Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Because investment in permanent working capital is required so long as the firm remains in business,it constitutes a long-term investment. 
B) Because temporary working capital represents a short-term need,the firm should finance this portion of its investment with short-term financing. 
C) Temporary working capital is the difference between the lowest level of investment in short-term assets and the permanent working capital investment. 
D) The matching principle states that short-term needs should be financed with short-term debt and long-term needs should be financed with long-term sources of funds. 
A) Because investment in permanent working capital is required so long as the firm remains in business,it constitutes a long-term investment. 
B) Because temporary working capital represents a short-term need,the firm should finance this portion of its investment with short-term financing. 
C) Temporary working capital is the difference between the lowest level of investment in short-term assets and the permanent working capital investment. 
D) The matching principle states that short-term needs should be financed with short-term debt and long-term needs should be financed with long-term sources of funds. C

Question 2

Use the following information to answer the question(s)below.
Taggart Transcontinental needs a $100,000 loan for the next 30 days.Taggart has three alternatives available:
Alternative #1: Forgo the discount on its trade credit agreement that offers terms of 2/5 net 35.
Alternative #2: Borrow the money from Bank A,which has offered to lend the firm $100,000 for one month at
an APR of 9%.The bank will require a (no-interest)compensating balance of 10% of the face-value of the loan and will charge a $200 loan origination fee,which means that Taggart must borrow even more than the $100,000 they need.
Alternative #3: Borrow the money from Bank B,which has offered to lend the firm $100,000 for one month at an APR of 12%.The loan has a 1% origination fee.
-The effective annual rate for Taggart if they choose alternative #2 is closest to:

Accepted Answer

A) 13.0%. 
B) 13.9%. 
C) 18.8%. 
D) 27.0%. 
A) 13.0%. 
B) 13.9%. 
C) 18.8%. 
D) 27.0%. A

Question 3

Which of the following statements regarding commercial paper is FALSE?

Accepted Answer

A) With dealer paper,dealers sell the commercial paper to investors in exchange for a spread (or fee)for their services. 
B) With dealer paper,the spread increases the proceeds that the issuing firm receives,thereby decreasing the effective cost of the paper. 
C) The minimum face value of commercial paper is $25,000,and most commercial paper has a face value of at least $100,000. 
D) With direct paper,the firm sells the security directly to investors. 
A) With dealer paper,dealers sell the commercial paper to investors in exchange for a spread (or fee)for their services. 
B) With dealer paper,the spread increases the proceeds that the issuing firm receives,thereby decreasing the effective cost of the paper. 
C) The minimum face value of commercial paper is $25,000,and most commercial paper has a face value of at least $100,000. 
D) With direct paper,the firm sells the security directly to investors. B

Question 4

Kinston Industries issued $4,000,000 in commercial paper which matures in six months and received $3,876,000.Calculate the effective annual rate that Kinston is paying.

Accepted Answer

@#IMG-DLM& - 1 = .031992 or 3.

Question 5

Use the table for the question(s)below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):  
-The temporary working capital needs for Hasbeen Toys in quarter 3 is closest to:

Accepted Answer

A) $845 million. 
B) $0 million. 
C) $770 million. 
D) $340 million. 
A) $845 million. 
B) $0 million. 
C) $770 million. 
D) $340 million.

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) Commercial banks,finance companies,and factors,which are firms that purchase the receivables of other companies,are the most common sources for secured short-term loans. 
B) The factoring arrangement may be without recourse,in which case the lender bears the risk of bad-debt losses. 
C) In a floating lien,general lien,or blanket lien arrangement,specific inventory is used to secure the loan. 
D) If a firm sells its goods on terms of net 30,then the factor will pay the firm the face value of its receivables,less a factor's fee,at the end of 30 days. 
A) Commercial banks,finance companies,and factors,which are firms that purchase the receivables of other companies,are the most common sources for secured short-term loans. 
B) The factoring arrangement may be without recourse,in which case the lender bears the risk of bad-debt losses. 
C) In a floating lien,general lien,or blanket lien arrangement,specific inventory is used to secure the loan. 
D) If a firm sells its goods on terms of net 30,then the factor will pay the firm the face value of its receivables,less a factor's fee,at the end of 30 days.

Question 7

Luther Industries is offered a $1 million loan for four months at an APR of 9%.If this loan has an origination fee of 1%,then the effective annual rate (EAR)for this loan is closest to:

Accepted Answer

A) 12.0%. 
B) 12.6%. 
C) 4.1%. 
D) 13.8%. 
A) 12.0%. 
B) 12.6%. 
C) 4.1%. 
D) 13.8%.

Question 8

Use the table for the question(s)below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):  
-The temporary working capital needs for Hasbeen Toys in quarter 1 is closest to:

Accepted Answer

A) $0 million. 
B) $340 million. 
C) $770 million. 
D) $845 million. 
A) $0 million. 
B) $340 million. 
C) $770 million. 
D) $845 million.

