Question 1

Which of the following statements about various short-term credit alternatives is correct?

Accepted Answer

A) The firm has complete control over the terms and the levels of the accruals it uses, which makes this type of credit an attractive source of additional funding. 
B) Commercial paper is a type of secured promissory note issued by large, financially strong firms. 
C) Banks generally charge a commitment fee on the used balances of credit lines to compensate for guaranteeing the availability of revolving credit. 
D) The funds used by a firm to maintain a compensating balance with the bank cannot be used by the firm to pay its bills or to invest in capital budgeting projects. 
E) The credit created when one firm buys goods or services on credit from another firm is known as accounts receivable. 
A) The firm has complete control over the terms and the levels of the accruals it uses, which makes this type of credit an attractive source of additional funding. 
B) Commercial paper is a type of secured promissory note issued by large, financially strong firms. 
C) Banks generally charge a commitment fee on the used balances of credit lines to compensate for guaranteeing the availability of revolving credit. 
D) The funds used by a firm to maintain a compensating balance with the bank cannot be used by the firm to pay its bills or to invest in capital budgeting projects. 
E) The credit created when one firm buys goods or services on credit from another firm is known as accounts receivable.

Question 2

Which of the following mathematical equations is used to compute the effective annual rate (EAR)?

Accepted Answer

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

Question 3

MoJo Corporation purchases goods on credit with terms of 4.5/15, net 40. Which of the following is the annual cost (APR) of the non-free trade credit if the firm pays on Day 40 (i.e., the cost of forgoing the discount)? In your computations, assume there are 360 days in a year.

Accepted Answer

A) 42.41% 
B) 67.85% 
C) 0.00% 
D) 30.84% 
E) 113.09% 
A) 42.41% 
B) 67.85% 
C) 0.00% 
D) 30.84% 
E) 113.09%

Question 4

Bravo Corporation recently issued 270-day commercial paper with a face value of $2,000,000 and a simple interest rate of 11 percent. The company paid a transaction fee equal to 0.4 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 is the commercial paper's effective annual rate (rEAR)?

Accepted Answer

A) 17.51% 
B) 11.99% 
C) 12.56% 
D) 12.63% 
E) 12.82% 
A) 17.51% 
B) 11.99% 
C) 12.56% 
D) 12.63% 
E) 12.82%

Question 5

______ are short-term liabilities, which include wages payable and taxes payable, that change spontaneously as the firm's normal operations change.

Accepted Answer

A) Supplier credits 
B) Accruals 
C) Corporate bonds 
D) Notes payable 
E) Receivables 
A) Supplier credits 
B) Accruals 
C) Corporate bonds 
D) Notes payable 
E) Receivables

Question 6

The maturities of commercial paper generally range from:

Accepted Answer

A) one month to nine months. 
B) 10 months to 12 months. 
C) one year to three years. 
D) one year to 10 years. 
E) five years to 10 years. 
A) one month to nine months. 
B) 10 months to 12 months. 
C) one year to three years. 
D) one year to 10 years. 
E) five years to 10 years.

Question 7

Most firms purchase from their suppliers on credit, recording these debts in their financial statements/accounts as ______.

Accepted Answer

A) accounts payable 
B) notes payable 
C) promissory notes 
D) inventory 
E) accounts receivable 
A) accounts payable 
B) notes payable 
C) promissory notes 
D) inventory 
E) accounts receivable

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 name of the credit that is 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 name of the credit that is 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

Scarlett Linens offers credit with terms of 3/15, net 30 to its customers. These terms indicate that Scarlett allows its customers to take a:

Accepted Answer

A) 15 percent discount from the total invoice price if payment is made on or before Day 30 of the billing cycle; after that, only a 3 percent discount is available. 
B) 30 percent discount from the total invoice price if payment is made on or before Day 15 of the billing cycle; after that, only a 3 percent discount is available. 
C) 3 percent discount from the total invoice price if payment is made on or before Day 15 of the billing cycle; otherwise, the entire bill is due by Day 30. 
D) 15 percent discount from the total invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 30. 
E) 30 percent discount from the total 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) 15 percent discount from the total invoice price if payment is made on or before Day 30 of the billing cycle; after that, only a 3 percent discount is available. 
B) 30 percent discount from the total invoice price if payment is made on or before Day 15 of the billing cycle; after that, only a 3 percent discount is available. 
C) 3 percent discount from the total invoice price if payment is made on or before Day 15 of the billing cycle; otherwise, the entire bill is due by Day 30. 
D) 15 percent discount from the total invoice price if payment is made on or before Day 3 of the billing cycle; otherwise, the entire bill is due by Day 30. 
E) 30 percent discount from the total 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 10

Fast Corporation recently borrowed $600,000 from its bank at a simple interest rate of 14 percent. The loan is for 10 months. The loan agreement requires interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. What is the loan's monthly payment?

