Exam 15: Working-Capital Management

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?

Popular measures of foreign-exchange risk include all of the following except:

Management of a firm's liquidity involves management of the firm's investment in current assets as well as its mix of long-term capital.

Compounding effectively raises the cost of short-term credit.

Which of the following sources of short-term financing is likely to have the highest interest rate?

The primary advantage that pledging accounts receivable provides is

Interest costs for short-term debt are generally lower than interest costs for long-term debt because

Achieving a lower inventory balance through working capital management can result in savings from both carrying costs and losses associated with obsolete inventory.

The inclusion of a compensating balance requirement in a line of credit will reduce the effective annual cost of credit since the bank has additional collateral for the borrowing.

Sources of spontaneous financing include trade credit,salaries payable,and accrued taxes.

With regard to the hedging principle,which of the following would be an appropriate method to finance a minimum level of current assets required for year round operations?

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

Crenshaw Inc.has a $400,000 line of credit with a local bank.The bank requires a compensating balance of 10% of the loan and extends credit to Crenshaw at 1% over the current prime rate.Crenshaw needs the use of $200,000 for the three-month period.They currently have no deposits with the lending bank. a.What will the effective annual cost of this credit be? (Assume a 360-day year and a 9% prime rate.) b.Using the above information,what would be the effective interest rate if the firm discounted the interest on the loan?

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

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 APY ,or annual percentage yield,calculation?

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.

Working capital includes all of the following except:

The inventory loan agreement in which the lender can increase his or her security interest by having specific items of inventory identified in the loan agreement is called

Accrued wages and accrued taxes are considered to be

Which of the following is an advantage of the use of current liabilities to finance assets?