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) With a discount loan,the borrower is required to pay the interest at the end of the loan period. 
B) Bridge loans are often quoted as discount loans with fixed interest rates. 
C) A bridge loan is another type of short-term bank loan that is often used to "bridge the gap" until a firm can arrange for long-term financing. 
D) After a natural disaster,lenders may provide businesses with short-term loans to serve as bridges until they receive insurance payments or long-term disaster relief. 
A) With a discount loan,the borrower is required to pay the interest at the end of the loan period. 
B) Bridge loans are often quoted as discount loans with fixed interest rates. 
C) A bridge loan is another type of short-term bank loan that is often used to "bridge the gap" until a firm can arrange for long-term financing. 
D) After a natural disaster,lenders may provide businesses with short-term loans to serve as bridges until they receive insurance payments or long-term disaster relief.

Question 10

Use the table for the question(s)below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):  
-The permanent working capital needs for Hasbeen Toys is closest to:

Accepted Answer

A) $1100 million. 
B) $2435 million. 
C) $1275 million. 
D) $765 million. 
A) $1100 million. 
B) $2435 million. 
C) $1275 million. 
D) $765 million.

Question 11

Which of the following is NOT a specific financing option for temporary working capital?

Accepted Answer

A) Secured financing 
B) Commercial paper 
C) Bank loans 
D) Treasury bills 
A) Secured financing 
B) Commercial paper 
C) Bank loans 
D) Treasury bills

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) Bank loans are typically initiated with a promissory note,which is a written statement that indicates the amount of the loan,the date payment is due,and the interest rate. 
B) The most straightforward type of bank loan is a single,end-of-period-payment loan. 
C) With a fixed interest rate,the specific rate that the bank will charge is stipulated at the time the loan is made. 
D) One of the primary sources of short-term financing,especially for small businesses,is the investment bank. 
A) Bank loans are typically initiated with a promissory note,which is a written statement that indicates the amount of the loan,the date payment is due,and the interest rate. 
B) The most straightforward type of bank loan is a single,end-of-period-payment loan. 
C) With a fixed interest rate,the specific rate that the bank will charge is stipulated at the time the loan is made. 
D) One of the primary sources of short-term financing,especially for small businesses,is the investment bank.

Question 13

Use the following information to answer the question(s)below.
Taggart Transcontinental needs a $100,000 loan for the next 30 days.Taggart has three alternatives available:
Alternative #1: Forgo the discount on its trade credit agreement that offers terms of 2/5 net 35.
Alternative #2: Borrow the money from Bank A,which has offered to lend the firm $100,000 for one month at
an APR of 9%.The bank will require a (no-interest)compensating balance of 10% of the face-value of the loan and will charge a $200 loan origination fee,which means that Taggart must borrow even more than the $100,000 they need.
Alternative #3: Borrow the money from Bank B,which has offered to lend the firm $100,000 for one month at an APR of 12%.The loan has a 1% origination fee.
-The effective annual rate for Taggart if they choose alternative #1 is closest to:

Accepted Answer

A) 13.9%. 
B) 18.8%. 
C) 27.0%. 
D) 27.9%. 
A) 13.9%. 
B) 18.8%. 
C) 27.0%. 
D) 27.9%.

Question 14

d'Anconia Copper has borrowed $5 million for six months at a stated annual rate of 10%,using inventory stored in a field warehouse as collateral.The warehouse charges a $25,000 fee,payable at the end of the six months.The effective annual rate on this loan is closest to:

Accepted Answer

A) 9.3%. 
B) 11.3%. 
C) 15.2%. 
D) 17.1%. 
A) 9.3%. 
B) 11.3%. 
C) 15.2%. 
D) 17.1%.

Question 15

Which of the following statements regarding lines of credit is FALSE?

Accepted Answer

A) The line of credit agreement may also stipulate that at some point in time the outstanding balance must be zero.This policy ensures that the firm does not use the short-term financing to finance its long-term obligations. 
B) A revolving line of credit is an uncommitted line of credit that involves an informal agreement from the bank for a longer period of time,typically two to three years. 
C) The line of credit may be uncommitted,meaning it is an informal agreement that does not legally bind the bank to provide the funds. 
D) A revolving line of credit with no fixed maturity is called evergreen credit. 
A) The line of credit agreement may also stipulate that at some point in time the outstanding balance must be zero.This policy ensures that the firm does not use the short-term financing to finance its long-term obligations. 
B) A revolving line of credit is an uncommitted line of credit that involves an informal agreement from the bank for a longer period of time,typically two to three years. 
C) The line of credit may be uncommitted,meaning it is an informal agreement that does not legally bind the bank to provide the funds. 
D) A revolving line of credit with no fixed maturity is called evergreen credit.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) Firms with seasonal cash flows may find themselves with a surplus of cash during some months that is sufficient to compensate for a shortfall during other months.However,because of timing differences,such firms often have short-term financing needs. 
B) A company forecasts its cash flows to determine whether it will have surplus cash or a cash deficit for each period. 
C) Like seasonalities,positive cash flow shocks can create short-term financing needs. 
D) When sales are concentrated during a few months,sources and uses of cash are also likely to be seasonal. 
A) Firms with seasonal cash flows may find themselves with a surplus of cash during some months that is sufficient to compensate for a shortfall during other months.However,because of timing differences,such firms often have short-term financing needs. 
B) A company forecasts its cash flows to determine whether it will have surplus cash or a cash deficit for each period. 
C) Like seasonalities,positive cash flow shocks can create short-term financing needs. 
D) When sales are concentrated during a few months,sources and uses of cash are also likely to be seasonal.