Accepted Answer

A) $68,400.00 
B) $67,000.00 
C) $57,000.00 
D) $69,767.44 
E) $51,600.00 
A) $68,400.00 
B) $67,000.00 
C) $57,000.00 
D) $69,767.44 
E) $51,600.00

Question 11

A ______ is the document that specifies the terms and conditions of a bank loan, including the amount, interest rate, and repayment schedule.

Accepted Answer

A) promissory note 
B) factoring agreement 
C) bond indenture 
D) trade credit note 
E) receivables agreement 
A) promissory note 
B) factoring agreement 
C) bond indenture 
D) trade credit note 
E) receivables agreement

Question 12

McGrath Corporation recently issued 180-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 amount issued, 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?

Accepted Answer

A) APR = 7.30%; rEAR = 15.12% 
B) APR = 9.73%; rEAR = 9.84% 
C) APR = 13.97%; rEAR = 14.23% 
D) APR = 14.59%; rEAR = 15.12% 
E) APR = 15.34%; rEAR = 15.34% 
A) APR = 7.30%; rEAR = 15.12% 
B) APR = 9.73%; rEAR = 9.84% 
C) APR = 13.97%; rEAR = 14.23% 
D) APR = 14.59%; rEAR = 15.12% 
E) APR = 15.34%; rEAR = 15.34%

Question 13

Commercial paper is a discount interest loan.

Accepted Answer

A) True 
 B)False

Question 14

A firm has an accounts receivables turnover equal to 33.5 days, an average inventory equal to $120,000, and an average accounts payable balance equal to $52,000. What is the firm's receivables collection period? In your computations, assume there are 360 days in a year.

Accepted Answer

A) 3.00 days 
B) 77.31 days 
C) 14.52 days 
D) 12.25 days 
E) 10.75 days 
A) 3.00 days 
B) 77.31 days 
C) 14.52 days 
D) 12.25 days 
E) 10.75 days

Question 15

The following information relates to LoGo Corporation:

Accounts payable                         $650,000              
Credit purchases                      $21,000,000              
Accounts receivable                  $2,100,000

What is LoGo's payables deferral period (DPO)? In your computations, assume there are 360 days in the year.

Accepted Answer

A) 21.45 days 
B) 11.14 days 
C) 32.31 days 
D) 20.11 days 
E) 30.95 days 
A) 21.45 days 
B) 11.14 days 
C) 32.31 days 
D) 20.11 days 
E) 30.95 days

Question 16

The effective annual rate (rEAR) it pays on a loan is lower whenever a firm must use some of the proceeds from the loan to meet the bank's compensating balance requirement.

Accepted Answer

A) True 
 B)False

Question 17

Suppose a firm purchases goods on credit with terms of 3/10, net 25. What is the cost of trade credit (APR) to the firm if it always pays its bill on Day 8 or sooner? In your computations, assume there are 360 days in a year.

Accepted Answer

A) 74.23% 
B) 24.74% 
C) 44.54% 
D) 0.00% 
E) 111.34% 
A) 74.23% 
B) 24.74% 
C) 44.54% 
D) 0.00% 
E) 111.34%

Question 18

Computation of the annual percentage rate (APR) recognizes interest compounding, whereas computation of the effective annual rate (EAR) does not.

Accepted Answer

A) True 
 B)False

Question 19

The following information relates to Rodeo Corporation: 
$$\begin{array} { l c } 
\text { Current assets } & \$ 70,000 \
\text { Current liabilities } & \$ 52,500 \
\text { Long-term assets } & \$ 210,000 \
\text { Long-term liabilities } & \$ 140,000
\end{array}$$ 
Based on the information given above, the amount of the current assets financed by the long-term liabilities is:

Accepted Answer

A) $12,500. 
B) $52,500. 
C) $102,500. 
D) $70,000. 
E) $17,500. 
A) $12,500. 
B) $52,500. 
C) $102,500. 
D) $70,000. 
E) $17,500.

Question 20

With a general line of credit, the bank:

Accepted Answer

A) does not charge a commitment fee. 
B) charges a commitment fee on the total amount. 
C) charges a commitment fee on the used balance. 
D) charges a commitment fee on the unused balance. 
E) charges the same total fees as it does with a revolving credit agreement. 
A) does not charge a commitment fee. 
B) charges a commitment fee on the total amount. 
C) charges a commitment fee on the used balance. 
D) charges a commitment fee on the unused balance. 
E) charges the same total fees as it does with a revolving credit agreement.

Which of the following statements about various short-term credit alternatives is correct?

