Question 1

Firms should be more prepared to sell on credit to high-risk customers if:

Accepted Answer

A)  the profit margin is low. 
B)  the probability of repeat orders is low. 
C)  the profit margin is high. 
D)  the firm's sales representative is paid on commission. 
A)  the profit margin is low. 
B)  the probability of repeat orders is low. 
C)  the profit margin is high. 
D)  the firm's sales representative is paid on commission.

Question 2

Bank certificates of deposit are the safest and most liquid of all the money market securities.

Accepted Answer

A) True 
 B)False

Question 3

What is the expected payoff on a $2,000 sale that has a 30% profit margin if there is a 20% probability of default?

Accepted Answer

A)  $1,000 
B)  $120 
C)  $600 
D)  $200 
A)  $1,000 
B)  $120 
C)  $600 
D)  $200

Question 4

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 10th day of the following month. 
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 10th day of the following month. 
D)  The discount period ends either 10 days after invoicing or at the end of the month, whichever is earlier.

Question 5

Commercial paper is usually used to finance overseas trade.

Accepted Answer

A) True 
 B)False

Question 6

Which one of the following is most likely to discourage purchasers from taking a discount?

Accepted Answer

A)  A higher discount percentage 
B)  A shorter payment period 
C)  A longer discount period 
D)  A longer payment period 
A)  A higher discount percentage 
B)  A shorter payment period 
C)  A longer discount period 
D)  A longer payment period

Question 7

How much value would be added to a firm that could permanently reduce its cash collection period by 2 days if daily collections average $10,000 and the opportunity cost is 5% annually?

Accepted Answer

A)  $1,000 
B)  $1,200 
C)  $10,000 
D)  $20,000 
A)  $1,000 
B)  $1,200 
C)  $10,000 
D)  $20,000

Question 8

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 9

Which one of the following terms of sale is the most restrictive?

Accepted Answer

A)  Net 30 
B)  2/10, net 4 
C)  CBD 
D)  COD 
A)  Net 30 
B)  2/10, net 4 
C)  CBD 
D)  COD

Question 10

What is the break-even probability in the following case? A customer wishes to purchase a $2,000 item that has been marked up to 50% over cost.Assume all cash flows are discounted to present value and there is no chance of subsequent sales.

Accepted Answer

A)  55.67% 
B)  66.67% 
C)  77.67% 
D)  88.67% 
A)  55.67% 
B)  66.67% 
C)  77.67% 
D)  88.67%

Question 11

If the probability of collection is 65%,should you grant credit to a customer wishing to purchase a $2,000 item that cost $1,333.33 to produce? Assume all cash flows are discounted to present value and there is no chance of subsequent sales.

Accepted Answer

A)  No; the expected loss is $33.33. 
B)  No; the expected loss is $150.00. 
C)  Yes; the expected profit is $33.33. 
D)  Yes; the expected profit is $150.00. 
A)  No; the expected loss is $33.33. 
B)  No; the expected loss is $150.00. 
C)  Yes; the expected profit is $33.33. 
D)  Yes; the expected profit is $150.00.

Question 12

An aging schedule is a statement sent to customers who are delinquent in their payments.

Accepted Answer

A) True 
 B)False

Question 13

Which statement is true about terms of trade credit of 2/10,net 30?

Accepted Answer

A)  A 10% cash discount is offered for payment before 30 days. 
B)  A 2% cash discount can be taken for payment before the 10th of the following month. 
C)  A 10% cash discount can be taken if paid by the second day after invoicing. 
D)  No cash discount is offered after the tenth day. 
A)  A 10% cash discount is offered for payment before 30 days. 
B)  A 2% cash discount can be taken for payment before the 10th of the following month. 
C)  A 10% cash discount can be taken if paid by the second day after invoicing. 
D)  No cash discount is offered after the tenth day.

Question 14

A 6-month Treasury bill sells at a discount of 5%.What is the effective annual interest rate?

