Question 1

A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.

Accepted Answer

A) True 
 B)False

Question 2

Marley Financial plans to sell $50,000,000 of 120-day commercial paper,on which it expects to pay discounted interest at a rate of 5% per year.Dealer fees are expected to be $30,000.The effective cost of credit to Marley Financial is

Accepted Answer

A)  5.27%. 
B)  5.64%. 
C)  6.22%. 
D)  7.53%. 
A)  5.27%. 
B)  5.64%. 
C)  6.22%. 
D)  7.53%.

Question 3

One example of the hedging principle is to reduce a company's foreign exchange risk by purchasing futures contracts,which are called hedges.

Accepted Answer

A) True 
 B)False

Question 4

The hedging principle is also called the principle of self-liquidating inventory.

Accepted Answer

A) True 
 B)False

Question 5

According to the hedging principle,fixed assets should NOT be financed with

Accepted Answer

A)  permanent financing. 
B)  temporary financing. 
C)  permanent plus spontaneous financing. 
D)  equity financing. 
A)  permanent financing. 
B)  temporary financing. 
C)  permanent plus spontaneous financing. 
D)  equity financing.

Question 6

Which of the following is NOT true regarding the use of short-term debt?

Accepted Answer

A)  It must be rolled over more often than long-term debt. 
B)  There is uncertainty connected with interest costs on short-term debt from year to year. 
C)  The firm is subjected to greater liquidity risk when using short-term credit. 
D)  Interest rates are usually higher on short-term debt. 
A)  It must be rolled over more often than long-term debt. 
B)  There is uncertainty connected with interest costs on short-term debt from year to year. 
C)  The firm is subjected to greater liquidity risk when using short-term credit. 
D)  Interest rates are usually higher on short-term debt.

Question 7

Permanent sources of financing include all but

Accepted Answer

A)  corporate bonds. 
B)  common stock. 
C)  preferred stock. 
D)  commercial paper. 
A)  corporate bonds. 
B)  common stock. 
C)  preferred stock. 
D)  commercial paper.

Question 8

The inclusion of a compensating balance requirement in a line of credit will reduce the effective annual cost of credit since the bank has additional collateral for the borrowing.

Accepted Answer

A) True 
 B)False

Question 9

Both compensating balances and discounting interest increase the effective interest rate on a loan.

Accepted Answer

A) True 
 B)False

Question 10

According to the hedging principle,which of the following assets should be financed with permanent sources of financing?

Accepted Answer

A)  seasonal expansions of inventory 
B)  seasonal increases in accounts receivable 
C)  levels of inventory and accounts receivable the firm maintains throughout the year 
D)  none of the above 
A)  seasonal expansions of inventory 
B)  seasonal increases in accounts receivable 
C)  levels of inventory and accounts receivable the firm maintains throughout the year 
D)  none of the above

Question 11

All of the following are likely to increase the cost of a company's short-term financing EXCEPT

Accepted Answer

A)  an increase in the bank's prime lending rate. 
B)  an increase in the compensating balance required. 
C)  taking a loan on a discount basis. 
D)  an increase in the company's debt rating by Moody's or Standard and Poors. 
A)  an increase in the bank's prime lending rate. 
B)  an increase in the compensating balance required. 
C)  taking a loan on a discount basis. 
D)  an increase in the company's debt rating by Moody's or Standard and Poors.

Question 12

Spontaneous sources of financing include

Accepted Answer

A)  marketable securities. 
B)  wages payable. 
C)  accounts receivable. 
D)  common stock. 
A)  marketable securities. 
B)  wages payable. 
C)  accounts receivable. 
D)  common stock.

Question 13

Assume that Montana Mining,Inc.borrows $5,000,000 for 120 days.The total interest paid is $150,000.What is the APY,or Effective Annual Rate of interest that Billings pays?

Accepted Answer

A)  3.00% 
B)  9.00% 
C)  9.27% 
D)  9.77% 
A)  3.00% 
B)  9.00% 
C)  9.27% 
D)  9.77%

Question 14

The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.

Accepted Answer

A) True 
 B)False

Question 15

All of the following are potential advantages of commercial paper EXCEPT

Accepted Answer

A)  flexible repayment terms. 
B)  lower interest rates than comparable sources of short-term financing. 
C)  no compensating balance requirements. 
D)  ability to borrow very large amounts. 
A)  flexible repayment terms. 
B)  lower interest rates than comparable sources of short-term financing. 
C)  no compensating balance requirements. 
D)  ability to borrow very large amounts.

Question 16

Which of the following statements about factoring is true?

Accepted Answer

A)  The firm, not the factor, bears the risk of collecting bad receivables in a factoring arrangement. 
B)  Factoring involves the outright sale of a firm's accounts receivable to the factor. 
C)  The borrowing firm is able to obtain a greater advance against inventory in a factoring arrangement than in a typical line of credit secured by accounts receivable. 
D)  Factoring firms sell the receivables of other firms. 
A)  The firm, not the factor, bears the risk of collecting bad receivables in a factoring arrangement. 
B)  Factoring involves the outright sale of a firm's accounts receivable to the factor. 
C)  The borrowing firm is able to obtain a greater advance against inventory in a factoring arrangement than in a typical line of credit secured by accounts receivable. 
D)  Factoring firms sell the receivables of other firms.

Question 17

Which of the following actions would improve a firm's liquidity?

