Question 1

A loan agreement that requires the firm to pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called:

Accepted Answer

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

Question 2

Galt Industries has issued four-month commercial paper with a $8 million face value.The firm netted $7,831,000 on the sale.The effective annual rate for this financing is closest to:

Accepted Answer

A) 5.6%. 
B) 6.6%. 
C) 7.2%. 
D) 8.4%. 
A) 5.6%. 
B) 6.6%. 
C) 7.2%. 
D) 8.4%.

Question 3

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.
-Which alternative should Taggart choose?

Accepted Answer

A) Alternative #1 since it has the lowest EAR 
B) Alternative #2 since it has the lowest EAR 
C) Alternative #3 since it has the lowest EAR 
D) Alternative #2 since it has the highest actual rate 
A) Alternative #1 since it has the lowest EAR 
B) Alternative #2 since it has the lowest EAR 
C) Alternative #3 since it has the lowest EAR 
D) Alternative #2 since it has the highest actual rate

Question 4

Luther Industries is offered a $1 million loan for four months at an APR of 9%.If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest-bearing account,then the effective annual rate (EAR)for this loan is closest to:

Accepted Answer

A) 10.34%. 
B) 12.6%. 
C) 14.4%. 
D) 71.5%. 
A) 10.34%. 
B) 12.6%. 
C) 14.4%. 
D) 71.5%.

Question 5

Which of the following statements is FALSE?

Accepted Answer

A) The prime rate is the rate banks charge other banks. 
B) With a variable interest rate,the terms of the loan may indicate that the rate will vary with some spread relative to a benchmark rate,such as the yield on one-year Treasury securities or the prime rate. 
C) With a discount loan,the borrower is required to pay the interest at the beginning of the loan period. 
D) A common benchmark rate is the London Inter-Bank Offered Rate,or LIBOR,which is the rate of interest at which banks borrow funds from each other in the London inter-bank market. 
A) The prime rate is the rate banks charge other banks. 
B) With a variable interest rate,the terms of the loan may indicate that the rate will vary with some spread relative to a benchmark rate,such as the yield on one-year Treasury securities or the prime rate. 
C) With a discount loan,the borrower is required to pay the interest at the beginning of the loan period. 
D) A common benchmark rate is the London Inter-Bank Offered Rate,or LIBOR,which is the rate of interest at which banks borrow funds from each other in the London inter-bank market.

Question 6

Occasionally,a company will encounter circumstances in which cash flows are temporarily negative for an unexpected reason.We refer to such a situation as:

Accepted Answer

A) a liquidity shock. 
B) a negative cash flow shock. 
C) a negative liquidity shock. 
D) a cash crunch. 
A) a liquidity shock. 
B) a negative cash flow shock. 
C) a negative liquidity shock. 
D) a cash crunch.

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) The matching principle indicates that the firm should finance permanent working capital with short-term sources of funds. 
B) Following the matching principle should,in the long run,help minimize a firm's transaction costs. 
C) In a perfect capital market,the choice of financing is irrelevant;thus,how the firm chooses to finance its short-term cash needs cannot affect value. 
D) A portion of a firm's investment in its accounts receivable and inventory is temporary and results from seasonal fluctuations in the firm's business or unanticipated shocks. 
A) The matching principle indicates that the firm should finance permanent working capital with short-term sources of funds. 
B) Following the matching principle should,in the long run,help minimize a firm's transaction costs. 
C) In a perfect capital market,the choice of financing is irrelevant;thus,how the firm chooses to finance its short-term cash needs cannot affect value. 
D) A portion of a firm's investment in its accounts receivable and inventory is temporary and results from seasonal fluctuations in the firm's business or unanticipated shocks.

Question 8

When a company analyzes its short-term financing needs,it typically examines cash flows at:

Accepted Answer

A) monthly intervals. 
B) yearly intervals. 
C) quarterly intervals. 
D) weekly intervals. 
A) monthly intervals. 
B) yearly intervals. 
C) quarterly intervals. 
D) weekly intervals.

Question 9

Rearden Metal has borrowed $4 million for three months at a stated annual rate of 8%,using inventory stored in a field warehouse as collateral.The warehouse charges a $10,000 fee,payable at the end of the quarter.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 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):  
-In which quarter are Hasbeen's seasonal working capital needs the greatest?

Accepted Answer

A) 4 
B) 2 
C) 3 
D) 1 
A) 4 
B) 2 
C) 3 
D) 1

Question 11

Wyatt Oil has an issue of commercial paper with a face value of $10,000,000 and a maturity of three months.Wyatt received $9,800,000 when it sold the paper.The effective annual rate for this financing is closest to:

Accepted Answer

A) 5.6%. 
B) 6.6%. 
C) 7.2%. 
D) 8.4%. 
A) 5.6%. 
B) 6.6%. 
C) 7.2%. 
D) 8.4%.

Question 12

A firm issued three-month commercial paper with a $2,000,000 face value and received $1,964,000.The effective annual rate that this firm is paying is closest to:

Accepted Answer

A) 8.0%. 
B) 7.5%. 
C) 1.8%. 
D) 7.3%. 
A) 8.0%. 
B) 7.5%. 
C) 1.8%. 
D) 7.3%.

