Question 1

The three components of credit policy are:

Accepted Answer

A)  collection policy, credit analysis, and interest rate determination. 
B)  collection policy, credit analysis, and terms of the sale. 
C)  collection policy, interest rate determination, and repayment analysis. 
D)  credit analysis, repayment analysis, and terms of the sale. 
E)  interest rate determination, repayment analysis and terms of salE. 
A)  collection policy, credit analysis, and interest rate determination. 
B)  collection policy, credit analysis, and terms of the sale. 
C)  collection policy, interest rate determination, and repayment analysis. 
D)  credit analysis, repayment analysis, and terms of the sale. 
E)  interest rate determination, repayment analysis and terms of salE. B

Question 2

The carrying value of a firm's account receivable is $1,500,000 and the average collection period is 45 days. The firm's credit sales per day are:

Accepted Answer

A)  $18,181.82. 
B)  $33,333.33. 
C)  $1,000,000.00. 
D)  $1,500,000.00. 
E)  None of these. 
A)  $18,181.82. 
B)  $33,333.33. 
C)  $1,000,000.00. 
D)  $1,500,000.00. 
E)  None of these. B

Question 3

Lengthening the credit period _____ the price paid by the customer. Generally,this acts to _____ sales.

Accepted Answer

A)  increases; increase 
B)  increases; decrease 
C)  decreases; decrease 
D)  decreases; increase 
E)  increases; have no effect on 
A)  increases; increase 
B)  increases; decrease 
C)  decreases; decrease 
D)  decreases; increase 
E)  increases; have no effect on D

Question 4

Delta Distributors has an investment in accounts receivable of $3,000,000. Daily credit sales are $120,000. If 30% of Delta's credit customers receive a discount by paying within 10 days and the remainder of Delta's customers pay in 40 days,what is the net period that Delta maintains? (Round up to the next day.)

Accepted Answer

A)  21 days 
B)  37 days 
C)  39 days 
D)  45 days 
E)  None of these. 
A)  21 days 
B)  37 days 
C)  39 days 
D)  45 days 
E)  None of these.

Question 5

The carrying value of a firm's account receivable is $1,000,000 and the average collection period is 55 days. The firm's credit sales per day are:

Accepted Answer

A)  $33,333.33. 
B)  $18,181.82. 
C)  $1,000,000.00. 
D)  $1,333,333.33. 
E)  None of these. e 
A)  $33,333.33. 
B)  $18,181.82. 
C)  $1,000,000.00. 
D)  $1,333,333.33. 
E)  None of these. e

Question 6

Which of the following statements is not true?

Accepted Answer

A)  An aging schedule shows only overdue accounts. 
B)  An aging schedule shows the probability that a 67-day account will be unpaid when it is a 68-day account. 
C)  Average collection period data is somewhat flawed if sales are seasonal. 
D)  Collection efforts may involve legal action. 
E)  Investments in accounts receivable equal average daily sales times average collection period. 
A)  An aging schedule shows only overdue accounts. 
B)  An aging schedule shows the probability that a 67-day account will be unpaid when it is a 68-day account. 
C)  Average collection period data is somewhat flawed if sales are seasonal. 
D)  Collection efforts may involve legal action. 
E)  Investments in accounts receivable equal average daily sales times average collection period.

Question 7

Edgeworth Heating is selling a commercial heating unit at the price of $100,000 per unit. The variable cost of producing this unit is $75,000. Edgeworth is considering offering credit terms to their customers,which would allow payment to be delayed one month. Edgeworth predicts that offering these terms will increase monthly sales from 50 units to 60 units. Edgeworth does not expect the increased production to change its variable cost and Edgeworth does not expect to charge a higher price. The default rate on credit customers is predicted to be 2.25%. Which of the following statements is true?

