Exam 15: Working-Capital Management

Assume that Billings,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?

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.

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.

Jones Company has a cash flow problem.The company owes its suppliers $300,000 on credit terms of 2/10 net 40,but Jones doesn't have the cash to pay during the discount period.Jones,however,can borrow the $300,000 at annual rate of 24%.Should Jones borrow the money to pay its accounts payable?

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

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?

Which of the following statements about factoring is true?

The cash conversion cycle is equal to the days of sales outstanding plus the days of sales in inventory plus the days of payables outstanding.

A major risk in using commercial paper for short-term financing is the inflexible repayment schedule.

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

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

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

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.

Which of the following is not true regarding the use of short-term debt?

Symco Corp.needs $500,000 for 90 days to get through a period of unexpectedly high oil prices.Symco's line of credit with the bank allows the company to borrow at 6% per year with a compensating balance of 10% of the amount borrowed.Currently,Symco has no money on deposit with the bank. a.Calculate the amount Symco must borrow to meets its needs plus the compensating balance. b.What is the annual percentage rate for this financing? c.If the bank requires discount interest,what is the annual percentage rate for this financing?

Which of the following is considered a spontaneous source of financing?

Spontaneous sources of financing include

Boeing Corp.buys on 3/10,net 30 days.What is the nominal cost of interest if Boeing does not take advantage of the trade discount offered? Assume a 360-day year.

Notes payable is a spontaneous source of financing.

Exchange rate risk may be handled by matching exposed assets with exposed liabilities.