Exam 15: Working-Capital Management

The effective annual cost of not taking advantage of the 1/10,net 60 terms offered by a supplier is

To ensure that a borrower is not using short-term bank credit to finance a part of its permanent needs for funds,banks often require borrowers to clean up their short-term loans for a 30 - 45 day period during the year.

You are working on your company's cash budget for the coming year and you believe there may be short periods of time where financing is required.Which of the following sources of short-term financing is most certain to be available when needed?

AJAX Corp.needs $100,000 for the next 30 days.The company has $100,000 in cash it was expecting to use to pay off accounts payable in order to take advantage of the 2/10 net 40 credit terms.Another source of financing is a short-term bank loan with an interest rate of 20%.Would you recommend AJAX borrow the $100,000 it needs from the bank and use the cash it already has to pay its accounts payable and take the cash discount,or would you recommend the company forgo the cash discount and use the $100,000 it has for its financing needs?

Which of the following is not a source of unsecured short-term credit?

Current assets would usually not include

The amount that can be obtained on an inventory loan depends on both the marketability and perishability of the items in the inventory.

Discuss the risk-return tradeoff experienced in working-capital management.

JoLi Corp.purchases a new delivery van which is expected to increase cash flows for the next 10 years.JoLi can finance the purchase with a standard 48 month vehicle loan,or by getting a 10 year loan from the bank.According to the hedging principle,JoLi should

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.What is the effective annual cost of credit if the loan is made on a discount basis?

Accrued wages and taxes are secured sources of financing because companies are obligated to make these payments before they make payments on any other loans or pay dividends.

The Jubilee Manufacturing Company is going to issue 180-day commercial paper to raise $25 million.It anticipates a discounted interest rate of 13 percent,and dealer placement costs of approximately $60,000.What is the effective annual cost of credit to Jubilee?

Credit terms of 2/10,net 30 have a lower effective cost than credit terms of 2/10,net 60 because in the first case the loan will be repaid sooner.

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

Net working capital refers to which of the following?

All of the following are likely to increase the cost of a company's short-term financing except:

The hedging principle involves the use of hedge funds to manage the firm's working capital.

The inventory loan arrangement in which all of the borrower's inventories are used as collateral is termed a

A secured loan should have a higher interest rate because the lender has less risk and therefore values the loan more highly.

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