Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Firms with seasonal cash flows may find themselves with a surplus of cash during some months that is sufficient to compensate for a shortfall during other months.However,because of timing differences,such firms often have short-term financing needs. 
B) A company forecasts its cash flows to determine whether it will have surplus cash or a cash deficit for each period. 
C) Like seasonalities,positive cash flow shocks can create short-term financing needs. 
D) When sales are concentrated during a few months,sources and uses of cash are also likely to be seasonal. 
A) Firms with seasonal cash flows may find themselves with a surplus of cash during some months that is sufficient to compensate for a shortfall during other months.However,because of timing differences,such firms often have short-term financing needs. 
B) A company forecasts its cash flows to determine whether it will have surplus cash or a cash deficit for each period. 
C) Like seasonalities,positive cash flow shocks can create short-term financing needs. 
D) When sales are concentrated during a few months,sources and uses of cash are also likely to be seasonal. C

Question 2

Use the following information to answer the question(s)below.
Taggart Transcontinental needs a $100,000 loan for the next 30 days.Taggart has three alternatives available:
Alternative #1: Forgo the discount on its trade credit agreement that offers terms of 2/5 net 35.
Alternative #2: Borrow the money from Bank A,which has offered to lead the firm $100,000 for one month at
an APR of 9%.The bank will require a (no-interest)compensating balance of 10% of the face-value of the loan and will charge a $200 loan origination fee,which means that Taggart must borrow even more than the $100,000 they need.
Alternative #3: Borrow the money from Bank B,which has offered to lend the firm $100,000 for one month at an APR of 12%.The loan has a 1% origination fee.
-The effective annual rate for Taggart if they choose alternative #1 is closest to:

Accepted Answer

A) 13.9% 
B) 18.8% 
C) 27.0% 
D) 27.9% 
A) 13.9% 
B) 18.8% 
C) 27.0% 
D) 27.9% D

Question 3

Which of the following firms is likely to have the highest short-term financing needs?

Accepted Answer

A) A pharmaceutical manufacturer 
B) A grocery store 
C) An electric utility 
D) A toy store 
A) A pharmaceutical manufacturer 
B) A grocery store 
C) An electric utility 
D) A toy store D

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) Financing part or all of the permanent working capital with short-term debt is known as an aggressive financing policy. 
B) When the yield curve is downward sloping,the interest rate on short-term debt is lower than the rate on long-term debt.In that case,short-term debt may appear cheaper than long-term debt. 
C) The value of short-term debt is less sensitive to the firm's credit quality than long-term debt;therefore,its value will be less affected by management's actions or information. 
D) Permanent working capital is the amount that a firm must keep invested in its short-term assets to support its continuing operations. 
A) Financing part or all of the permanent working capital with short-term debt is known as an aggressive financing policy. 
B) When the yield curve is downward sloping,the interest rate on short-term debt is lower than the rate on long-term debt.In that case,short-term debt may appear cheaper than long-term debt. 
C) The value of short-term debt is less sensitive to the firm's credit quality than long-term debt;therefore,its value will be less affected by management's actions or information. 
D) Permanent working capital is the amount that a firm must keep invested in its short-term assets to support its continuing operations.

Question 5

The temporary working capital needs for Hasbeen Toys in quarter 1 is closest to:

Accepted Answer

A) $0 million 
B) $340 million 
C) $770 million 
D) $845 million 
A) $0 million 
B) $340 million 
C) $770 million 
D) $845 million

Question 6

Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%.If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest bearing account,then the effective annual rate EAR for this loan is closest to:

Accepted Answer

A) 50.0% 
B) 12.6% 
C) 14.4% 
D) 71.5% 
A) 50.0% 
B) 12.6% 
C) 14.4% 
D) 71.5%

Question 7

A firm issued three-month commercial paper with a $2,000,000 face value and received $1,964,000.The effective annual rate that this firm is paying is closest to:

Accepted Answer

A) 8.0% 
B) 7.5% 
C) 1.8% 
D) 7.3% 
A) 8.0% 
B) 7.5% 
C) 1.8% 
D) 7.3%

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) When following a conservative financing policy,a firm would use long-term sources of funds to finance its fixed assets,permanent working capital,and some of its seasonal needs. 
B) An aggressive financing policy also increases the possibility that managers of the firm will use excess cash nonproductively-for example,on perquisites for themselves. 
C) A firm could finance its short-term needs with long-term debt,a practice known as a conservative financing policy. 
D) To implement a conservative financing policy effectively,there will necessarily be periods when excess cash is available-those periods when the firm requires little or no investment in temporary working capital. 
A) When following a conservative financing policy,a firm would use long-term sources of funds to finance its fixed assets,permanent working capital,and some of its seasonal needs. 
B) An aggressive financing policy also increases the possibility that managers of the firm will use excess cash nonproductively-for example,on perquisites for themselves. 
C) A firm could finance its short-term needs with long-term debt,a practice known as a conservative financing policy. 
D) To implement a conservative financing policy effectively,there will necessarily be periods when excess cash is available-those periods when the firm requires little or no investment in temporary working capital.