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) Financing part or all of the permanent working capital with short-term debt is known as an aggressive financing policy. 
B) When the yield curve is downward sloping,the interest rate on short-term debt is lower than the rate on long-term debt.In that case,short-term debt may appear cheaper than long-term debt. 
C) The value of short-term debt is less sensitive to the firm's credit quality than long-term debt;therefore,its value will be less affected by management's actions or information. 
D) Permanent working capital is the amount that a firm must keep invested in its short-term assets to support its continuing operations. 
A) Financing part or all of the permanent working capital with short-term debt is known as an aggressive financing policy. 
B) When the yield curve is downward sloping,the interest rate on short-term debt is lower than the rate on long-term debt.In that case,short-term debt may appear cheaper than long-term debt. 
C) The value of short-term debt is less sensitive to the firm's credit quality than long-term debt;therefore,its value will be less affected by management's actions or information. 
D) Permanent working capital is the amount that a firm must keep invested in its short-term assets to support its continuing operations.

Question 14

A short-term bank loan that is often used until a firm can arrange for long-term financing is called:

Accepted Answer

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

Question 15

Hammond Motors is considering using a public warehouse loan as part of its short-term financing.The firm will require a loan of $2 million for three months.Interest on the loan will be 12% (APR,compounded quarterly)to be paid at the end of the quarter.The warehouse charges 1% of the face value of the loan,payable at the beginning of the quarter.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 16

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 #3 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 17

Inventory can be used as collateral for a loan in all of the following ways,EXCEPT:

Accepted Answer

A) a floating lien. 
B) a warehouse arrangement. 
C) a factoring arrangement. 
D) a trust receipt. 
A) a floating lien. 
B) a warehouse arrangement. 
C) a factoring arrangement. 
D) a trust receipt.

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) If a company anticipates an ongoing surplus of cash,it may choose to increase its dividend payout. 
B) Seasonal sales can create large short-term cash flow deficits and surpluses. 
C) The first step in short-term financial planning is to forecast the company's future net working capital. 
D) Deficits resulting from investments in long-term projects are often financed using long-term sources of capital,such as equity or long-term bonds. 
A) If a company anticipates an ongoing surplus of cash,it may choose to increase its dividend payout. 
B) Seasonal sales can create large short-term cash flow deficits and surpluses. 
C) The first step in short-term financial planning is to forecast the company's future net working capital. 
D) Deficits resulting from investments in long-term projects are often financed using long-term sources of capital,such as equity or long-term bonds.

Question 19

Which of the following statements is FALSE?

Accepted Answer

A) By relying on short-term debt the firm exposes itself to funding risk,which is the risk of incurring financial distress costs should the firm not be able to refinance its debt in a timely manner or at a reasonable rate. 
B) An ultra-conservative policy would involve financing even some of the plant,property,and equipment with short-term sources of funds. 
C) With a conservative financing policy,the firm would use short-term debt very sparingly to meet its peak seasonal needs. 
D) Short-term debt can have lower agency and "lemons" costs than long-term debt,and an aggressive financing policy can benefit shareholders. 
A) By relying on short-term debt the firm exposes itself to funding risk,which is the risk of incurring financial distress costs should the firm not be able to refinance its debt in a timely manner or at a reasonable rate. 
B) An ultra-conservative policy would involve financing even some of the plant,property,and equipment with short-term sources of funds. 
C) With a conservative financing policy,the firm would use short-term debt very sparingly to meet its peak seasonal needs. 
D) Short-term debt can have lower agency and "lemons" costs than long-term debt,and an aggressive financing policy can benefit shareholders.

Question 20

Use the table for the question(s)below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):  
-Calculate the temporary working capital needs for each of the four quarters for Hasbeen Toys.

Accepted Answer

@#IMG-DLM& Working capital = Cash + AR + Inventory

Exam 27: Short-Term Financial Planning

A loan agreement that requires the firm to pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called:

Galt Industries has issued four-month commercial paper with a $8 million face value.The firm netted $7,831,000 on the sale.The effective annual rate for this financing is closest to:

Luther Industries is offered a $1 million loan for four months at an APR of 9%.If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest-bearing account,then the effective annual rate (EAR)for this loan is closest to:

Which of the following statements is FALSE?

Occasionally,a company will encounter circumstances in which cash flows are temporarily negative for an unexpected reason.We refer to such a situation as:

Which of the following statements is FALSE?

When a company analyzes its short-term financing needs,it typically examines cash flows at:

Rearden Metal has borrowed $4 million for three months at a stated annual rate of 8%,using inventory stored in a field warehouse as collateral.The warehouse charges a $10,000 fee,payable at the end of the quarter.The effective annual rate on 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): -In which quarter are Hasbeen's seasonal working capital needs the greatest?

Wyatt Oil has an issue of commercial paper with a face value of $10,000,000 and a maturity of three months.Wyatt received $9,800,000 when it sold the paper.The effective annual rate for this financing is closest to:

A firm issued three-month commercial paper with a $2,000,000 face value and received $1,964,000.The effective annual rate that this firm is paying is closest to:

Which of the following statements is FALSE?

A short-term bank loan that is often used until a firm can arrange for long-term financing is called:

Inventory can be used as collateral for a loan in all of the following ways,EXCEPT:

Which of the following statements is FALSE?

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): -Calculate the temporary working capital needs for each of the four quarters for Hasbeen Toys.

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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