Exam 15: Working-Capital Management

Simpson Conglomerates borrows $12,000 for a short-term purpose.The loan will be repaid after 120 days,with Simpson paying a total of $12,400.What is the approximate cost of credit using the APY,or annual percentage yield,calculation?

Discuss the similarities and differences between a line of credit and a revolving credit agreement.

In the context of managing working capital,the hedging principle refers to which of the following?

Which of the following is NOT a source of unsecured short-term credit?

Which of the following sources of short-term financing is likely to have the highest interest rate?

Short-term debt provides a more flexible form of financing than long-term debt.

The Native Industries,Inc.is going to issue 180-day commercial paper to raise $25 million.It anticipates a discounted interest rate of 13 percent,and dealer placement costs of approximately $60,000.What is the effective annual cost of credit to Native Industries?

Quincy Fathows & Co.plans to issue commercial paper for the first time in its 85-year history.The firm plans to issue $400,000 in 120-day maturity notes.The paper will carry a 13% quarterly compounded rate with discounted interest and will cost Quincy Fathows $8,000 in advance to issue. a.What is the effective cost of credit to Quincy Fathows? b.What other factors should the firm consider in analyzing whether or not to issue the commercial paper?

Which of the following is most likely to be a temporary source of financing?

One way to improve a company's cash conversion cycle is to increase its days sales outstanding.

AAC,Inc.is planning to issue $5,000,000 in 180-day maturity notes paying a rate of 12 percent per annum.The company expects to incur costs of approximately $20,000 in dealer placement fees and other expenses of issuing the commercial paper.The company plans to back up their commercial paper offering with a line of credit from a bank for $5,000,000.The compensating balance requirement is 10 percent of the line of credit.The company normally maintains $450,000 in its accounts with the bank.What is the effective cost of the commercial paper offering?

Trade credit is an example of which of the following sources of financing?

Marley Financial plans to sell $50,000,000 of 120-day commercial paper,on which it expects to pay discounted interest at a rate of 5% per year.Dealer fees are expected to be $30,000.The effective cost of credit to Marley Financial is

Calculate the effective cost of the following trade credit terms if the discount is forgone and payment is made on the net due date. a.2/10 net 50 b.2/15 net 60 c.2/20 net 45

Although interest rates are generally higher on long-term debt,using more long-term debt rather than short-term debt can reduce the risk of illiquidity and decrease uncertainty related to interest rate changes.

All of the following are potential disadvantages of short-term debt EXCEPT

DAS,Inc has a line of credit with FBT Bank that allows DAS to borrow up to $400,000 at an annual interest rate of 11 percent.However,DAS must keep a compensating balance of 25 percent of any amount borrowed on deposit at the bank.DAS does not normally have a cash balance account with the bank.What is the effective annual cost of credit?

Which of the following statements concerning liquidity and debt is true?

Net working capital refers to which of the following?

The Smith Corporation is a maker of fine stereo components and presently has finished goods inventories of $800,000.They need a short-term bank loan of $400,000 for three months.The bank has proposed two different financing arrangements.The first is a floating lien arrangement at a rate of 22 percent.The second proposal is for a terminal warehouse arrangement at 11 percent.Under the latter proposal,Smith will pay $1,000 a month plus round trip shipping expense of $6,000.Which source of credit should be selected by the Smith Corporation? Explain.