Question 9

Rearden Metal wants to raise $5 million using six-month commercial paper.The net proceeds to Rearden will be $4,865,000.The effect annual rate for this financing is closest to:

Accepted Answer

A) 5.6% 
B) 6.6% 
C) 7.2% 
D) 8.4% 
A) 5.6% 
B) 6.6% 
C) 7.2% 
D) 8.4%

Question 10

Which of the following statements is FALSE?

Accepted Answer

A) Regardless of the loan structure,the bank may include a compensating balance requirement in the loan agreement that reduces the usable loan proceeds. 
B) Another common type of fee is a loan origination fee,which a bank charges to cover credit checks and legal fees. 
C) Firms frequently use lines of credit to finance seasonal needs. 
D) The commitment fee associated with a committed line of credit is designed to decrease the effective cost of the loan to the firm. 
A) Regardless of the loan structure,the bank may include a compensating balance requirement in the loan agreement that reduces the usable loan proceeds. 
B) Another common type of fee is a loan origination fee,which a bank charges to cover credit checks and legal fees. 
C) Firms frequently use lines of credit to finance seasonal needs. 
D) The commitment fee associated with a committed line of credit is designed to decrease the effective cost of the loan to the firm.

Question 11

Luther Industries wants to borrow $1 million for two months.Using its inventory as collateral,it can obtain a 10% (APR)loan (compounded monthly).The lender requires that a warehouse arrangement be used.The warehouse fee is $10,000,payable at the end of the two months.Calculate the effective annual rate of this loan for Row Cannery.

Accepted Answer

The monthly interest rate is @#IMG-DLM& 
= .83333%

Question 12

Which of the following is NOT a specific financing option for temporary working capital?

Accepted Answer

A) Secured financing 
B) Commercial paper 
C) Bank loans 
D) Treasury bills 
A) Secured financing 
B) Commercial paper 
C) Bank loans 
D) Treasury bills

Question 13

Which of the following statements is FALSE?

Accepted Answer

A) Unlike long-term debt,because of its short maturity,commercial paper is not rated by credit rating agencies. 
B) The interest on commercial paper is typically paid by selling it at an initial discount. 
C) Commercial paper is short-term,unsecured debt used by large corporations that is usually a cheaper source of funds than a short-term bank loan. 
D) Extending the maturity of commercial paper beyond 270 days triggers a registration requirement with the Securities and Exchange Commission (SE
C) ,which increases issue costs and creates a time delay in the sale of the issue. 
A) Unlike long-term debt,because of its short maturity,commercial paper is not rated by credit rating agencies. 
B) The interest on commercial paper is typically paid by selling it at an initial discount. 
C) Commercial paper is short-term,unsecured debt used by large corporations that is usually a cheaper source of funds than a short-term bank loan. 
D) Extending the maturity of commercial paper beyond 270 days triggers a registration requirement with the Securities and Exchange Commission (SE
C) ,which increases issue costs and creates a time delay in the sale of the issue.

Question 14

Which of the following statements is FALSE?

Accepted Answer

A) Because investment in permanent working capital is required so long as the firm remains in business,it constitutes a long-term investment. 
B) Because temporary working capital represents a short-term need,the firm should finance this portion of its investment with short-term financing. 
C) Temporary working capital is the difference between the lowest level of investment in short-term assets and the permanent working capital investment. 
D) The matching principle states that short-term needs should be financed with short-term debt and long-term needs should be financed with long-term sources of funds. 
A) Because investment in permanent working capital is required so long as the firm remains in business,it constitutes a long-term investment. 
B) Because temporary working capital represents a short-term need,the firm should finance this portion of its investment with short-term financing. 
C) Temporary working capital is the difference between the lowest level of investment in short-term assets and the permanent working capital investment. 
D) The matching principle states that short-term needs should be financed with short-term debt and long-term needs should be financed with long-term sources of funds.

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) The matching principle indicates that the firm should finance permanent working capital with short-term sources of funds. 
B) Following the matching principle should,in the long run,help minimize a firm's transaction costs. 
C) In a perfect capital market,the choice of financing is irrelevant;thus how the firm chooses to finance its short-term cash needs cannot affect value. 
D) A portion of a firm's investment in its accounts receivable and inventory is temporary and results from seasonal fluctuations in the firm's business or unanticipated shocks. 
A) The matching principle indicates that the firm should finance permanent working capital with short-term sources of funds. 
B) Following the matching principle should,in the long run,help minimize a firm's transaction costs. 
C) In a perfect capital market,the choice of financing is irrelevant;thus how the firm chooses to finance its short-term cash needs cannot affect value. 
D) A portion of a firm's investment in its accounts receivable and inventory is temporary and results from seasonal fluctuations in the firm's business or unanticipated shocks.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) In a pledging of accounts receivable agreement,the lender reviews the invoices that represent the credit sales of the borrowing firm and decides which credit accounts it will accept as collateral for the loan,based on its own credit standards. 
B) With a trust receipts loan or floor planning,all inventory items are held in a trust as security for the loan. 
C) If the factoring agreement is without recourse,the borrowing firm must receive credit approval for a customer from the factor prior to shipping the goods.If the factor gives its approval,the firm ships the goods and the customer is directed to make payment directly to the lender. 
D) In a warehouse arrangement,the inventory that serves as collateral for the loan is stored in a warehouse. 
A) In a pledging of accounts receivable agreement,the lender reviews the invoices that represent the credit sales of the borrowing firm and decides which credit accounts it will accept as collateral for the loan,based on its own credit standards. 
B) With a trust receipts loan or floor planning,all inventory items are held in a trust as security for the loan. 
C) If the factoring agreement is without recourse,the borrowing firm must receive credit approval for a customer from the factor prior to shipping the goods.If the factor gives its approval,the firm ships the goods and the customer is directed to make payment directly to the lender. 
D) In a warehouse arrangement,the inventory that serves as collateral for the loan is stored in a warehouse.

