Exam 15: Working-Capital Management

The trade-off associated with holding large amounts of cash and marketable securities is increased liquidity offset by a reduction in the overall rate of return.

Your company needs to pay $10,000 for the overhaul of five trucks.A bank offers you a loan at 18 percent per annum with a compensating balance requirement of 15 percent of the loan amount.You plan to borrow the money for 9 months and currently do not have any account with this bank.What is the effective cost of the loan?

All of the following are potential advantages of commercial paper except:

When the accounts receivable of a firm have been factored,bad debt losses remain the responsibility of the borrowing firm and must be made good.

Define translation exposure,transaction exposure,and economic exposure.

Mac Department Stores sell goods on terms of net 40.The store's average monthly sales (all on credit)are $70,000.Mac pledges all of its receivables to the bank,which advances 80% of the face value of the receivables at a rate of 2.5% above prime.The bank also charges a 1% processing fee on all receivables pledged.Mac borrows the full amount possible,and the current prime rate is 5%.What is the annual percentage rate (APR)of using this source of financing for one full year?

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.

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

Major sources of secured credit include commercial banks,finance companies,and factors.

Which of the following is most likely to be a temporary source of financing?

Which of the following is an unsecured short-term bank loan made for a specific purpose?

The Smith Corporation is a maker of fine stereo components and presently has finished goods inventories of $800,000.They need a short-term bank loan of $400,000 for three months.The bank has proposed two different financing arrangements.The first is a floating lien arrangement at a rate of 22 percent.The second proposal is for a terminal warehouse arrangement at 11 percent.Under the latter proposal,Smith will pay $1,000 a month plus round trip shipping expense of $6,000.Which source of credit should be selected by the Smith Corporation? Explain.

Terminal warehouse agreements

Quincy Fathows & Co.plans to issue commercial paper for the first time in its 85-year history.The firm plans to issue $400,000 in 120-day maturity notes.The paper will carry a 13% quarterly compounded rate with discounted interest and will cost Quincy Fathows $8,000 in advance to issue. a.What is the effective cost of credit to Quincy Fathows? b.What other factors should the firm consider in analyzing whether or not to issue the commercial paper?

Permanent sources of financing include all but

Long-term debt is generally less costly than short-term debt,but also results in more illiquidity hence,the risk/return tradeoff.

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 is the annual percentage rate for this financing assuming discounted interest?

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

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.

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