Question 17

Which of the following statements is FALSE?

Accepted Answer

A) If a factoring arrangement is with recourse,the factor will pay the firm the amount due regardless of whether the factor receives payment from the firm's customers. 
B) In a factoring of accounts receivable arrangement,the firm sells receivables to the lender (i.e. ,the factor),and the lender agrees to pay the firm the amount due from its customers at the end of the firm's payment period. 
C) Businesses can also obtain short-term financing by using secured loans,which are loans collateralized with short-term assets-most typically the firm's accounts receivables or inventory. 
D) Both the interest rate and the factor's fee vary depending on such issues as the size of the borrowing firm and the dollar volume of its receivables. 
A) If a factoring arrangement is with recourse,the factor will pay the firm the amount due regardless of whether the factor receives payment from the firm's customers. 
B) In a factoring of accounts receivable arrangement,the firm sells receivables to the lender (i.e. ,the factor),and the lender agrees to pay the firm the amount due from its customers at the end of the firm's payment period. 
C) Businesses can also obtain short-term financing by using secured loans,which are loans collateralized with short-term assets-most typically the firm's accounts receivables or inventory. 
D) Both the interest rate and the factor's fee vary depending on such issues as the size of the borrowing firm and the dollar volume of its receivables.

Question 18

A written,legally binding agreement that obligates the bank to lend a firm any amount up to a stated maximum,regardless of the financial condition of the firm (unless the firm is bankrupt)as long as the firm satisfies any restrictions in the agreement is called:

Accepted Answer

A) a bridge loan. 
B) a single,end-of-period-payment loan. 
C) a short-term mortgage loan. 
D) a committed line of credit. 
A) a bridge loan. 
B) a single,end-of-period-payment loan. 
C) a short-term mortgage loan. 
D) a committed line of credit.

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) When following a conservative financing policy,a firm would use long-term sources of funds to finance its fixed assets,permanent working capital,and some of its seasonal needs. 
B) An aggressive financing policy also increases the possibility that managers of the firm will use excess cash nonproductively-for example,on perquisites for themselves. 
C) A firm could finance its short-term needs with long-term debt,a practice known as a conservative financing policy. 
D) To implement a conservative financing policy effectively,there will necessarily be periods when excess cash is available-those periods when the firm requires little or no investment in temporary working capital. 
A) When following a conservative financing policy,a firm would use long-term sources of funds to finance its fixed assets,permanent working capital,and some of its seasonal needs. 
B) An aggressive financing policy also increases the possibility that managers of the firm will use excess cash nonproductively-for example,on perquisites for themselves. 
C) A firm could finance its short-term needs with long-term debt,a practice known as a conservative financing policy. 
D) To implement a conservative financing policy effectively,there will necessarily be periods when excess cash is available-those periods when the firm requires little or no investment in temporary working capital.

Question 20

Luther Industries wants to borrow $1 million for two months.Using its inventory as collateral,it can obtain a 10% (APR)loan (compounded monthly).The lender requires that a warehouse arrangement be used.The warehouse fee is $10,000,payable at the end of the two months.Calculate the effective annual rate of this loan for Luther Industries.

Accepted Answer

The monthly interest rate is @#IMG-DLM& = .83333%,

Exam 27: Short-Term Financial Planning

Which of the following statements is FALSE?

Which of the following statements regarding commercial paper is FALSE?

Kinston Industries issued $4,000,000 in commercial paper which matures in six months and received $3,876,000.Calculate the effective annual rate that Kinston is paying.

Use the table for the question(s)below. The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions): -The temporary working capital needs for Hasbeen Toys in quarter 3 is closest to:

Which of the following statements is FALSE?

Luther Industries is offered a $1 million loan for four months at an APR of 9%.If this loan has an origination fee of 1%,then the effective annual rate (EAR)for this loan is closest to:

Use the table for the question(s)below. The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions): -The temporary working capital needs for Hasbeen Toys in quarter 1 is closest to:

Which of the following statements is FALSE?

Use the table for the question(s)below. The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions): -The permanent working capital needs for Hasbeen Toys is closest to:

Which of the following is NOT a specific financing option for temporary working capital?

Which of the following statements is FALSE?

d'Anconia Copper has borrowed $5 million for six months at a stated annual rate of 10%,using inventory stored in a field warehouse as collateral.The warehouse charges a $25,000 fee,payable at the end of the six months.The effective annual rate on this loan is closest to:

Which of the following statements regarding lines of credit is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

A written,legally binding agreement that obligates the bank to lend a firm any amount up to a stated maximum,regardless of the financial condition of the firm (unless the firm is bankrupt)as long as the firm satisfies any restrictions in the agreement is called:

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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