Question 1

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) A 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 decreases 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) A 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 decreases the effective cost of the loan to the firm.

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) With a discount loan, the borrower is required to pay the interest at the end of the loan period. 
B) Bridge loans are often quoted as discount loans with fixed interest rates. 
C) A bridge loan is another type of short-term bank loan that is often used to "bridge the gap" until a firm can arrange for long-term financing. 
D) After a natural disaster, lenders may provide businesses with short-term loans to serve as bridges until they receive insurance payments or long-term disaster relief. 
A) With a discount loan, the borrower is required to pay the interest at the end of the loan period. 
B) Bridge loans are often quoted as discount loans with fixed interest rates. 
C) A bridge loan is another type of short-term bank loan that is often used to "bridge the gap" until a firm can arrange for long-term financing. 
D) After a natural disaster, lenders may provide businesses with short-term loans to serve as bridges until they receive insurance payments or long-term disaster relief.

Question 3

Luther Industries is offered a $1 million 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-earning account, then the effective annual rate EAR for this loan is closest to ________.

Accepted Answer

A) 10.3% 
B) 12.6% 
C) 14.4% 
D) 71.5% 
A) 10.3% 
B) 12.6% 
C) 14.4% 
D) 71.5%

Question 4

Use the table for the question(s)below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):  
-The permanent working capital needs for Hasbeen Toys is closest to ________.

Accepted Answer

A) $1,100 million 
B) $2,435 million 
C) $1,275 million 
D) $770 million 
A) $1,100 million 
B) $2,435 million 
C) $1,275 million 
D) $770 million

Question 5

Use the table for the question(s)below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):  
-In which quarter are Hasbeen's seasonal working capital needs the smallest?

Accepted Answer

A) 4 
B) 2 
C) 3 
D) 1 
A) 4 
B) 2 
C) 3 
D) 1

Question 6

What is permanent working capital?

Accepted Answer

Permanent working capital is t

Question 7

A loan agreement that requires the firm to pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called ________.

Accepted Answer

A) a short-term mortgage loan 
B) a single, end-of-period-payment loan 
C) a bridge loan 
D) a line of credit 
A) a short-term mortgage loan 
B) a single, end-of-period-payment loan 
C) a bridge loan 
D) a line of credit

Question 8

An uncommitted line of credit is obtained through a nonbinding, informal agreement.

Accepted Answer

A) True 
 B)False

Question 9

Picketfence Realty issues commercial paper with a face value of $200,000 and a maturity of six months. Picketfence receives net proceeds of $198,000 when it sells the paper. If the prime rate is 7.7% APR compounded quarterly, how much savings in interest did Picketfence realize by accessing the commercial paper market?

Accepted Answer

A) $3,645 
B) $6,800 
C) $5,696 
D) $8,000 
A) $3,645 
B) $6,800 
C) $5,696 
D) $8,000

Question 10

Use the table for the question(s)below.
The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions):  
-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 11

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.

Question 12

Which of the following statements regarding lines of credit is FALSE?

Accepted Answer

A) The line of credit agreement may also stipulate that at some point in time the outstanding balance must be zero. This policy ensures that the firm does not use the short-term financing to finance its long-term obligations. 
B) A revolving line of credit is an uncommitted line of credit that involves an informal agreement from the bank for a longer period of time, typically two to three years. 
C) The line of credit may be uncommitted, meaning it is an informal agreement that does not legally bind the bank to provide the funds. 
D) A revolving line of credit with no fixed maturity is called evergreen credit. 
A) The line of credit agreement may also stipulate that at some point in time the outstanding balance must be zero. This policy ensures that the firm does not use the short-term financing to finance its long-term obligations. 
B) A revolving line of credit is an uncommitted line of credit that involves an informal agreement from the bank for a longer period of time, typically two to three years. 
C) The line of credit may be uncommitted, meaning it is an informal agreement that does not legally bind the bank to provide the funds. 
D) A revolving line of credit with no fixed maturity is called evergreen credit.

Question 13

Which of the following statements regarding commercial paper is FALSE?

Accepted Answer

A) With dealer paper, dealers sell the commercial paper to investors in exchange for a spread (or fee)for their services. 
B) With dealer paper, the spread increases the proceeds that the issuing firm receives, thereby decreasing the effective cost of the paper. 
C) The minimum face value is $25,000, and most commercial paper has a face value of at least $100,000. 
D) With direct paper, the firm sells the security directly to investors. 
A) With dealer paper, dealers sell the commercial paper to investors in exchange for a spread (or fee)for their services. 
B) With dealer paper, the spread increases the proceeds that the issuing firm receives, thereby decreasing the effective cost of the paper. 
C) The minimum face value is $25,000, and most commercial paper has a face value of at least $100,000. 
D) With direct paper, the firm sells the security directly to investors.

