Exam 15: Working-Capital Management

A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with

Spontaneous sources of financing include

Trade credit appears on a company's balance sheet as accounts payable.

A company decreases the risk of insolvency by financing long-term assets with short-term debt.

Total debt must always be equal to the sum of temporary,permanent,and spontaneous sources of financing.

Credit terms of 1/10 net 30 means that the buyer may take a 10% discount (1/10)if the bill in paid within 30 days.

Notes payable is a spontaneous source of financing.

The inclusion of a compensating balance requirement in a line of credit will reduce the effective annual cost of credit since the bank has additional collateral for the borrowing.

All of the following are true EXCEPT

The inventory loan arrangement in which all of the borrower's inventories are used as collateral is termed a

The hedging principle is also called the principle of self-liquidating inventory.

If a company's inventory turnover increases from 8 to 10,then its cash conversion cycle will also increase,i.e.,get longer.

Selection of a source of short-term financing should include all of the following EXCEPT

According to the hedging principle,fixed assets should NOT be financed with

You are working on your company's cash budget for the coming year and you believe there may be short periods of time where financing is required.Which of the following sources of short-term financing is most certain to be available when needed?

If a company offers a cash discount for early payment,this will most likely increase its cash conversion cycle since it will have to pay out more cash to its customers.

Crenshaw Inc.has a $400,000 line of credit with a local bank.The bank requires a compensating balance of 10% of the loan and extends credit to Crenshaw at 1% over the current prime rate.Crenshaw needs the use of $200,000 for the three-month period.They currently have no deposits with the lending bank. a.What will the effective annual cost of this credit be? (Assume a 360-day year and a 9% prime rate.) b.Using the above information,what would be the effective interest rate if the firm discounted the interest on the loan?

Which of the following loans provide the least amount of security to the lender?

The primary source of spontaneous financing is accrued taxes.

A secured loan should have a higher interest rate because the lender has less risk and therefore values the loan more highly.