Question 1

Discuss the premise behind the validity of a numerical credit scoring system.

Accepted Answer

This form of credit scoring attempts to

Question 2

What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?

Accepted Answer

A)  The rate declines 
B)  The rate increases 
C)  The rate remains constant 
D)  Impossible to predict without knowing length of discount period 
A)  The rate declines 
B)  The rate increases 
C)  The rate remains constant 
D)  Impossible to predict without knowing length of discount period

Question 3

Which of the following is correct concerning terms of trade credit of 4/10,EOM,net 90?

Accepted Answer

A)  The discount period expires on the last day of the month. 
B)  The invoice becomes delinquent 90 days after the last day of the month. 
C)  The discount period ends on the tenth day of the month following the invoice. 
D)  The discount period ends either 10 days after invoicing or at the end of the month, whichever is earlier. 
A)  The discount period expires on the last day of the month. 
B)  The invoice becomes delinquent 90 days after the last day of the month. 
C)  The discount period ends on the tenth day of the month following the invoice. 
D)  The discount period ends either 10 days after invoicing or at the end of the month, whichever is earlier.

Question 4

Ajax predicts that if a customer pays on the first sale,it is assured that it is a reliable customer.As such,it expects that customer to generate a net profit of $350 per year for 12 years.Ajax calculates present value with a 15% rate of return.There is a 90% probability that Ajax will secure a reliable customer.However,if the customer defaults,Ajax will have to incur a loss of $500.Determine the expected benefit if credit is granted.

Accepted Answer

A)  $1,657 
B)  $1,757 
C)  $1,857 
D)  $1,957 
A)  $1,657 
B)  $1,757 
C)  $1,857 
D)  $1,957

Question 5

When sales are made without the accompaniment of a formal debt contract,the sales are said to be on:

Accepted Answer

A)  Conditional sale terms 
B)  Open account 
C)  Trade credit 
D)  Sight draft 
A)  Conditional sale terms 
B)  Open account 
C)  Trade credit 
D)  Sight draft

Question 6

Which of the following changes to the terms of credit would make the effective annual rate increase?

Accepted Answer

A)  Increase the cash discount percentage 
B)  Extend the discount period 
C)  Extend the payment period 
D)  All of these changes will increase the effective rate 
A)  Increase the cash discount percentage 
B)  Extend the discount period 
C)  Extend the payment period 
D)  All of these changes will increase the effective rate

Question 7

Saxon Corporation sells a product for $48 with costs of $33 per unit.Saxon uses a 9% rate of return for all its calculations.The CFO estimates that there is a 20% probability of a prospective new customers seeking credit will go bankrupt within the next 6 months.Customer wishes to place an order for 1,000 units of the product.

Accepted Answer

A)  Extend credit; total benefit of $3,780 
B)  Extend credit; total benefit of $3,880 
C)  Extend credit; total benefit of $3,980 
D)  Extend credit; total benefit of $4,080 
A)  Extend credit; total benefit of $3,780 
B)  Extend credit; total benefit of $3,880 
C)  Extend credit; total benefit of $3,980 
D)  Extend credit; total benefit of $4,080

Question 8

The "five C's of credit" represent a framework for analyzing credit risk.

Accepted Answer

A) True 
 B)False

Question 9

At what point does a customer's unpaid account become delinquent when the terms of sale are 2/10,net 60?

Accepted Answer

A)  11 days after the sale 
B)  31 days after the sale 
C)  61 days after the sale 
D)  71 days after the sale 
A)  11 days after the sale 
B)  31 days after the sale 
C)  61 days after the sale 
D)  71 days after the sale

Question 10

What is the break-even probability of collection if the present value of the revenues from the sale is $2,200 rather than $2,400? Why does the break-even probability increase? Use your answer to decide whether firms that sell high-profit margin or low-margin goods should be more willing to issue credit.

Accepted Answer

The present value of costs is still $200

Question 11

Which of the following financial ratios is not used to develop Altman's Z score from multiple discriminate analysis?

Accepted Answer

A)  Market value of equity/book debt 
B)  EBIT/total assets 
C)  Interest expense/total assets 
D)  Working capital/total assets 
A)  Market value of equity/book debt 
B)  EBIT/total assets 
C)  Interest expense/total assets 
D)  Working capital/total assets

Question 12

A breakdown of accounts receivable according to the length of time outstanding is known as a(n):

Accepted Answer

A)  Amortization schedule 
B)  Sources of cash flow statement 
C)  Receivables inventory 
D)  Aging schedule 
A)  Amortization schedule 
B)  Sources of cash flow statement 
C)  Receivables inventory 
D)  Aging schedule

Question 13

Which of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers?

