Exam 15: Working-Capital Management

Trade credit is a source of spontaneous financing.

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.How much will Penn Inc.need to borrow?

The firm's total investment in current assets should be financed with temporary sources of financing.

Issuers of commercial paper usually maintain lines of credit with banks to back up their short-term financing needs.

A bank is legally obligated to provide credit under a revolving credit agreement,but not under a line of credit.

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

In a chattel mortgage,specific items of inventory are identified in the security agreement.

A company that forgoes the discount when credit terms are 2/10 net 60 due to insufficient cash flow would be better off to borrow funds and take the discount as long the company could borrow the funds at any rate

The risk-return trade-off in managing a firm's working capital involves which of the following?

A company decreases the risk of insolvency by financing long-term assets with short-term debt.

A company that forgoes the discount when credit terms are 2/10 net 60 is essentially borrowing money from his supplier for an additional

Under terms of a field warehouse financing agreement,the collateral inventories are physically separated from the borrower's other inventories but remain under the borrower's control.

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.It borrowed the $240,000 from the bank by drawing on the line of credit.What is the effective annual cost of credit?

A floating lien,chattel mortgage,or terminal warehouse receipt have which of the following in common?

Which item would constitute poor collateral for an inventory loan?

All of the following are potential disadvantages of short-term debt except:

Richenstein Enterprises is in the business of selling dishwashers.The firm needs $192,000 to finance an anticipated expansion in receivables due to increased sales.Richenstein's credit terms are net 40,and its average monthly credit sales are $180,000.In general,the firm's customers pay within the credit period; thus,the firm's average accounts receivable balance is $240,000. The comptroller of Richenstein Enterprises,Mr.Gee,approached their bank for the needed capital,pledging the accounts receivable as collateral.The bank offered to make the loan at a rate of 2 percent over prime plus a 1 percent processing charge on all receivables pledged.The bank agreed to loan up to 80 percent of the face value of the receivables pledged. a.Estimate the cost of the receivables loan to Richenstein where the firm borrows the $192,000.The prime rate is currently 13%. b.Gee also requested a line of credit for $192,000 from the bank.The bank agreed to grant the necessary line of credit at a rate of 4% over prime and required a 12% compensating balance Gee currently maintains an average demand deposit of $40,000.Estimate the cost of the line of credit to Richenstein. c.Which source of credit should Richenstein Enterprises select?

Dazzly Diamond Corp.called for credit at the Home Alone Bank of Paris,TX.The terms included a $35,000 maximum loan with interest of 1 percent over prime,and the agreement also requires a 15% compensating balance throughout the year.The prime rate is currently 12 percent. a.If Dazzly Diamond Corp.maintains a balance in its account of $5,250 to $6,000,what is the effective cost of credit through the line-of-credit agreement where the maximum amount of the loan is used? b.Recompute the effective cost of credit to Dazzly Diamond if it will have to borrow the compensating balance and the maximum amount possible under the agreement.

An inventory loan agreement in which the inventories pledged as collateral are physically separated from the firm's other inventory and placed under the control of a third-party is called

The cash conversion cycle cannot be negative.