Accepted Answer

A)  At a monthly interest rate of 1%, Edgeworth is indifferent between extending credit and continuing current policies. At higher interest rates Edgeworth would prefer granting credit. 
B)  At a monthly interest rate of 1%, Edgeworth is indifferent between extending credit and continuing current policies. At lower interest rates Edgeworth would prefer granting credit. 
C)  At a monthly interest rate of 2%, Edgeworth is indifferent between extending credit and continuing current policies. At higher interest rates Edgeworth would prefer granting credit. 
D)  At a monthly interest rate of 2%, Edgeworth is indifferent between extending credit and continuing current policies. At lower interest rates Edgeworth would prefer granting credit. 
E)  At a monthly interest rate of 3%, Edgeworth is indifferent between extending credit and continuing current policies. At lower or higher interest rates Edgeworth would prefer granting credit. 
A)  At a monthly interest rate of 1%, Edgeworth is indifferent between extending credit and continuing current policies. At higher interest rates Edgeworth would prefer granting credit. 
B)  At a monthly interest rate of 1%, Edgeworth is indifferent between extending credit and continuing current policies. At lower interest rates Edgeworth would prefer granting credit. 
C)  At a monthly interest rate of 2%, Edgeworth is indifferent between extending credit and continuing current policies. At higher interest rates Edgeworth would prefer granting credit. 
D)  At a monthly interest rate of 2%, Edgeworth is indifferent between extending credit and continuing current policies. At lower interest rates Edgeworth would prefer granting credit. 
E)  At a monthly interest rate of 3%, Edgeworth is indifferent between extending credit and continuing current policies. At lower or higher interest rates Edgeworth would prefer granting credit.

Question 8

If 20% of the customers pay on day 10 and 80% pay on day 30,the average collection period is:

Accepted Answer

A)  20 days. 
B)  22 days. 
C)  26 days. 
D)  30 days. 
E)  None of these. 
A)  20 days. 
B)  22 days. 
C)  26 days. 
D)  30 days. 
E)  None of these.

Question 9

If a firm refuses to offer credit,the net present value of the transaction is:

Accepted Answer

A)  the cash revenues received minus the cost paid in time period 0. 
B)  the discounted value of the revenues from time period 0. 
C)  the net cash flow from the future payments to be received. 
D)  determined by all of these. 
E)  always equal to zero. 
A)  the cash revenues received minus the cost paid in time period 0. 
B)  the discounted value of the revenues from time period 0. 
C)  the net cash flow from the future payments to be received. 
D)  determined by all of these. 
E)  always equal to zero.

Question 10

When analyzing the decision to change the cash discount policy,the firm should:

Accepted Answer

A)  choose the policy with the highest order size. 
B)  choose the policy with the lowest variable cost. 
C)  choose the policy with the lowest NPV. 
D)  choose the policy with the highest NPV. 
E)  choose the policy offering the lowest cash discount. 
A)  choose the policy with the highest order size. 
B)  choose the policy with the lowest variable cost. 
C)  choose the policy with the lowest NPV. 
D)  choose the policy with the highest NPV. 
E)  choose the policy offering the lowest cash discount.

Question 11

Factoring refers to:

Accepted Answer

A)  determining the aging schedule of the firm's accounts receivable. 
B)  the sale of a firm's accounts receivable to a financial institution. 
C)  the determination of the average collection period. 
D)  scoring a customer based on the 5 C's of credit. 
E)  All of 
A)  determining the aging schedule of the firm's accounts receivable. 
B)  the sale of a firm's accounts receivable to a financial institution. 
C)  the determination of the average collection period. 
D)  scoring a customer based on the 5 C's of credit. 
E)  All of

Question 12

Captive finance companies are:

Accepted Answer

A)  parent companies to the subsidiary. 
B)  subsidiaries to the parent company. 
C)  used by firms with good credit ratings. 
D)  Both parent companies to the subsidiary and subsidiaries to the parent company. 
E)  Both subsidiaries to the parent company and used by firms with good credit ratings. 
A)  parent companies to the subsidiary. 
B)  subsidiaries to the parent company. 
C)  used by firms with good credit ratings. 
D)  Both parent companies to the subsidiary and subsidiaries to the parent company. 
E)  Both subsidiaries to the parent company and used by firms with good credit ratings.

Question 13

Which of the following statements is true?

Accepted Answer

A)  Most credit arrangements use promissory notes. 
B)  Promissory notes are used when firms do not anticipate a problem with collections. 
C)  Promissory notes usually involve no cash discount. 
D)  All of these. 
E)  None of these. 
A)  Most credit arrangements use promissory notes. 
B)  Promissory notes are used when firms do not anticipate a problem with collections. 
C)  Promissory notes usually involve no cash discount. 
D)  All of these. 
E)  None of these.

Question 14

To collect on the accounts receivable due to the firm,a firm can:

Accepted Answer

A)  send a delinquency letter of past due status to the customer. 
B)  make personal contact by telephone. 
C)  employ a collection agency. 
D)  take legal action against the customer as necessary. 
E)  All of 
A)  send a delinquency letter of past due status to the customer. 
B)  make personal contact by telephone. 
C)  employ a collection agency. 
D)  take legal action against the customer as necessary. 
E)  All of

Question 15

Collegiate Tuxedo rents apparel throughout the year. They have experienced non-payment by about 20% of their customers with an average loss of $300. Collegiate wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $12 on each of the 1,000 customers. The opportunity cost is 2.0% for the credit period. Should they pursue the credit check?

