cost to Gooden Foods of borrowing $4 million. a. 13.3% b. 14.7% c. 14.2% d. 2.7%

Q: Melody Dairy has a line of credit with its bank. The firm plans to borrow $400,000 at a rate of 10 percent. The bank requires a 15 percent compensating balance and the firm currently maintains $20,000 in its account at the bank that can be used to meet the compensating balance requirement. Determine the annual financing cost to Melody of this loan. a. 11.1% b. 10.0% c. 11.8% d. 6.4%

Q: Determine the annual financing cost of foregoing a cash discount under credit terms of 2/30, net 90. a. 8.0% b. 24.0% c. 12.2% d. 12.4%

Q: Idaho Industries currently purchases an average of $20,000 per day of raw materials. Idaho's suppliers offer credit terms of "net 60" and the firm waits until the end of the credit period to pay its suppliers. Determine the additional trade credit that can be obtained by the firm if Idaho stretches its accounts payable an extra 30 days beyond the due date. a. $1,800,000 b. $600,000 c. $60,000 d. $180,000

Q: Idaho Industries currently purchases an average of $20,000 per day of raw materials. Idaho's suppliers offer credit terms of "net 60" and the firm waits until the end of the credit period to pay suppliers. Determine Idaho Industries' current level of trade credit (accounts payable). a. $ 20,000 b. $600,000 c. $1,200,000 d. $200,000

Q: In a ____ the bank is legally committed to making loans to a company up to a predetermined credit limit specified in the agreement. a. line of credit b. floating lien c. revolving credit agreement d. terminal loan

Q: A ____ is an agreement that permits a firm to borrow funds up to a predetermined limit at any time during the life of the agreement. a. floating lien b. revolving lien agreement c. terminal loan d. line of credit

Q: The pledging of receivables a. typically is done on a non-recourse basis b. typically is done on a non-notification basis c. by small companies generally is considered an indication of poor financial health d. is never done on a non-notification basis

Q: The factoring of receivables a. typically is done on a recourse basis b. typically is done on a non-notification basis c. removes the receivables from the factoring firm's balance sheet d. does not affect the firm's balance sheet

Q: Which of the following methods of financing would usually have the lowest cost to the firm? a. pledging accounts receivable b. commercial paper c. factoring accounts receivable d. line of credit

Q: All the following are advantages of accounts receivable loans except a. they are relatively liquid b. they involve documents representing customer obligations c. administrative costs of processing receivables are low d. their value is relatively easy to recover

Q: Under a field warehouse financing agreement, the inventory that serves as collateral for a loan is a. held in trust for the lender b. stored in a bonded warehouse c. all of the firm's inventory d. segregated from the firm's other inventory

Q: Which of the following is nota characteristic of commercial paper? a. interest rates tend to be just a little over the prime lending rate b. sold on a discount basis c. has maturities ranging from a few days to a maximum of 9 months d. usually sold in multiples of $100,000

Q: Which of the following are potential purchasers of commercial paper? a. money market mutual funds b. insurance companies c. banks d. all the above are potential purchasers

Q: A major purpose of short-term bank loans is to a. meet the firm's seasonal needs for funds b. purchase equipment c. provide start-up capital d. meet payroll expenses

Q: Open trade credit appears on the buyer's balance sheet as a. accounts receivable b. accounts payable c. accruals d. trade credit

Q: Two loans involve the same principal amount, maturity, and nominal interest rates. One is a bullet loan, the other a discounted loan. The effective annual percentage cost of the loan will be higher for a. the discounted loan b. the bullet loan c. the effective costs are the same d. not enough information is provided to answer the question

Q: All of the following are legitimate forms of secured short-term financing except a. factoring accounts receivable b. terminal warehousing arrangements c. floating liens d. accrued expenses

Q: Compensating balances are often required by financial institutions in a loan agreement in order to a. increase the return earned by the institution on the loan b. provide some measure of protection in the event of a default by the borrower c. both a and b d. none of the above

Q: Under a ____ financing agreement, the inventory that is being used as collateral for a loan is stored in a bonded warehouse operated by a public warehousing company. a. floating lien b. trust receipts c. terminal warehouse d. field warehouse

Q: "Floor Planning" is an example of a ____ inventory financing arrangement. a. floating lien b. trust receipt c. terminal warehouse d. field warehouse

Q: The net cost of borrowing under a non-recourse factoring arrangement will usually be below the stated factoring cost and interest expenses because a. credit department cost can be reduced or eliminated b. bad-debt losses are eliminated c. interest rates charged by factors are generally below the prime rate charged by banks d. bad debt losses are eliminated, and credit department cost can be reduced or eliminated

Q: Which of the following statements concerning factoring is true? a. Most factoring is done on a non-recourse basis b. When receivables are factored, the firm retains the title to the receivables c. The factor usually is not responsible for credit checking and collection of the receivables d. The use of factoring is confined to the apparel, furniture, and textile industries.

