Question 1

If the default probability is less than the profit margin, you should extend credit for the sale.

Accepted Answer

A) True 
 B)False

Question 2

Which one of the following statements is correct about banker's acceptances?

Accepted Answer

A)  They are equivalent to a sight draft. 
B)  They represent the norm for installment sales. 
C)  The bank guarantees payment of the invoice. 
D) The bank retains title to the merchandise. 
A)  They are equivalent to a sight draft. 
B)  They represent the norm for installment sales. 
C)  The bank guarantees payment of the invoice. 
D) The bank retains title to the merchandise.

Question 3

The cost of holding inventory is defined as the interest paid on the money used to buy that inventory.

Accepted Answer

A) True 
 B)False

Question 4

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

Accepted Answer

A)  Increasing the cash discount percentage 
B)  Extending the discount period and payment period by 10 days each 
C)  Extending the payment period only 
D) Decreasing the discount period only 
A)  Increasing the cash discount percentage 
B)  Extending the discount period and payment period by 10 days each 
C)  Extending the payment period only 
D) Decreasing the discount period only

Question 5

Would it ever make financial sense to forgo cash discounts that are offered from suppliers? Can you provide an example?

Accepted Answer

The provision of trade credit is a form

Question 6

Repos are long-term unsecured loan agreements.

Accepted Answer

A) True 
 B)False

Question 7

What is the daily net opportunity cost of holding a cash balance of $2.5 million, if the daily interest rate is 0.025% and the average transaction cost of investing money overnight is $50?

Accepted Answer

A)  $121 
B)  $171 
C)  $575 
D) $675 
A)  $121 
B)  $171 
C)  $575 
D) $675

Question 8

Which one of the following assumptions is made when declaring that the break-even probability of collection is lower for customers with repeat orders?

Accepted Answer

A)  The discount rate is fairly high. 
B)  The cost of the item will continually decline. 
C)  The sales price of the item will continually increase. 
D) Payment on the first order ensures payments on subsequent orders. 
A)  The discount rate is fairly high. 
B)  The cost of the item will continually decline. 
C)  The sales price of the item will continually increase. 
D) Payment on the first order ensures payments on subsequent orders.

Question 9

An accepted time draft is quite similar to:

Accepted Answer

A)  selling on open account. 
B)  a conditional sale. 
C)  a check dated in the future. 
D) an overdue account. 
A)  selling on open account. 
B)  a conditional sale. 
C)  a check dated in the future. 
D) an overdue account.

Question 10

Since defaults can be costly, it is cost-effective to undertake a full credit analysis of all customers.

Accepted Answer

A) True 
 B)False

Question 11

Which one of the following statements is true regarding repurchase agreements?

Accepted Answer

A)  Their initial maturity is greater than 1 year. 
B)  They are an unsecured form of borrowing. 
C)  U.S. Treasury securities serve as their collateral. 
D) They make explicit, rather than implicit, interest payments. 
A)  Their initial maturity is greater than 1 year. 
B)  They are an unsecured form of borrowing. 
C)  U.S. Treasury securities serve as their collateral. 
D) They make explicit, rather than implicit, interest payments.

Question 12

Ignoring the time value of money, how much does a firm lose on a $2,000 sale that has a 30% profit margin if the 20% probability of default occurs?

Accepted Answer

A)  $120 
B)  $280 
C)  $600 
D) $1,400 
A)  $120 
B)  $280 
C)  $600 
D) $1,400

Question 13

What effective interest rate is charged to a purchaser receiving terms of 5/10, net 90 if the purchaser avoids the discount and pays in 90 days?

Accepted Answer

A)  20.00% 
B)  22.81% 
C)  24.93% 
D) 26.37% 
A)  20.00% 
B)  22.81% 
C)  24.93% 
D) 26.37%

Question 14

Just-in-time inventory management is suitable for an aircraft manufacturer, like Boeing, whose production schedules are known well in advance.

Accepted Answer

A) True 
 B)False

Question 15

A firm that is located in New York receives on average 2,000 checks a day from its customers in the Twin Cities area. Average payment per check is $1,500. A bank in the Twin Cities is offering a lock-box arrangement for collection and processing of these checks at a cost of $0.50 per check. This arrangement will reduce the float by 2 days. The daily interest rate for the firm is 0.02%. What is the net saving from the lock-box arrangement?

Accepted Answer

A)  $200 
B)  $400 
C)  $1,000 
D) $1,200 
A)  $200 
B)  $400 
C)  $1,000 
D) $1,200

Question 16

What are some of the ways that companies receive payments?

Accepted Answer

Companies that receive a large volume of

Question 17

What would be the gain from a lock-box system given the following information?

Accepted Answer

@#IMG-DLM& Daily gain = [150 × $1,200 ×

Question 18

In general, a firm's credit policy should grant credit whenever the expected:

Accepted Answer

A)  loss from default is less than the cost of the product. 
B)  profit from granting credit exceeds the profit from refusing. 
C)  profit exceeds the price of the product. 
D) probability of a loss is less than 50%. 
A)  loss from default is less than the cost of the product. 
B)  profit from granting credit exceeds the profit from refusing. 
C)  profit exceeds the price of the product. 
D) probability of a loss is less than 50%.

Question 19

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

Accepted Answer

A)  The break-even probability is higher than for single sale customers. 
B)  The 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)  The break-even probability is higher than for single sale customers. 
B)  The 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 20

Small face-to-face purchases are commonly paid for in cash. Briefly explain some other ways that you can pay your bills.

Accepted Answer

Recapping the textbook table:
▪ Check
Wh

Exam 20: Working Capital Management

If the default probability is less than the profit margin, you should extend credit for the sale.

Which one of the following statements is correct about banker's acceptances?

The cost of holding inventory is defined as the interest paid on the money used to buy that inventory.

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

Would it ever make financial sense to forgo cash discounts that are offered from suppliers? Can you provide an example?

Repos are long-term unsecured loan agreements.

What is the daily net opportunity cost of holding a cash balance of $2.5 million, if the daily interest rate is 0.025% and the average transaction cost of investing money overnight is $50?

Which one of the following assumptions is made when declaring that the break-even probability of collection is lower for customers with repeat orders?

An accepted time draft is quite similar to:

Since defaults can be costly, it is cost-effective to undertake a full credit analysis of all customers.

Which one of the following statements is true regarding repurchase agreements?

Ignoring the time value of money, how much does a firm lose on a $2,000 sale that has a 30% profit margin if the 20% probability of default occurs?

What effective interest rate is charged to a purchaser receiving terms of 5/10, net 90 if the purchaser avoids the discount and pays in 90 days?

Just-in-time inventory management is suitable for an aircraft manufacturer, like Boeing, whose production schedules are known well in advance.

What are some of the ways that companies receive payments?

What would be the gain from a lock-box system given the following information?

In general, a firm's credit policy should grant credit whenever the expected:

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

Small face-to-face purchases are commonly paid for in cash. Briefly explain some other ways that you can pay your bills.

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Mergers, Acquisitions, and Corporate Control

International Financial Management

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