Question 1

The three main working capital strategies, namely aggressive, conservative, and moderate, differ primarily in the:

Accepted Answer

A)  relative amounts of short-term debt used. 
B)  minimum level of permanent current assets. 
C)  relative amount of long-term debt versus equity used to finance permanent current assets. 
D)  average level of temporary current assets. 
E)  amount of trade credit used. 
A)  relative amounts of short-term debt used. 
B)  minimum level of permanent current assets. 
C)  relative amount of long-term debt versus equity used to finance permanent current assets. 
D)  average level of temporary current assets. 
E)  amount of trade credit used.

Question 2

A firm offers credit terms of 3/15, net 20 to its customers, which means the firm allows its customers to:

Accepted Answer

A)  take a 15 percent discount on the invoice price if payment is made on or before Day 20 of the billing cycle; after that, only a 3 percent discount will be available. 
B)  take a 20 percent discount on the invoice price if payment is made on or before Day 15 of the billing cycle; after that, only a 3 percent discount will be available. 
C)  take a 3 percent discount on the invoice price if payment is made on or before Day 15 of the billing cycle; otherwise, the entire bill is due by Day 20. 
D)  take a 15 percent discount on the invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 20. 
E)  take a 20 percent discount on the invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 15. 
A)  take a 15 percent discount on the invoice price if payment is made on or before Day 20 of the billing cycle; after that, only a 3 percent discount will be available. 
B)  take a 20 percent discount on the invoice price if payment is made on or before Day 15 of the billing cycle; after that, only a 3 percent discount will be available. 
C)  take a 3 percent discount on the invoice price if payment is made on or before Day 15 of the billing cycle; otherwise, the entire bill is due by Day 20. 
D)  take a 15 percent discount on the invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 20. 
E)  take a 20 percent discount on the invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 15.

Question 3

Which of the following sources of short-term credit is also known as accounts payable?

Accepted Answer

A)  Trade credit 
B)  Revolving credit 
C)  Promissory notes 
D)  Lines of credit 
E)  Commercial paper 
A)  Trade credit 
B)  Revolving credit 
C)  Promissory notes 
D)  Lines of credit 
E)  Commercial paper

Question 4

Maturities of commercial paper range from:

Accepted Answer

A)  one month to nine months. 
B)  one month to twelve months. 
C)  one year to three years. 
D)  one year to ten years. 
E)  five years to ten years. 
A)  one month to nine months. 
B)  one month to twelve months. 
C)  one year to three years. 
D)  one year to ten years. 
E)  five years to ten years.

Question 5

European firms follow much more conservative working capital policies than U.S. firms.

Accepted Answer

A) True 
 B)False

Question 6

Kerry Corporation is planning to get a 270-day $500,000 simple interest loan from its bank at a quoted interest rate of 12 percent. If the bank has a 20% compensating balance requirement and Kerry currently holds no funds at the lending bank, what is the effective annual rate (eEAR) of the loan? (Assume there are 360 days in a year. Round your answer to two decimal places.)

Accepted Answer

A)  11.52% 
B)  13.78% 
C)  14.25% 
D)  15.27% 
E)  12.55% 
A)  11.52% 
B)  13.78% 
C)  14.25% 
D)  15.27% 
E)  12.55%

Question 7

Which of the following types of inventory financing is generally used for goods that are relatively high priced, slow moving, and easy to identify individually using serial numbers or other distinguishing characteristics?

Accepted Answer

A)  Warehouse receipt 
B)  Trust receipts 
C)  Blanket liens 
D)  Factoring 
E)  Recourse 
A)  Warehouse receipt 
B)  Trust receipts 
C)  Blanket liens 
D)  Factoring 
E)  Recourse

Question 8

A revolving credit agreement is:

Accepted Answer

A)  created because of recurring short-term liabilities such as wages and taxes that change spontaneously with operations. 
B)  the credit created when one firm buys on credit from another firm. 
C)  an outright sale of receivables. 
D)  an unsecured, short-term promissory note issued by large, financially sound firms to raise funds. 
E)  a formal, committed arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period. 
A)  created because of recurring short-term liabilities such as wages and taxes that change spontaneously with operations. 
B)  the credit created when one firm buys on credit from another firm. 
C)  an outright sale of receivables. 
D)  an unsecured, short-term promissory note issued by large, financially sound firms to raise funds. 
E)  a formal, committed arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period.

