Exam 15: Working-Capital Management

Terminal warehouse agreements

Floating lien agreements are the least secure form of inventory collateral.

If a firm relies on short-term debt or current liabilities in financing its asset investments,and all other things remain the same,what can be said about the firm's liquidity?

A cash conversion cycle of -5 days is better than a cash conversion cycle of 50 days.

Accrued wages and accrued taxes are considered to be

Bonneau Sunglass Co.is considering the factoring of its receivables.The firm has credit sales of $500,000 per month and has an average receivables balance of $1,000,000 with 60-day credit terms.The factor has offered to extend credit equal to 85% of the receivables factored less interest on the loan at a rate of 2% per month.The 15% difference in the advance and face value of all receivables factored consists of a 2% factoring fee plus a 13% reserve,which the factor maintains.In addition,if Bonneau decides to factor its receivables,it will sell them all,so that it can reduce its credit costs by $2,000 a month. a.What is the cost of borrowing the maximum amount of credit available to Bonneau through the factoring agreement? b.What considerations other than cost should be accounted for by Bonneau in determining whether or not to enter the factoring agreement?

A bank is legally obligated to provide credit under a revolving credit agreement,but not under a line of credit.

The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used.

Which of the following actions would decrease a firm's liquidity?

All of the following are likely to increase the cost of a company's short-term financing EXCEPT

The terminal warehouse agreement differs from the field warehouse agreement in that

Commercial paper is an example of spontaneous financing because it is generated by the day-to-day operations of a company.

Your company is able to arrange financing at either a rate of 12.75% annually,or at a rate of 12% compounded monthly.Assuming financing is needed for one year,which rate is the best?

The Rosewood Corporation established a line of credit with a local bank.The maximum amount that can be borrowed under the terms of the agreement is $500,000 at a rate of 10 percent.A compensating balance averaging 15 percent of the loan is required.Prior to the agreement,Rosewood had maintained an account at the bank averaging $25,000.Any additional funds needed for the compensating balance will also have to be borrowed at the 10 percent rate.If the firm needs $280,000 for 6 months,what is the annual cost of the loan?

The Missouri River Pendant Company uses commercial paper to satisfy part of its short-term financing requirements.Next week,it intends to sell $18 million in 90-day maturity paper on which it expects to have to pay discounted interest at an annual rate of 7 percent per annum.In addition,Stoney River expects to incur a cost of approximately $25,000 in dealer placement fees and other expenses of issuing the paper.What is the effective annual cost of credit to Missouri River?

In a chattel mortgage,specific items of inventory are identified in the security agreement.

A firm increases the risks of insolvency by keeping relatively large amounts of money tied up in marketable securities.

The firm's total investment in current assets should be financed with temporary sources of financing.

According to the hedging principle,which of the following assets should be financed with permanent sources of financing?

In general the greater a firm's reliance upon short-term debt or current liabilities