Accepted Answer

A)  2.564% 
B)  5.194% 
C)  5.063% 
D)  5.000% 
A)  2.564% 
B)  5.194% 
C)  5.063% 
D)  5.000%

Question 15

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 and assume that there is no chance of subsequence sales.

Accepted Answer

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

Question 16

Why should the possibility of a repeat order increase a firm's willingness to grant credit?

Accepted Answer

A)  The expected cash flow from two orders is twice that from one order. 
B)  The sales rep would earn increased commission. 
C)  The customer can be given more time to pay. 
D)  Payment on the first order increases the chance of payment on subsequent orders. 
A)  The expected cash flow from two orders is twice that from one order. 
B)  The sales rep would earn increased commission. 
C)  The customer can be given more time to pay. 
D)  Payment on the first order increases the chance of payment on subsequent orders.

Question 17

If the marginal order cost exceeds the marginal carrying cost of inventory,then the firm:

Accepted Answer

A)  has minimized its total carrying costs. 
B)  should increase its order size. 
C)  should decrease its order size. 
D)  has maximized its order costs. 
A)  has minimized its total carrying costs. 
B)  should increase its order size. 
C)  should decrease its order size. 
D)  has maximized its order costs.

Question 18

A firm that buys on credit is in effect borrowing from its supplier.

Accepted Answer

A) True 
 B)False

Question 19

The economic order quantity:

Accepted Answer

A)  is the order size that minimizes the order costs. 
B)  is independent of forecast sales. 
C)  is based on sales, carrying costs, and order costs. 
D)  increases as cost per order decreases. 
A)  is the order size that minimizes the order costs. 
B)  is independent of forecast sales. 
C)  is based on sales, carrying costs, and order costs. 
D)  increases as cost per order decreases.

Question 20

Assume a firm can either hold cash paying no interest or invest in marketable securities.Which one of the following might induce the manager to hold higher cash balances today?

Accepted Answer

A)  The cost of borrowing is high relative to interest rates on marketable securities. 
B)  Future cash flows are relatively predictable. 
C)  The cost of cash balances is relatively high. 
D)  Bank interest rates are expected to decrease. 
A)  The cost of borrowing is high relative to interest rates on marketable securities. 
B)  Future cash flows are relatively predictable. 
C)  The cost of cash balances is relatively high. 
D)  Bank interest rates are expected to decrease.

Exam 20: Working Capital Management

Firms should be more prepared to sell on credit to high-risk customers if:

Bank certificates of deposit are the safest and most liquid of all the money market securities.

What is the expected payoff on a $2,000 sale that has a 30% profit margin if there is a 20% probability of default?

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

Commercial paper is usually used to finance overseas trade.

Which one of the following is most likely to discourage purchasers from taking a discount?

How much value would be added to a firm that could permanently reduce its cash collection period by 2 days if daily collections average $10,000 and the opportunity cost is 5% annually?

The purpose of credit analysis is to:

Which one of the following terms of sale is the most restrictive?

What is the break-even probability in the following case? A customer wishes to purchase a $2,000 item that has been marked up to 50% over cost.Assume all cash flows are discounted to present value and there is no chance of subsequent sales.

If the probability of collection is 65%,should you grant credit to a customer wishing to purchase a $2,000 item that cost $1,333.33 to produce? Assume all cash flows are discounted to present value and there is no chance of subsequent sales.

An aging schedule is a statement sent to customers who are delinquent in their payments.

Which statement is true about terms of trade credit of 2/10,net 30?

A 6-month Treasury bill sells at a discount of 5%.What is the effective annual interest rate?

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 and assume that there is no chance of subsequence sales.

Why should the possibility of a repeat order increase a firm's willingness to grant credit?

If the marginal order cost exceeds the marginal carrying cost of inventory,then the firm:

A firm that buys on credit is in effect borrowing from its supplier.

The economic order quantity:

Assume a firm can either hold cash paying no interest or invest in marketable securities.Which one of the following might induce the manager to hold higher cash balances today?

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 Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

Filters