Question 9

Which of the following is the correct expression for the effective annual rate (EAR)?

Accepted Answer

A)  (1 / Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
B)  (1 + Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
C)  (1 - Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
D)  (1 + Periodic rate of interest)number of borrowing (interest) periods in one year + 1 
E)  (1 - Periodic rate of interest)number of borrowing (interest) periods in one year + 1 
A)  (1 / Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
B)  (1 + Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
C)  (1 - Periodic rate of interest)number of borrowing (interest) periods in one year - 1 
D)  (1 + Periodic rate of interest)number of borrowing (interest) periods in one year + 1 
E)  (1 - Periodic rate of interest)number of borrowing (interest) periods in one year + 1

Question 10

McGrath Corporation recently issued 210-day commercial paper with a face value of $1,500,000 and a simple interest rate of 13 percent. The company paid a transaction fee equal to 0.3 percent of the issue, which was taken out of the issue amount before the company received any funds. Assuming there are 360 days in a year, what are the commercial paper's annual percentage rate (APR) and effective annual rate (rEAR), respectively? (Round your answer to two decimal places.)

Accepted Answer

A)  13.75% and 14.04% 
B)  14.20% and 14.74% 
C)  13.97% and 14.23% 
D)  14.11% and 14.52% 
E)  14.01% and 14.35% 
A)  13.75% and 14.04% 
B)  14.20% and 14.74% 
C)  13.97% and 14.23% 
D)  14.11% and 14.52% 
E)  14.01% and 14.35%

Question 11

Accruals are generally considered free debt in the sense that no explicit interest is paid on funds raised through them.

Accepted Answer

A) True 
 B)False

Question 12

Venus Inc. recently borrowed $750,000 from its bank at a simple interest rate of 10 percent. The loan is for six months and, according to the loan agreement, the interest should be added to the amount borrowed and the total amount to be repaid in monthly installments. The loan's effective annual rate (EAR) is:

Accepted Answer

A)  12.51%. 
B)  16.58%. 
C)  18.32%. 
D)  20.33%. 
E)  24.75%. 
A)  12.51%. 
B)  16.58%. 
C)  18.32%. 
D)  20.33%. 
E)  24.75%.

Question 13

The inventory conversion period of a firm is equivalent to the average age of its inventory.

Accepted Answer

A) True 
 B)False

Question 14

Musk Corporation needs $200,000 to pay its bills, and requires a 25% compensating balance to be maintained with the bank. Assuming that Musk currently holds no funds at the lending bank, Musk has to borrow:

Accepted Answer

A)  $250,000. 
B)  $266,667. 
C)  $278,889. 
D)  $275,000. 
E)  $150,000. 
A)  $250,000. 
B)  $266,667. 
C)  $278,889. 
D)  $275,000. 
E)  $150,000.

Question 15

Mars Inc. recently borrowed $220,000 from its bank at a simple interest rate of 11 percent. The loan is for nine months and, according to the loan agreement, the interest should be added to the amount borrowed and the total amount to be repaid in monthly installments. The loan's annual percentage rate (APR) is:

Accepted Answer

A)  32.51%. 
B)  28.50%. 
C)  22.00%. 
D)  33.05%. 
E)  25.00%. 
A)  32.51%. 
B)  28.50%. 
C)  22.00%. 
D)  33.05%. 
E)  25.00%.

Question 16

Compensating balances to be maintained with the bank decrease the effective rate on a loan.

Accepted Answer

A) True 
 B)False

Question 17

A firm that makes use of the extreme form of the conservative approach will finance all of its seasonal needs with long-term financing alternatives, eliminating the need to use short-term financing. Such a firm will have extra permanent funds during off-peak periods, allowing it to store liquidity in the form of short-term investments during the off-season.