Q: Which of the following statements concerning the pledging of receivables is(are) true? a. When accounts receivables are pledged, the firm retains title to the receivables. b. Most pledging is done on a non-recourse basis wherein the lender assumes the risk of default on the pledged receivables. c. The firm is normally required to sign a promissory note and security agreement before receiving the funds from the lender. d. a and c

Q: Which of the following provisions is usually not associated with a line of credit agreement? a. restrictions on the firm's dividend payments b. commitment fee c. maintenance of a minimum working capital position d. commitment fees and restrictions on dividend payments

Q: The prime rate is the: a. interest rate charged on loans to commercial banks by the Federal Reserve b. lowest published rate that large banks charge on loans made to their most credit-worthy business customers c. interest rate on prime commercial paper d. prevailing interest rate on Treasury Bills

Q: The primary source of deferred income to the firm is a. money owed to employees for their services b. funds owed to governments for taxes c. interest payments owed to banks d. advance payments made by customers

Q: Deferred income a. represents a source of funds to the firm b. decreases the firm's liquidity and assets c. is listed as an asset on the firm's balance sheet d. consists of payments earned before delivery of goods or services

Q: Deferred income a. is payments received for goods and services that are to be delivered by the firm at some future date b. is a liability for services rendered to the firm which have not been paid by the firm c. increases the firm's liquidity and assets d. increases the firm's liquidity and assets and consists of payments received for goods and services that are to be delivered by the firm at some future date

Q: Accrued expenses a. are an interest-free source of funds to the firm b. increase the firm's liquidity and assets c. are listed as an asset on the firm's balance sheet d. are liabilities for services that have already been paid by the firm

Q: Accrued expenses a. are liabilities for services rendered to the firm that have not yet been paid by the firm b. are payments received for goods and services which are to be delivered by the firm at some future date c. are shown on the firm's balance sheet as an asset d. do not constitute an interest-free source of financing

Q: Paying trade credit beyond the end of the credit period is known as a. playing the float b. seasonal datings c. stretching payables d. stretching receivables

Q: The most important source of short-term credit to business firms in the aggregate is a. bank loans b. trade credit c. receivables loans d. inventory loans

Q: Firms generally prefer to borrow funds on an unsecured basis because pledging assets as security a. can raise the cost of the loan b. can reduce its future dividend payments c. can restrict its future sales of new equity d. can lower the cost of the loan

Q: When receivables are ____, they no longer appear on the firm's balance sheet. a. factored b. pledged c. factored and pledged d. disclosed

Q: A floating lien is a loan in which the lender receives a security interest or general claim on all of a company's ____. a. fixed assets b. assets c. cash d. inventory

Q: The primary sources of spontaneous short-term credit for a firm include a. trade credit b. bank loans c. line of credit d. trade credit and bank loans

Q: With a variable interest rate term loan, the interest rate is normally linked to the ____. a. Treasury bill rate b. long-term government bond rate c. prime rate d. Fed funds rate

Q: Which of the following factors influence the interest cost of a loan? a. the size of the loan b. existence of compensating balances c. loan discounting d. All of these answers are correct.

Q: All of the following are criteria that a firm should consider when deciding where to invest excess cash reserves among the different types of securities except a. rate of return b. maturity date c. issue date d. marketability

Q: ____, which are similar to other checks except they are not payable on demand, are used primarily to provide for centralized control over payments authorized in field offices. a. Preauthorized checks b. Drafts c. Mail depository transfer checks d. Electronic depository transfer checks

Q: In general the ____ the number of checks being handled and the ____ the dollar amount of each check, the greater the benefit of a lockbox arrangement is to a firm. a. smaller, greater b. greater, smaller c. greater, greater d. smaller, smaller

Q: The primary components or sources of float include all the following except a. check clearing float b. collection float c. processing float d. mail float

Q: The objective of cash collection and disbursement policies is to a. minimize storage costs b. speed up collections and slow down disbursements c. maximize the return on near cash equivalents d. plan for acquisitions

Q: The cash management function is concerned with determining a. the optimal size of a firm's liquid asset balance b. the appropriate types and amounts of short-term investments the firm should make c. the most efficient methods of controlling the collection and disbursement of cash d. All of these answers are correct.

Q: All of the following are cash management strategies to expedite collections except a. a lockbox collection system b. wire transfers c. decentralized collection system d. the use of drafts instead of checks

Q: The "shortage" costs associated with inadequate liquid asset balances include all of the following except a. deterioration of the firm's credit rating b. foregone cash discounts c. lost sales d. possible financial insolvency

Q: All of the following would be viable securities to purchase with temporary excess cash except: a. a recently issued 30 year Baa corporate bond b. U.S. Treasury bill c. the commercial paper of General Motors Acceptance Corporation d. a repurchase agreement

Q: The primary reason(s) that firms do nothold long-term U.S. Treasury securities in their marketable securities portfolio is because a. the interest-rate risk associated with these securities is too high b. the transactions costs associated with these securities is too high c. the default risk associated with these securities is too high d. these securities are not readily marketable

Q: Which of the following types of marketable securities has a relatively weak secondary market? a. Bankers' acceptances b. Federal agency issues c. negotiable certificates of deposit d. commercial paper

Q: Which of the following types of marketable securities is most suitable for a smaller firm with only a few thousand dollars to invest at any given time? a. money market mutual funds b. Treasury bills c. Federal agency issues d. commercial paper

