Exam 15: Working-Capital Management

Hyper Retail Outlets sell goods on terms of net 40.The store's average monthly sales (all on credit)are $70,000.Hyper pledges all of its receivables to the bank,which advances 80% of the face value of the receivables at a rate of 2.5% above prime.The bank also charges a 1% processing fee on all receivables pledged.Hyper borrows the full amount possible,and the current prime rate is 5%.What is the annual percentage rate (APR)of using this source of financing for one full year?

Permanent sources of financing include all but

Which of the following is considered a spontaneous source of financing?

Which of the following statements about factoring is true?

A company that increases its liquidity by holding more cash and marketable securities is

Idaho Mining,Inc borrows at prime plus 1.5% on its line of credit.The line requires a 15% compensating balance.If prime rate is 9%,what is the nominal APR of the line of credit?

Major sources of secured credit include commercial banks,finance companies,and factors.

Parsons Company has a cash flow problem.The company owes its suppliers $300,000 on credit terms of 2/10 net 40,but Parsons doesn't have the cash to pay during the discount period.Parsons,however,can borrow the $300,000 at annual rate of 24%.Should Parsons borrow the money to pay its accounts payable?

Higher liquidity (holding larger cash and marketable securities balances)generally results in a lower return on equity.

Long-term debt is generally less costly than short-term debt,but also results in more illiquidity-hence,the risk/return tradeoff.

Short-term debt has a greater risk of illiquidity than long-term debt because it must be rolled over more frequently and its use creates more uncertainty concerning future interest rates.

When the accounts receivable of a firm have been factored,bad debt losses remain the responsibility of the borrowing firm and must be made good.

AJAX Corp.needs $100,000 for the next 30 days.The company has $100,000 in cash it was expecting to use to pay off accounts payable in order to take advantage of the 2/10 net 40 credit terms.Another source of financing is a short-term bank loan with an interest rate of 20%.Would you recommend AJAX borrow the $100,000 it needs from the bank and use the cash it already has to pay its accounts payable and take the cash discount,or would you recommend the company forgo the cash discount and use the $100,000 it has for its financing needs?

The trade-off associated with holding large amounts of cash and marketable securities is increased liquidity offset by a reduction in the overall rate of return.

An inventory loan agreement in which the inventories pledged as collateral are physically separated from the firm's other inventory and placed under the control of a third-party is called

The inventory loan agreement in which the lender can increase his or her security interest by having specific items of inventory identified in the loan agreement is called

As a company accounts payable manager,which of the following credit terms are most likely to entice you to take the cash discount?

Trade credit is a source of spontaneous financing.

A floating lien,chattel mortgage,or terminal warehouse receipt have which of the following in common?

What is the primary advantage of a firm that is able to issue commercial paper to finance its short-term assets?