Exam 15: Working-Capital Management

Credit terms of 2/10,net 30 have a lower effective cost than credit terms of 2/10,net 60 because in the first case the loan will be repaid sooner.

A company that forgoes the discount when credit terms are 2/10 net 60 due to insufficient cash flow would be better off to borrow funds and take the discount as long the company could borrow the funds at any rate

A company that increases its liquidity by holding more cash and marketable securities is

The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.

What is the primary advantage of a firm that is able to issue commercial paper to finance its short-term assets?

Commercial paper is an unsecured form of credit.

AAC,Inc.is planning to issue $5,000,000 in 180-day maturity notes paying a rate of 12 percent per annum.The company expects to incur costs of approximately $20,000 in dealer placement fees and other expenses of issuing the commercial paper.The company plans to back up their commercial paper offering with a line of credit from a bank for $5,000,000.The compensating balance requirement is 10 percent of the line of credit.The company normally maintains $450,000 in its accounts with the bank.What is the effective cost of the commercial paper offering?

A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 days.

Although interest rates are generally higher on long-term debt,using more long-term debt rather than short-term debt can reduce the risk of illiquidity and decrease uncertainty related to interest rate changes.

The Rosewood Corporation established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $500,000 at a rate of 10 percent.A compensating balance averaging 15 percent of the loan is required.Prior to the agreement,Rosewood had maintained an account at the bank averaging $25,000.Any additional funds needed for the compensating balance will also have to be borrowed at the 10 percent rate.If the firm needs $280,000 for 6 months,what is the annual cost of the loan?

The amount that can be obtained on an inventory loan depends on both the marketability and perishability of the items in the inventory.

Simpson Conglomerates borrows $12,000 for a short-term purpose.The loan will be repaid after 120 days,with Simpson paying a total of $12,400.What is the approximate cost of credit using the APR,or annual percentage rate,calculation?

What are some examples of permanent and temporary investments in current assets?

Notes payable is a spontaneous source of financing.

Bonneau Sunglass Co.is considering the factoring of its receivables.The firm has credit sales of $500,000 per month and has an average receivables balance of $1,000,000 with 60-day credit terms.The factor has offered to extend credit equal to 85% of the receivables factored less interest on the loan at a rate of 2% per month.The 15% difference in the advance and face value of all receivables factored consists of a 2% factoring fee plus a 13% reserve,which the factor maintains.In addition,if Bonneau decides to factor its receivables,it will sell them all,so that it can reduce its credit costs by $2,000 a month. a.What is the cost of borrowing the maximum amount of credit available to Bonneau through the factoring agreement? b.What considerations other than cost should be accounted for by Bonneau in determining whether or not to enter the factoring agreement?

The cash conversion cycle cannot be negative.

Because only the largest and most creditworthy companies are able to use commercial paper,the interest rate on commercial paper is generally lower than the prime rate.

Which of the following is NOT an advantage of trade credit?

Factoring accounts receivable is the sale of a firm's receivables while pledging accounts receivable is the use of accounts receivable as collateral for a loan.

Total debt must always be equal to the sum of temporary,permanent,and spontaneous sources of financing.