Accepted Answer

A)  Break-even probability is higher than for single sale customers. 
B)  Break-even probability is lower than for single sale customers. 
C)  The break-even probability does not change between single sale and repeat sale customers. 
D)  Sales should never be refused for customers offering the potential of repeat sales. 
A)  Break-even probability is higher than for single sale customers. 
B)  Break-even probability is lower than for single sale customers. 
C)  The break-even probability does not change between single sale and repeat sale customers. 
D)  Sales should never be refused for customers offering the potential of repeat sales.

Question 14

Select the earliest date below which does not deserve a cash discount if the terms of a January 1 sale are 2/10,EOM,net 60?

Accepted Answer

A)  January 2 
B)  January 12 
C)  February 2 
D)  February 12 
A)  January 2 
B)  January 12 
C)  February 2 
D)  February 12

Question 15

The purpose of credit analysis is to:

Accepted Answer

A)  Reconcile the accounts receivable balance 
B)  Modify the terms of trade credit 
C)  Organize the right side of the balance sheet 
D)  Decide whether or not to grant credit to a customer 
A)  Reconcile the accounts receivable balance 
B)  Modify the terms of trade credit 
C)  Organize the right side of the balance sheet 
D)  Decide whether or not to grant credit to a customer

Question 16

A firm offered 3/10,net 30 as terms of trade credit on a $1,000 invoice dated January 1.How much must the purchaser offer to pay in full on January 4th?

Accepted Answer

A)  $970.00 
B)  $971.16 
C)  $1,000.00 
D)  $1,030.00 
A)  $970.00 
B)  $971.16 
C)  $1,000.00 
D)  $1,030.00

Question 17

What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

Accepted Answer

A)  20% 
B)  25% 
C)  50% 
D)  75% 
A)  20% 
B)  25% 
C)  50% 
D)  75%

Question 18

What is the break-even probability of collection for a firm that has a 40% profit margin (ignore present value)?

Accepted Answer

A)  24% 
B)  40% 
C)  60% 
D)  80% 
A)  24% 
B)  40% 
C)  60% 
D)  80%

Question 19

Progress payments allow the customers to choose the payment schedule.

Accepted Answer

A) True 
 B)False

Question 20

The more liberal the terms of the collection policy,the less the potential for bad debts and unprofitable sales.

Accepted Answer

A) True 
 B)False

Exam 22: Credit Management and Collection

Discuss the premise behind the validity of a numerical credit scoring system.

What happens to the implied interest rate on trade credit as the time interval between the discount period and payment period is decreased?

Which of the following is correct concerning terms of trade credit of 4/10,EOM,net 90?

When sales are made without the accompaniment of a formal debt contract,the sales are said to be on:

Which of the following changes to the terms of credit would make the effective annual rate increase?

The "five C's of credit" represent a framework for analyzing credit risk.

At what point does a customer's unpaid account become delinquent when the terms of sale are 2/10,net 60?

Which of the following financial ratios is not used to develop Altman's Z score from multiple discriminate analysis?

A breakdown of accounts receivable according to the length of time outstanding is known as a(n):

Which of the following statements is typically correct concerning the break-even probability of collection for repeat sale customers?

Select the earliest date below which does not deserve a cash discount if the terms of a January 1 sale are 2/10,EOM,net 60?

The purpose of credit analysis is to:

A firm offered 3/10,net 30 as terms of trade credit on a $1,000 invoice dated January 1.How much must the purchaser offer to pay in full on January 4th?

What is the minimum probability of collection that should be accepted by firms that have a 25% profit margin? Ignore the time value of money.

What is the break-even probability of collection for a firm that has a 40% profit margin (ignore present value)?

Progress payments allow the customers to choose the payment schedule.

The more liberal the terms of the collection policy,the less the potential for bad debts and unprofitable sales.

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Using Discounted Cash Flow Analysis to Make Investment Decisions

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt and Payout Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters

A firm offered 3/10,net 30 as terms of trade credit on a $1,000 invoice dated January 1.How much must the purchaser offer to pay in full on January 4^th?