Question 1

Interest rates for bank loans are frequently linked to either the London Interbank Offered Rate (LIBOR) or the Treasury bill rate.

Accepted Answer

A) True 
 B)False

Question 2

Customers may change firms when faced with minimal inventory selection. Sales lost in this manner illustrate the:

Accepted Answer

A)  costs of carrying inventory. 
B)  lack of customer loyalty. 
C)  need to maintain a high current ratio. 
D) impact of shortage costs. 
A)  costs of carrying inventory. 
B)  lack of customer loyalty. 
C)  need to maintain a high current ratio. 
D) impact of shortage costs.

Question 3

Which one of the following would generally reduce the carrying costs of inventory?

Accepted Answer

A)  Increasing the spoilage rate 
B)  Carrying more fad-sensitive goods 
C)  Experiencing a decrease in the overall interest rate 
D) Increasing the need to sell securities 
A)  Increasing the spoilage rate 
B)  Carrying more fad-sensitive goods 
C)  Experiencing a decrease in the overall interest rate 
D) Increasing the need to sell securities

Question 4

Which one of these is most associated with a disadvantage of the relaxed strategy of long- versus short-term financing?

Accepted Answer

A)  Transaction costs are required to continually obtain financing. 
B)  Short-term investment income is often unattractive. 
C)  Investment opportunities must frequently be ignored. 
D) Long-term financing has burdensome tax consequences. 
A)  Transaction costs are required to continually obtain financing. 
B)  Short-term investment income is often unattractive. 
C)  Investment opportunities must frequently be ignored. 
D) Long-term financing has burdensome tax consequences.

Question 5

Which one of the following would not be included as a source of short-term financing?

Accepted Answer

A)  Line of credit 
B)  Increase in the minimum operating cash balance 
C)  Sale of marketable securities 
D) Stretching of accounts payable 
A)  Line of credit 
B)  Increase in the minimum operating cash balance 
C)  Sale of marketable securities 
D) Stretching of accounts payable

Question 6

The safety margin kept by the bank on loan against liquid assets is called:

Accepted Answer

A)  a haircut. 
B)  a line of credit. 
C)  factoring. 
D) field warehousing. 
A)  a haircut. 
B)  a line of credit. 
C)  factoring. 
D) field warehousing.

Question 7

What will be the change in net working capital if current assets increase by $170,000 and current liabilities decrease by $60,000?

Accepted Answer

A)  Increase of $110,000 
B)  Increase of $230,000 
C)  Decrease of $110,000 
D) Decrease of $230,000 
A)  Increase of $110,000 
B)  Increase of $230,000 
C)  Decrease of $110,000 
D) Decrease of $230,000

Question 8

When a loan is secured by receivables, the firm assigns the receivables to the bank. If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt. The risk of default on the receivables is now borne by the bank.

Accepted Answer

A) True 
 B)False

Question 9

A firm has borrowed $1 million and assigned its receivables to the lender. Because of defaults, the receivables prove insufficient to cover the debt. In this case, the:

Accepted Answer

A)  lender bears the risk of default. 
B)  firm bears the risk of default. 
C)  default risk is shared between lender and firm. 
D) insurance carrier will bear the risk. 
A)  lender bears the risk of default. 
B)  firm bears the risk of default. 
C)  default risk is shared between lender and firm. 
D) insurance carrier will bear the risk.

Question 10

A cash conversion cycle is the period between a firm's payment for materials and collection on its sales.

Accepted Answer

A) True 
 B)False

Question 11

It is possible for a firm to collect payment on a sale prior to paying its suppliers for the items sold.

Accepted Answer

A) True 
 B)False

Question 12

Which type of inventory would a bank be most willing to accept as security for a loan?

Accepted Answer

A)  Wheat growing in a farmer's field 
B)  Produce on the shelves of a grocery store 
C)  Boats owned by a boat dealer 
D) Work-in-progress in an appliance manufacturing firm 
A)  Wheat growing in a farmer's field 
B)  Produce on the shelves of a grocery store 
C)  Boats owned by a boat dealer 
D) Work-in-progress in an appliance manufacturing firm

Question 13

Banks will not usually lend the full value of the assets that are used as security. The safety margin is likely to be even larger in the case of loans that are secured by inventory.

