Exam 15: Working-Capital Management

The prime rate of interest is

AFB,Inc.purchases a new delivery van which is expected to increase cash flows for the next 10 years.AFB can finance the purchase with a standard 48-month vehicle loan,or by getting a 10-year loan from the bank.According to the hedging principle,AFB should

Trade credit appears on a company's balance sheet as accounts payable.

If a company offers a cash discount for early payment,this will most likely increase its cash conversion cycle since it will have to pay out more cash to its customers.

A secured loan should have a higher interest rate because the lender has less risk and therefore values the loan more highly.

The Boyles Ceramics,Inc.established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent.A compensating balance averaging 25 percent of the amount borrowed is required.Prior to the agreement,Boyles had no deposit with the bank.Shortly after signing the agreement,Boyles needed $240,000 to pay off a note that was due.It borrowed the $240,000 from the bank by drawing on the line of credit.What is the effective annual cost of credit?

The hedging principle involves the use of hedge funds to manage the firm's working capital.

According to the hedging principle,plant and equipment should be financed with

How does the use of current liabilities enhance profitability and also increase the firm's risk of default on its financial obligations?

In a chattel mortgage,specific items of inventory are identified in the security agreement.

All of the following are true EXCEPT

When the accounts receivable of a firm have been factored,bad debt losses remain the responsibility of the borrowing firm and must be made good.

Which item would constitute poor collateral for an inventory loan?

Two advantages of financing with current liabilities are flexibility and lower interest cost.

The hedging principle is used to address the issue of how much short-term financing a firm should use.

Nike Corp.buys on 3/10,net 30 days.What is the nominal cost of interest if Nike does not take advantage of the trade discount offered? Assume a 360-day year.

To ensure that a borrower is not using short-term bank credit to finance a part of its permanent needs for funds,banks often require borrowers to clean up their short-term loans for a 30-45 day period during the year.

What is the difference between a line of credit and a revolving credit agreement?

Compounding effectively raises the cost of short-term credit.

Discuss the risk-return trade-off experienced in working-capital management.