Q: Which of the following types of marketable securities normally has the lowest yields? a. Federal agency issues b. Treasury bills c. repurchase agreements d. commercial paper

Q: Which of the following types of marketable securities is considered to have the lowest default risk? a. bankers' acceptances b. U.S. Treasury issues c. repurchase agreements d. commercial paper

Q: Which of the following criteria is generally leastimportant in selecting marketable securities for inclusion in the firm's portfolio? a. length of maturity b. yield c. marketability d. default risk

Q: The optimal amount of the firm's liquid asset balance to be invested in marketable securities is a function of a. the interest earned over the expected holding period b. the transaction cost involved in buying and selling the securities c. the spread between long-term and short-term interest rates d. a and b only

Q: Which of the following statements concerning drafts is correct? a. Drafts require the firm to keep larger balances in its disbursement account. b. When a draft is transmitted to the firm's bank for collection, the bank must present the draft to the firm for acceptance before payment is made. c. Drafts are cheaper to use than checks. d. Drafts are payable on demand.

Q: Which of the following statements concerning "zero balance" systems is (are) correct? a. Zero balance systems help utilize disbursement float more effectively. b. Exactly enough funds are transferred into the zero balance accounts each day to cover the checks that have cleared. c. The function of the concentration account is to receive all deposits coming into the zero balance system. d. All of these answers are correct.

Q: The fastest method for moving funds between banks is a. special courier services b. wire transfers c. drafts d. float

Q: The costs of a lockbox collection system include a. foregone returns on the required compensating balances b. service fees charged by the bank c. increased bad-debt expenses d. foregone returns on required compensating balances, and bank service fees

Q: All of the following are methods used in expediting the collection of cash except a. wire transfers b. lockboxes c. drafts d. decentralized collection centers and concentration banks

Q: The difference between the firm's checking account balance shown on the books of the bank and the account balance shown on its own books is known as a. overdraft b. compensating balances c. surplus balances d. float

Q: The firm's optimal liquid asset balance occurs where the sum of the opportunity holding and ____ costs is minimized. a. borrowing b. compensating balance c. shortage d. capital

Q: Liquid asset balances include all of the following except a. accounts receivable b. checking account balances c. marketable securities d. currency on hand

Q: The "shortage" costs associated with inadequate liquid asset balances include a. higher cash discounts b. possible financial insolvency c. lower interest expense d. higher cash discounts and lower interest rate expense

Q: The primary reason(s) why firms hold liquid asset balances is (are): a. for transactions purposes b. for precautionary purposes c. to compensate its broker for various services rendered to the firm d. for transactions and precautionary purposes

Q: Which of the following statements concerning auction rate money market preferred stocks is (are) true? a. The price of the stock stays near par. b. Fifty percent of the dividends are exempt from corporate income taxes. c. The dividend yield on these securities is adjusted every 20 days through an auction process, where investors can exchange their stock for cash. d. a and b only

Q: ____ are short-term debt instruments issued as part of a commercial transaction, with payment guaranteed by a commercial bank. a. Negotiable certificates of deposit b. Commercial paper c. Repurchase agreements d. Bankers' acceptances

Q: ____ consists of short-term unsecured promissory notes issued by large, well-known corporations and finance companies. a. Negotiable certificates of deposit b. Commercial paper c. Repurchase agreements d. Bankers' acceptances

Q: ____ are processed through the Automated Clearing House (ACH) System. a. Drafts b. Wire transfers c. Check-like electronic images d. Drafts and wire transfers

Q: Which of the following methods is (are) used to transfer surplus funds from local (collection) bank accounts to concentration (disbursement) bank accounts? a. wire transfers b. electronic depository transfer checks c. (mail) depository transfer checks d. All of these are correct.

Q: A firm's operating cycle is equal to its ____. a. inventory conversion period plus its receivables conversion period b. cash conversion cycle minus its payables deferral period c. inventory conversion period minus its receivables conversion period d. payables deferral period plus its inventory conversion period

Q: A firm's net working capital position is a widely used measure of its ____. a. leverage b. profitability c. risk d. operations cycle

Q: The size of a firm's investment in current assets is a function of all of the following factors except a. sales level b. inventory policies c. credit policies d. stockholders equity

Q: The firm's receivables conversion period (measured in days) is equal to its accounts receivable divided by its ____. a. annual credit sales/365 b. annual credit sales c. annual sales/365 d. inventory conversion period

Q: A firm's cash conversion cycle is equal to its operating cycle minus its ____. a. inventory conversion period b. receivables conversion period c. payables deferral period d. accounts payable

Q: The firm's inventory conversion period (measured in days) is equal to its average inventory divided by its ____. a. cost of sales b. sales c. cost of sales/365 d. receivables

Q: Which of the following assets (if any) are part of a firm's working capital investment? a. cash b. accounts receivable c. inventory d. All of these are part of a firm's working capital investment.

Q: ____ assets are those that are affected by the seasonal or cyclical nature of company sales. a. Current b. Permanent current c. Fluctuating current d. Maturity matching