Exam 15: Working-Capital Management

Accrued wages and taxes are secured sources of financing because companies are obligated to make these payments before they make payments on any other loans or pay dividends.

Credit terms of 2/10,net 30 have a lower effective cost than credit terms of 2/10,net 60 because in the first case the loan will be repaid sooner.

According to the hedging principle,plant and equipment should be financed with

The risk of illiquidity is increased if either cash and marketable securities are decreased,or if the firm relies more heavily of long-term debt.

The prime rate of interest is

Brown Inc.needs to borrow $250,000 for the next 6 months.The company has a line of credit with a bank that allows the company to borrow funds with an 8% interest rate subject to a 20% of loan compensating balance.Currently,Brown Inc.has no funds on deposit with the bank and will need the loan to cover the compensating balance as well as their other financing needs.What will be the annual percentage rate,or APR,for this financing?

The hedging principle is used to address the issue of how much short-term financing a firm should use.

Issuers of commercial paper usually maintain lines of credit with banks to back up their short-term financing needs.

Your company buys supplies on credit terms of 2/10 net 45.Suppose the company makes a purchase of $20,000 today.Which of the following payment options makes the most sense as a general rule?

Three basic factors that determine which sources of short-term financing a firm uses are the effective cost of financing,the availability of credit,and the influence of the use of a particular credit source on the cost and availability of other sources of financing.

The cost of trade credit varies directly with the size of the cash discount and inversely with the length of time between the end of the discount period and the final due date.

The primary sources of collateral for secured loans are accounts receivable and inventory.

Which of the following is a disadvantage of the use of current liabilities to finance assets?

Which of the following would normally occur if a firm increases its investment in current assets?

Assume that Montana Mining,Inc.borrows $5,000,000 for 120 days.The total interest paid is $150,000.What is the APY,or Effective Annual Rate of interest that Billings pays?

Discuss the risk-return tradeoff experienced in working-capital management.

Total assets must always equal the sum of temporary,permanent,and spontaneous sources of financing.

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.It borrowed the $240,000 from the bank by drawing on the line of credit.What is the effective annual cost of credit?

Two advantages of financing with current liabilities are flexibility and lower interest cost.

Which of the following is an advantage of utilizing short-term debt to finance the acquisition of short-term assets?