Accepted Answer

A) True 
 B)False

Question 14

The Boat Works started the month with $3.21 million in accounts receivable. Sales for the month were $7.84 million. The firm collects 18% of its sales in the month of sale with the remainder paid the following month. What is the accounts receivable balance at month end?

Accepted Answer

A)  $4,621,200 
B)  $6,428,800 
C)  $9,061,000 
D) $1,411,200 
A)  $4,621,200 
B)  $6,428,800 
C)  $9,061,000 
D) $1,411,200

Question 15

How would you develop a model to analyze the benefits and costs of stretching payables? Assume that cash discounts will be forgone and that short-term bank funds are usually available.

Accepted Answer

First, you could calculate the implicit

Question 16

Provide five reasons why firms may have a policy of maintaining a minimum cash balance at all times.

Accepted Answer

While the text does not specifically spe

Question 17

A self-liquidating line of credit is best illustrated by borrowing:

Accepted Answer

A)  a smaller amount each time a loan is drawn against the credit line. 
B)  to purchase inventory and repaying when payment for the sale of that inventory is received. 
C)  only when funds are currently available to repay the loan in full. 
D) additional funds only when the loan balance is lower than it was the last time an amount was borrowed. 
A)  a smaller amount each time a loan is drawn against the credit line. 
B)  to purchase inventory and repaying when payment for the sale of that inventory is received. 
C)  only when funds are currently available to repay the loan in full. 
D) additional funds only when the loan balance is lower than it was the last time an amount was borrowed.

Question 18

When financial managers are asked the key reason for choosing short-term rather than long-term debt, they often say that they try to match the maturities of the firm's assets and liabilities.

Accepted Answer

A) True 
 B)False

Question 19

Managers are alerted to projected cash shortages by way of the:

Accepted Answer

A)  statement of sources and uses of cash. 
B)  pro forma balance sheet. 
C)  cash budget. 
D) monthly bank statements. 
A)  statement of sources and uses of cash. 
B)  pro forma balance sheet. 
C)  cash budget. 
D) monthly bank statements.

Question 20

The credit crisis of 2007 to 2009 largely left the market for commercial paper unaffected.

Accepted Answer

A) True 
 B)False

Exam 19: Short-Term Financial Planning

Interest rates for bank loans are frequently linked to either the London Interbank Offered Rate (LIBOR) or the Treasury bill rate.

Customers may change firms when faced with minimal inventory selection. Sales lost in this manner illustrate the:

Which one of the following would generally reduce the carrying costs of inventory?

Which one of these is most associated with a disadvantage of the relaxed strategy of long- versus short-term financing?

Which one of the following would not be included as a source of short-term financing?

The safety margin kept by the bank on loan against liquid assets is called:

What will be the change in net working capital if current assets increase by $170,000 and current liabilities decrease by $60,000?

When a loan is secured by receivables, the firm assigns the receivables to the bank. If the firm fails to repay the loan, the bank can collect the receivables from the firm's customers and use the cash to pay off the debt. The risk of default on the receivables is now borne by the bank.

A firm has borrowed $1 million and assigned its receivables to the lender. Because of defaults, the receivables prove insufficient to cover the debt. In this case, the:

A cash conversion cycle is the period between a firm's payment for materials and collection on its sales.

It is possible for a firm to collect payment on a sale prior to paying its suppliers for the items sold.

Which type of inventory would a bank be most willing to accept as security for a loan?

Banks will not usually lend the full value of the assets that are used as security. The safety margin is likely to be even larger in the case of loans that are secured by inventory.

The Boat Works started the month with $3.21 million in accounts receivable. Sales for the month were $7.84 million. The firm collects 18% of its sales in the month of sale with the remainder paid the following month. What is the accounts receivable balance at month end?

How would you develop a model to analyze the benefits and costs of stretching payables? Assume that cash discounts will be forgone and that short-term bank funds are usually available.

Provide five reasons why firms may have a policy of maintaining a minimum cash balance at all times.

A self-liquidating line of credit is best illustrated by borrowing:

When financial managers are asked the key reason for choosing short-term rather than long-term debt, they often say that they try to match the maturities of the firm's assets and liabilities.

Managers are alerted to projected cash shortages by way of the:

The credit crisis of 2007 to 2009 largely left the market for commercial paper unaffected.

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

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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