Exam 15: Working-Capital Management

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

The primary source of spontaneous financing is accrued taxes.

Factoring accounts receivable is the sale of a firm's receivables while pledging accounts receivable is the use of accounts receivable as collateral for a loan.

The cash conversion cycle is a measure of a firm's effectiveness in managing its working capital.

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

Penn 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,Penn 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?

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

A U.S.multinational corporation holds assets in Japan.Which of the following statements is most correct if the value of the Japanese yen declines relative to the dollar?

All of the following are true except:

Both compensating balances and discounting interest increase the effective interest rate on a loan.

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

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

A company that increases its liquidity by holding more cash and marketable securities is

Working capital management involves managing a firm's liquidity.

Higher liquidity (holding larger cash and marketable securities balances)generally results in a lower return on equity.

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

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?

Wayne,Inc.has a line of credit with First National Bank that allows the company to borrow up to $800,000 at an interest rate of 12 percent.However,Wayne,Inc.must keep a compensating balance of 18 percent of any amount borrowed on deposit at the bank.Wayne,Inc.does not normally keep a cash balance account with First National Bank.What is the effective annual cost of credit?

Which of the following is not an advantage of trade credit?

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