Accepted Answer

A)  No, because the $24,000 cost is too high. 
B)  No, because a $300 loss is minor. 
C)  Yes, because the net gain is $30,000. 
D)  Yes, because the net gain is $48,000. 
E)  Yes, because the net gain is $60,000. 
A)  No, because the $24,000 cost is too high. 
B)  No, because a $300 loss is minor. 
C)  Yes, because the net gain is $30,000. 
D)  Yes, because the net gain is $48,000. 
E)  Yes, because the net gain is $60,000.

Question 16

When credit is offered with only the invoice as a formal instrument of credit,the credit procedure is called:

Accepted Answer

A)  invoice account. 
B)  open account. 
C)  unsecured account. 
D)  unsecured note. 
E)  None of these. 
A)  invoice account. 
B)  open account. 
C)  unsecured account. 
D)  unsecured note. 
E)  None of these.

Question 17

The net credit period for a company with terms of 2/10,net 30 is:

Accepted Answer

A)  10 days. 
B)  20 days. 
C)  30 days. 
D)  40 days. 
E)  None of these. 
A)  10 days. 
B)  20 days. 
C)  30 days. 
D)  40 days. 
E)  None of these.

Question 18

Rockwell Heating is selling a commercial heating unit at the price of $100,000 per unit. The variable cost of producing this unit is $75,000. Rockwell is considering offering credit terms to their customers,which would allow payment to be delayed one month. Rockwell predicts that offering these terms will increase monthly sales from 50 units to 60 units. Rockwell does not expect the increased production to change variable cost and Rockwell does not expect to charge a higher price. The appropriate discount rate is 1% a month. Determine the probability of payment that would make Rockwell indifferent between granting credit and the present policy.
B. b = .968

Accepted Answer

Strategy 1 - Refuse Credit: Pr

Question 19

Frank's Formals rents apparel throughout the year. They have experienced non-payment by about 15% of their customers with an average loss of $400. Frank's wants to stem their losses by using an instant electronic credit check on the customer. These checks will cost them $15 on each of the 1,000 customers. The opportunity cost is 2.0% for the credit period. Should they pursue the credit check?

Accepted Answer

A)  No, because the $15,000 cost is too high. 
B)  No, because a $400 loss is minor. 
C)  Yes, because the net gain is $30,000. 
D)  Yes, because the net gain is $45,000. 
E)  Yes, because the net gain is $60,000. 
A)  No, because the $15,000 cost is too high. 
B)  No, because a $400 loss is minor. 
C)  Yes, because the net gain is $30,000. 
D)  Yes, because the net gain is $45,000. 
E)  Yes, because the net gain is $60,000.

Question 20

A conditional sales contract is useful to the seller because:

Accepted Answer

A)  the firm retains legal ownership of the goods until they are completely paid for. 
B)  the firm is compensated for their opportunity cost. 
C)  there is a sequence of scheduled payments. 
D)  All of these. 
E)  None of these. 
A)  the firm retains legal ownership of the goods until they are completely paid for. 
B)  the firm is compensated for their opportunity cost. 
C)  there is a sequence of scheduled payments. 
D)  All of these. 
E)  None of these.

Exam 28: Credit and Inventory Management

The three components of credit policy are:

The carrying value of a firm's account receivable is $1,500,000 and the average collection period is 45 days. The firm's credit sales per day are:

Lengthening the credit period _____ the price paid by the customer. Generally,this acts to _____ sales.

The carrying value of a firm's account receivable is $1,000,000 and the average collection period is 55 days. The firm's credit sales per day are:

Which of the following statements is not true?

If 20% of the customers pay on day 10 and 80% pay on day 30,the average collection period is:

If a firm refuses to offer credit,the net present value of the transaction is:

When analyzing the decision to change the cash discount policy,the firm should:

Factoring refers to:

Captive finance companies are:

Which of the following statements is true?

To collect on the accounts receivable due to the firm,a firm can:

When credit is offered with only the invoice as a formal instrument of credit,the credit procedure is called:

The net credit period for a company with terms of 2/10,net 30 is:

A conditional sales contract is useful to the seller because:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

Filters

Lengthening the credit period _ the price paid by the customer. Generally,this acts to _ sales.