Exam 15: Working-Capital Management

Working capital refers to investment in current assets,while net working capital is the difference between current assets and current liabilities.

The effective interest rate on short-term loans from Bank A is 12.5 percent per year.Bank B claims that their interest rate is only 11 percent per year.However,Bank B charges interest on a discount basis.Which bank is charging the lowest effective rate of interest on a one-year loan?

A company that forgoes the discount when credit terms are 2/10 net 60 due to insufficient cash flow would be better off to borrow funds and take the discount as long the company could borrow the funds at any rate

The Boyles Ceramics,Inc.established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent.A compensating balance averaging 25 percent of the amount borrowed is required.Prior to the agreement,Boyles had no deposit with the bank.Shortly after signing the agreement,Boyles needed $240,000 to pay off a note that was due.Boyles decides to borrow an amount sufficient to pay the $240,000 note and also to cover the compensating balance.How much must Boyles Glass borrow?

In general,interest rates are short-term debt are higher than interest rates on long-term debt because the borrower has less time to repay the loans,and hence the risk to the lender is higher.

The amount that can be obtained on an inventory loan depends on both the marketability and perishability of the items in the inventory.

To ensure that a borrower is not using short-term bank credit to finance a part of its permanent needs for funds,banks often require borrowers to clean up their short-term loans for a 30 - 45 day period during the year.

The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.

Commercial paper is an unsecured form of credit.

Crawley,Inc.has a line of credit with HNC Bank that allows the company to borrow up to $800,000 at an interest rate of 12 percent.However,Crawley,Inc.must keep a compensating balance of 18 percent of any amount borrowed on deposit at the bank.Crawley,Inc.does not normally keep a cash balance account with HNC Bank.What is the effective annual cost of credit?

Which of the following is NOT an advantage of trade credit?

Compounding effectively raises the cost of short-term credit.

A company that forgoes the discount when credit terms are 2/10 net 60 is essentially borrowing money from his supplier for an additional

The effective cost to the borrower of an unsecured bank loan is increased if a compensating balance is required.

Current assets would usually NOT include

Accrued taxes and salaries payable are both sources of spontaneous financing.

Because only the largest and most creditworthy companies are able to use commercial paper,the interest rate on commercial paper is generally lower than the prime rate.

The cash conversion cycle cannot be negative.

Which item would constitute poor collateral for an inventory loan?

The Boyles Ceramics,Inc.established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $1,000,000 at an annual rate of 8 percent.A compensating balance averaging 25 percent of the amount borrowed is required.Prior to the agreement,Boyles had no deposit with the bank.Shortly after signing the agreement,Boyles needed $240,000 to pay off a note that was due.Boyles decides to borrow an amount sufficient to pay the $240,000 note and also to cover the compensating balance.What is the effective annual cost of credit if the loan is made on a discount basis?