Exam 16: Current Liabilities Management

Financing that matures in one year or less and has specific assets pledged as collateral is called ________.

Which of the following is a disadvantage of factoring?

Higher the riskiness of a borrower, higher is the premium charged above the prime rate by a banker.

Tangshan Mining was extended credit terms of 3/15 net 30 EOM. The cost of giving up the cash discount, assuming payment would be made on the last day of the credit period, would be ________. If the firm were able to stretch its accounts payable to 60 days without damaging its credit rating, the cost of giving up the cash discount would only be ________.

Loans on which the interest is paid in advance are often called ________.

The major type of loan made by banks to businesses is the ________.

A firm should take the cash discount if the firm's cost of borrowing from the bank is greater than the cost of giving up a cash discount.

Under a line of credit agreement, a bank may require an annual cleanup, which means that the borrower must pay off all its outstanding debts to all its operational creditors for a certain number of days during the year.

Secured short-term financing has specific assets pledged as collateral.

Which of the following is an advantage of factoring?

The two major sources of short-term financing are ________.

In a line of credit arrangement, a firm pays interest on ________.

Under a line of credit agreement, a bank may retain the right to revoke the line if any major changes occur in the firm's financial condition or operations.

A firm is offered credit terms of 1/10 net 45 EOM by a major supplier. The firm has determined that it can stretch the credit period (net period only) by 25 days without damaging its credit standing with the supplier. Assuming the firm needs short-term financing and can borrow from the bank on a line of credit at an interest rate of 14 percent, the firm should ________.

Lenders recognize that holding collateral can reduce losses if the borrower defaults, but the presence of collateral has no impact on the risk of default.

The interest rate on a line of credit is normally stated as a fixed rate-the prime rate.

The security agreement is an agreement between the borrower and the lender that specifies the collateral held against a secured loan.

For firms that are in a financial position to take a cash discount, it is advisable not to take the discount if the terms offered are 2/10 net 30.

XYZ Corporation borrowed $100,000 for six months from the bank. The rate is prime plus 2 percent. The prime rate was 8.5 percent at the beginning of the loan and changed to 9 percent after two months. This was the only change. How much interest must XYZ corporation pay?

The major attraction of a line of credit from the bank's point of view is that it eliminates the need to examine the creditworthiness of a customer each time it borrows money within the year.