Accepted Answer

A) True 
 B)False

Question 18

A spontaneous source of financing that arises from ordinary business transactions is called:

Accepted Answer

A)  commercial paper. 
B)  a promissory note. 
C)  a line of credit. 
D)  trade credit. 
E)  revolving credit. 
A)  commercial paper. 
B)  a promissory note. 
C)  a line of credit. 
D)  trade credit. 
E)  revolving credit.

Question 19

A type of unsecured promissory note issued by large, financially strong firms is called:

Accepted Answer

A)  trade credit. 
B)  commercial paper. 
C)  a compensating balance. 
D)  revolving credit. 
E)  a promissory note. 
A)  trade credit. 
B)  commercial paper. 
C)  a compensating balance. 
D)  revolving credit. 
E)  a promissory note.

Question 20

The inventory conversion period refers to the average length of time required:

Accepted Answer

A)  to convert raw materials into finished goods. 
B)  to sell all the finished goods. 
C)  to convert materials into finished goods and then to sell those goods. 
D)  to collect cash following the sale of inventory. 
E)  to provide payment in cash for the purchase of raw materials and labor. 
A)  to convert raw materials into finished goods. 
B)  to sell all the finished goods. 
C)  to convert materials into finished goods and then to sell those goods. 
D)  to collect cash following the sale of inventory. 
E)  to provide payment in cash for the purchase of raw materials and labor.

The three main working capital strategies, namely aggressive, conservative, and moderate, differ primarily in the:

A firm offers credit terms of 3/15, net 20 to its customers, which means the firm allows its customers to:

Which of the following sources of short-term credit is also known as accounts payable?

Maturities of commercial paper range from:

European firms follow much more conservative working capital policies than U.S. firms.

Which of the following types of inventory financing is generally used for goods that are relatively high priced, slow moving, and easy to identify individually using serial numbers or other distinguishing characteristics?

A revolving credit agreement is:

Which of the following is the correct expression for the effective annual rate (EAR)?

Accruals are generally considered free debt in the sense that no explicit interest is paid on funds raised through them.

The inventory conversion period of a firm is equivalent to the average age of its inventory.

Musk Corporation needs $200,000 to pay its bills, and requires a 25% compensating balance to be maintained with the bank. Assuming that Musk currently holds no funds at the lending bank, Musk has to borrow:

Compensating balances to be maintained with the bank decrease the effective rate on a loan.

A spontaneous source of financing that arises from ordinary business transactions is called:

A type of unsecured promissory note issued by large, financially strong firms is called:

The inventory conversion period refers to the average length of time required:

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Assets

Financial Planning and Control

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Exam 14: Managing Short-Term Financing Liabilities

The three main working capital strategies, namely aggressive, conservative, and moderate, differ primarily in the:

A firm offers credit terms of 3/15, net 20 to its customers, which means the firm allows its customers to:

Which of the following sources of short-term credit is also known as accounts payable?

Maturities of commercial paper range from:

European firms follow much more conservative working capital policies than U.S. firms.

Which of the following types of inventory financing is generally used for goods that are relatively high priced, slow moving, and easy to identify individually using serial numbers or other distinguishing characteristics?

A revolving credit agreement is:

Which of the following is the correct expression for the effective annual rate (EAR)?

Accruals are generally considered free debt in the sense that no explicit interest is paid on funds raised through them.

The inventory conversion period of a firm is equivalent to the average age of its inventory.

Musk Corporation needs $200,000 to pay its bills, and requires a 25% compensating balance to be maintained with the bank. Assuming that Musk currently holds no funds at the lending bank, Musk has to borrow:

Compensating balances to be maintained with the bank decrease the effective rate on a loan.

A spontaneous source of financing that arises from ordinary business transactions is called:

A type of unsecured promissory note issued by large, financially strong firms is called:

The inventory conversion period refers to the average length of time required:

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

Project Cash Flows and Risk

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Assets

Financial Planning and Control

Filters