Question 14

A company that makes decorations for Christmas trees has high sales in its fourth quarter but very low sales during the rest of the year. It manufactures decorations steadily throughout the year, however. Which of the following is NOT a likely consequence of this scenario?

Accepted Answer

A) The firm will need sources of short-term cash to fund inventory in the second and third quarters. 
B) The firm will see negative net cash flows in the second and third quarter. 
C) The firm will have a large short-term surplus in the fourth quarter. 
D) Accounts payables will rise from the first to fourth quarter. 
A) The firm will need sources of short-term cash to fund inventory in the second and third quarters. 
B) The firm will see negative net cash flows in the second and third quarter. 
C) The firm will have a large short-term surplus in the fourth quarter. 
D) Accounts payables will rise from the first to fourth quarter.

Question 15

Matt's Machine Company has borrowed $10 million for four months at 5.5% APR, using inventory stored in a field warehouse as collateral. The warehouse fee is 0.5%, payable at the beginning of the loan. What is Matt's EAR?

Accepted Answer

A) 5.5% 
B) 7.24% 
C) 0.58% 
D) 7.01% 
A) 5.5% 
B) 7.24% 
C) 0.58% 
D) 7.01%

Question 16

Bradford Maintenance, a firm which provides lawn care services, has some seasonal variations in its cash flow needs, since much of the demand for its services is in the summer months. It uses long-term sources of funds to finance its assets such as its fleet of vehicles and lawn-care equipment and for the permanent funds that it must have at all times. For its peak seasonal needs it uses long-term sources and some short-term debt. What best describes the financial policy being followed by Bradford?

Accepted Answer

A) matching 
B) conservative 
C) integrated 
D) seasonal 
A) matching 
B) conservative 
C) integrated 
D) seasonal

Question 17

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 this 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 this 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 18

Which of the following are the three reasons that firms need short-term financing?

Accepted Answer

A) seasonalities, permanent working capital, and positive cash flow shocks 
B) seasonalities, funding risk, and permanent working capital 
C) negative cash flow shocks, positive cash flow shocks, and seasonalities 
D) permanent working capital, negative cash flow shocks, and funding risk 
A) seasonalities, permanent working capital, and positive cash flow shocks 
B) seasonalities, funding risk, and permanent working capital 
C) negative cash flow shocks, positive cash flow shocks, and seasonalities 
D) permanent working capital, negative cash flow shocks, and funding risk

Question 19

Which of the following is a committed line of credit with no fixed maturity?

Accepted Answer

A) a bridge loan 
B) evergreen credit 
C) a promissory note 
D) a blanket lien 
A) a bridge loan 
B) evergreen credit 
C) a promissory note 
D) a blanket lien

Question 20

Cash flow forecasts are conducted in order to determine whether a firm has a cash flow surplus or deficit and whether such a surplus or deficit is temporary or permanent.

Accepted Answer

A) True 
 B)False

Exam 20: Short-Term Financial Planning

Which of the following statements is FALSE?

Which of the following statements is FALSE?

Luther Industries is offered a $1 million 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-earning account, then the effective annual rate EAR for this loan is closest to ________.

Use the table for the question(s)below. The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions): -The permanent working capital needs for Hasbeen Toys is closest to ________.

Use the table for the question(s)below. The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions): -In which quarter are Hasbeen's seasonal working capital needs the smallest?

What is permanent working capital?

A loan agreement that requires the firm to pay interest on the loan and pay back the principal in one lump sum at the end of the loan is called ________.

An uncommitted line of credit is obtained through a nonbinding, informal agreement.

Use the table for the question(s)below. The quarterly working capital levels for Hasbeen Toys are presented in the following table (in $ millions): -The temporary working capital needs for Hasbeen Toys in quarter 1 is closest to ________.

Which of the following statements is FALSE?

Which of the following statements regarding lines of credit is FALSE?

Which of the following statements regarding commercial paper is FALSE?

A company that makes decorations for Christmas trees has high sales in its fourth quarter but very low sales during the rest of the year. It manufactures decorations steadily throughout the year, however. Which of the following is NOT a likely consequence of this scenario?

Matt's Machine Company has borrowed $10 million for four months at 5.5% APR, using inventory stored in a field warehouse as collateral. The warehouse fee is 0.5%, payable at the beginning of the loan. What is Matt's EAR?

Which of the following statements is FALSE?

Which of the following are the three reasons that firms need short-term financing?

Which of the following is a committed line of credit with no fixed maturity?

Cash flow forecasts are conducted in order to determine whether a firm has a cash flow surplus or deficit and whether such a surplus or deficit is temporary or permanent.

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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