Exam 15: Working-Capital Management

Which of the following statements concerning liquidity and debt is true?

Which of the following statements regarding a line of credit is true?

One example of the hedging principle is to reduce a company's foreign exchange risk by purchasing futures contracts,which are called hedges.

A firm increases the risks of insolvency by keeping relatively large amounts of money tied up in marketable securities.

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

The hedging principle involves matching the cash flow from an asset with the cash flow requirements of the financing used.

Trade credit appears on a company's balance sheet as accounts payable.

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?

If a firm relies on short-term debt or current liabilities in financing its asset investments,and all other things remain the same,what can be said about the firm's liquidity?

The Stuart Glass Company 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,Stuart had no deposit with the bank.Shortly after signing the agreement,Stuart needed $240,000 to pay off a note that was due.Stuart decides to borrow an amount sufficient to pay the $240,000 note and also to cover the compensating balance.How much must Stuart Glass borrow?

Worthington,Inc.is planning to issue $7,500,000 in 120-day maturity notes carrying a rate of 11 percent per year.Worthington's commercial paper will be placed at a cost of $35,000.What is the effective cost of credit to Worthington?

A toy manufacturer following the hedging principle will generally finance seasonal inventory build-up prior to the Christmas season with

According to the hedging principle,fixed assets should not be financed with

Minimum levels of inventory and accounts receivable that will be maintained throughout the year are current assets,and therefore considered temporary investments.

What is the primary advantage of a firm that is able to issue commercial paper to finance its short-term assets?

MovieTone,Inc.is a producer and distributor of specialty DVDs.It sells directly to large retail firms on terms of net 60 and has average monthly sales of $350,000.It has recently decided to pledge all of its accounts receivable to its bank.The bank advances up to 80 percent of the face value of these receivables at a rate of 4 percent over the prime rate,while charging 2.5 percent on all receivables pledged for processing to cover billing and collection services.Prior to this arrangement MovieTone was spending $50,000 a year on its credit department.The prime rate is 6 percent. a.What is the average level of accounts receivable? b.What is the effective cost of using this short-term credit for one year?

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

Short-term debt has a greater risk of illiquidity than long-term debt because it must be rolled over more frequently and its use creates more uncertainty concerning future interest rates.

The Stoney River Pennant Company uses commercial paper to satisfy part of its short-term financing requirements.Next week,it intends to sell $18 million in 90-day maturity paper on which it expects to have to pay discounted interest at an annual rate of 7 percent per annum.In addition,Stoney River expects to incur a cost of approximately $25,000 in dealer placement fees and other expenses of issuing the paper.What is the effective annual cost of credit to Stoney River?

Bigtime Corp.is considering borrowing $15,000 for a 60-day period.The firm will repay the $15,000 principal amount plus $200 in interest.What is the effective annual rate of interest? Use a 360-day year.