Question 17

Rearden Metal has borrowed $4 million for three months at a stated annual rate of 8%,using inventory stored in a field warehouse as collateral.The warehouse charges a $10,000 fee,payable at the end of the month.The effect annual rate on this loan is closest to:

Accepted Answer

A) 9.3% 
B) 11.3% 
C) 15.2% 
D) 17.1% 
A) 9.3% 
B) 11.3% 
C) 15.2% 
D) 17.1%

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) On the other hand,by relying on short-term debt the firm exposes itself to funding risk,which is the risk of incurring financial distress costs should the firm not be able to refinance its debt in a timely manner or at a reasonable rate. 
B) An ultra-conservative policy would involve financing even some of the plant,property,and equipment with short-term sources of funds. 
C) With a conservative financing policy,the firm would use short-term debt very sparingly to meet its peak seasonal needs. 
D) Short-term debt can have lower agency and lemons costs than long-term debt,and an aggressive financing policy can benefit shareholders. 
A) On the other hand,by relying on short-term debt the firm exposes itself to funding risk,which is the risk of incurring financial distress costs should the firm not be able to refinance its debt in a timely manner or at a reasonable rate. 
B) An ultra-conservative policy would involve financing even some of the plant,property,and equipment with short-term sources of funds. 
C) With a conservative financing policy,the firm would use short-term debt very sparingly to meet its peak seasonal needs. 
D) Short-term debt can have lower agency and lemons costs than long-term debt,and an aggressive financing policy can benefit shareholders.

Question 19

Wyatt Oil has an issue of commercial paper with a face value of $10,000,000 and a maturity of three months.Wyatt received $9,800,000 when it sold the paper.The effect annual rate for this financing is closest to:

Accepted Answer

A) 5.6% 
B) 6.6% 
C) 7.2% 
D) 8.4% 
A) 5.6% 
B) 6.6% 
C) 7.2% 
D) 8.4%

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) Bank loans are typically initiated with a promissory note,which is a written statement that indicates the amount of the loan,the date payment is due,and the interest rate. 
B) The most straightforward type of bank loan is a single,end-of-period-payment loan. 
C) With a fixed interest rate,the specific rate that the bank will charge is stipulated at the time the loan is made. 
D) One of the primary sources of short-term financing,especially for small businesses,is the investment bank. 
A) Bank loans are typically initiated with a promissory note,which is a written statement that indicates the amount of the loan,the date payment is due,and the interest rate. 
B) The most straightforward type of bank loan is a single,end-of-period-payment loan. 
C) With a fixed interest rate,the specific rate that the bank will charge is stipulated at the time the loan is made. 
D) One of the primary sources of short-term financing,especially for small businesses,is the investment bank.

Exam 27: Short-Term Financial Planning

Which of the following statements is FALSE?

Which of the following firms is likely to have the highest short-term financing needs?

Which of the following statements is FALSE?

The temporary working capital needs for Hasbeen Toys in quarter 1 is closest to:

Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%.If Luther's bank requires that the firm maintain a compensating balance equal to 10% of the loan amount in a non-interest bearing account,then the effective annual rate EAR for this loan is closest to:

A firm issued three-month commercial paper with a $2,000,000 face value and received $1,964,000.The effective annual rate that this firm is paying is closest to:

Which of the following statements is FALSE?

Rearden Metal wants to raise $5 million using six-month commercial paper.The net proceeds to Rearden will be $4,865,000.The effect annual rate for this financing is closest to:

Which of the following statements is FALSE?

Which of the following is NOT a specific financing option for temporary working capital?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Rearden Metal has borrowed $4 million for three months at a stated annual rate of 8%,using inventory stored in a field warehouse as collateral.The warehouse charges a $10,000 fee,payable at the end of the month.The effect annual rate on this loan is closest to:

Which of the following statements is FALSE?

Wyatt Oil has an issue of commercial paper with a face value of $10,000,000 and a maturity of three months.Wyatt received $9,800,000 when it sold the paper.The effect annual rate for this financing is closest to:

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Investment Decision Rules

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

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