Which of the following mathematical equations is used to compute the effective annual rate (EAR)?

MoJo Corporation purchases goods on credit with terms of 4.5/15, net 40. Which of the following is the annual cost (APR) of the non-free trade credit if the firm pays on Day 40 (i.e., the cost of forgoing the discount)? In your computations, assume there are 360 days in a year.

______ are short-term liabilities, which include wages payable and taxes payable, that change spontaneously as the firm's normal operations change.

The maturities of commercial paper generally range from:

Most firms purchase from their suppliers on credit, recording these debts in their financial statements/accounts as ______.

A revolving credit agreement is:

Scarlett Linens offers credit with terms of 3/15, net 30 to its customers. These terms indicate that Scarlett allows its customers to take a:

Fast Corporation recently borrowed $600,000 from its bank at a simple interest rate of 14 percent. The loan is for 10 months. The loan agreement requires interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. What is the loan's monthly payment?

A ______ is the document that specifies the terms and conditions of a bank loan, including the amount, interest rate, and repayment schedule.

Commercial paper is a discount interest loan.

A firm has an accounts receivables turnover equal to 33.5 days, an average inventory equal to $120,000, and an average accounts payable balance equal to $52,000. What is the firm's receivables collection period? In your computations, assume there are 360 days in a year.

The following information relates to LoGo Corporation: Accounts payable $650,000 Credit purchases $21,000,000 Accounts receivable $2,100,000 What is LoGo's payables deferral period (DPO)? In your computations, assume there are 360 days in the year.

The effective annual rate (rEAR) it pays on a loan is lower whenever a firm must use some of the proceeds from the loan to meet the bank's compensating balance requirement.

Suppose a firm purchases goods on credit with terms of 3/10, net 25. What is the cost of trade credit (APR) to the firm if it always pays its bill on Day 8 or sooner? In your computations, assume there are 360 days in a year.

Computation of the annual percentage rate (APR) recognizes interest compounding, whereas computation of the effective annual rate (EAR) does not.

The following information relates to Rodeo Corporation: Current assets \ 70,000 Current liabilities \ 52,500 Long-term assets \ 210,000 Long-term liabilities \ 140,000 Based on the information given above, the amount of the current assets financed by the long-term liabilities is:

With a general line of credit, the bank:

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 Debt Characteristics 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

Which of the following statements about various short-term credit alternatives is correct?

Which of the following mathematical equations is used to compute the effective annual rate (EAR)?

MoJo Corporation purchases goods on credit with terms of 4.5/15, net 40. Which of the following is the annual cost (APR) of the non-free trade credit if the firm pays on Day 40 (i.e., the cost of forgoing the discount)? In your computations, assume there are 360 days in a year.

______ are short-term liabilities, which include wages payable and taxes payable, that change spontaneously as the firm's normal operations change.

The maturities of commercial paper generally range from:

Most firms purchase from their suppliers on credit, recording these debts in their financial statements/accounts as ______.

A revolving credit agreement is:

Scarlett Linens offers credit with terms of 3/15, net 30 to its customers. These terms indicate that Scarlett allows its customers to take a:

Fast Corporation recently borrowed $600,000 from its bank at a simple interest rate of 14 percent. The loan is for 10 months. The loan agreement requires interest to be added to the amount borrowed and the total amount to be repaid in monthly installments. What is the loan's monthly payment?

A ______ is the document that specifies the terms and conditions of a bank loan, including the amount, interest rate, and repayment schedule.

Commercial paper is a discount interest loan.

A firm has an accounts receivables turnover equal to 33.5 days, an average inventory equal to $120,000, and an average accounts payable balance equal to $52,000. What is the firm's receivables collection period? In your computations, assume there are 360 days in a year.

The following information relates to LoGo Corporation: Accounts payable $650,000 Credit purchases $21,000,000 Accounts receivable $2,100,000 What is LoGo's payables deferral period (DPO)? In your computations, assume there are 360 days in the year.

The effective annual rate (rEAR) it pays on a loan is lower whenever a firm must use some of the proceeds from the loan to meet the bank's compensating balance requirement.

Suppose a firm purchases goods on credit with terms of 3/10, net 25. What is the cost of trade credit (APR) to the firm if it always pays its bill on Day 8 or sooner? In your computations, assume there are 360 days in a year.

Computation of the annual percentage rate (APR) recognizes interest compounding, whereas computation of the effective annual rate (EAR) does not.

The following information relates to Rodeo Corporation: Current assets \ 70,000 Current liabilities \ 52,500 Long-term assets \ 210,000 Long-term liabilities \ 140,000 Based on the information given above, the amount of the current assets financed by the long-term liabilities is:

With a general line of credit, the bank:

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 Debt Characteristics 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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