Accepted Answer

A)  repurchasing stock 
B)  selling bonds and increasing cash 
C)  buying bonds 
D)  increasing the company's dividend payments 
A)  repurchasing stock 
B)  selling bonds and increasing cash 
C)  buying bonds 
D)  increasing the company's dividend payments

Question 18

The Missouri River Pendant Company uses commercial paper to satisfy part of its short-term financing requirements.Next week,it intends to sell $18 million in 90-day maturity paper on which it expects to have to pay discounted interest at an annual rate of 7 percent per annum.In addition,Stoney River expects to incur a cost of approximately $25,000 in dealer placement fees and other expenses of issuing the paper.What is the effective annual cost of credit to Missouri River?

Accepted Answer

A)  7.7% 
B)  7.5% 
C)  7.3% 
D)  7.1% 
A)  7.7% 
B)  7.5% 
C)  7.3% 
D)  7.1%

Question 19

The primary advantage that pledging accounts receivable provides is

Accepted Answer

A)  the flexibility it gives to the borrower. 
B)  that the financial institution bears the risk of collection. 
C)  the low cost as compared with other sources of short-term financing. 
D)  that the financial institution services the accounts. 
A)  the flexibility it gives to the borrower. 
B)  that the financial institution bears the risk of collection. 
C)  the low cost as compared with other sources of short-term financing. 
D)  that the financial institution services the accounts.

Question 20

Your company is able to arrange financing at either a rate of 12.75% annually,or at a rate of 12% compounded monthly.Assuming financing is needed for one year,which rate is the best?

Accepted Answer

A)  12% compounded monthly, because the annual percentage yield is 12.68%. 
B)  12.75% annually, because the annual percentage yield for 12% compounded monthly is greater than 12.75%. 
C)  12.75% annually, because even though the annual percentage yield is higher, interest if paid only once per year at year end. 
D)  Both rates are effectively the same, so your company should be indifferent between the two. 
A)  12% compounded monthly, because the annual percentage yield is 12.68%. 
B)  12.75% annually, because the annual percentage yield for 12% compounded monthly is greater than 12.75%. 
C)  12.75% annually, because even though the annual percentage yield is higher, interest if paid only once per year at year end. 
D)  Both rates are effectively the same, so your company should be indifferent between the two.

A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.

Marley Financial plans to sell $50,000,000 of 120-day commercial paper,on which it expects to pay discounted interest at a rate of 5% per year.Dealer fees are expected to be $30,000.The effective cost of credit to Marley Financial is

One example of the hedging principle is to reduce a company's foreign exchange risk by purchasing futures contracts,which are called hedges.

The hedging principle is also called the principle of self-liquidating inventory.

According to the hedging principle,fixed assets should NOT be financed with

Which of the following is NOT true regarding the use of short-term debt?

Permanent sources of financing include all but

The inclusion of a compensating balance requirement in a line of credit will reduce the effective annual cost of credit since the bank has additional collateral for the borrowing.

Both compensating balances and discounting interest increase the effective interest rate on a loan.

According to the hedging principle,which of the following assets should be financed with permanent sources of financing?

All of the following are likely to increase the cost of a company's short-term financing EXCEPT

Spontaneous sources of financing include

Assume that Montana Mining,Inc.borrows $5,000,000 for 120 days.The total interest paid is $150,000.What is the APY,or Effective Annual Rate of interest that Billings pays?

The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.

All of the following are potential advantages of commercial paper EXCEPT

Which of the following statements about factoring is true?

Which of the following actions would improve a firm's liquidity?

The primary advantage that pledging accounts receivable provides is

Your company is able to arrange financing at either a rate of 12.75% annually,or at a rate of 12% compounded monthly.Assuming financing is needed for one year,which rate is the best?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

International Business Finance

Cash,receivables,and Inventory Management

Filters

Exam 15: Working-Capital Management

A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.

Marley Financial plans to sell $50,000,000 of 120-day commercial paper,on which it expects to pay discounted interest at a rate of 5% per year.Dealer fees are expected to be $30,000.The effective cost of credit to Marley Financial is

One example of the hedging principle is to reduce a company's foreign exchange risk by purchasing futures contracts,which are called hedges.

The hedging principle is also called the principle of self-liquidating inventory.

According to the hedging principle,fixed assets should NOT be financed with

Which of the following is NOT true regarding the use of short-term debt?

Permanent sources of financing include all but

The inclusion of a compensating balance requirement in a line of credit will reduce the effective annual cost of credit since the bank has additional collateral for the borrowing.

Both compensating balances and discounting interest increase the effective interest rate on a loan.

According to the hedging principle,which of the following assets should be financed with permanent sources of financing?

All of the following are likely to increase the cost of a company's short-term financing EXCEPT

Spontaneous sources of financing include

Assume that Montana Mining,Inc.borrows $5,000,000 for 120 days.The total interest paid is $150,000.What is the APY,or Effective Annual Rate of interest that Billings pays?

The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.

All of the following are potential advantages of commercial paper EXCEPT

Which of the following statements about factoring is true?

Which of the following actions would improve a firm's liquidity?

The primary advantage that pledging accounts receivable provides is

Your company is able to arrange financing at either a rate of 12.75% annually,or at a rate of 12% compounded monthly.Assuming financing is needed for one year,which rate is the best?

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Cash Flows and Other Topics in Capital Budgeting

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

International Business Finance

Cash,receivables,and Inventory Management

Filters