Question 1

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 2

Use the information for the question(s) below.  
-The above graph shows the levels of fixed assets, permanent working capital and temporary working capital for a certain company. If the graphs below show the level of short-term debt that the firm borrows each quarter, which best illustrates an aggressive financing policy?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 3

In which of the following loans can inventory NOT be used as collateral?

Accepted Answer

A)  a floating lien 
B)  a warehouse arrangement 
C)  a factoring arrangement 
D)  a trust receipt 
A)  a floating lien 
B)  a warehouse arrangement 
C)  a factoring arrangement 
D)  a trust receipt

Question 4

What is the average and maximum maturity of commercial paper?

Accepted Answer

The average and maxi

Question 5

What are commitment fees and what effect does it have on the loan?

Accepted Answer

Commitment fees are associated

Question 6

Carborundum Metals issues commercial paper with a face value of $1,000,000 and a maturity of three months. Carborundum receives net proceeds of $992,000 when it sells the paper. If the prime rate is 8% APR compounded quarterly, how much savings in interest did Carborundum realize by accessing the commercial paper market?

Accepted Answer

A)  $8,000 
B)  $9,800 
C)  $10,200 
D)  $11,840 
A)  $8,000 
B)  $9,800 
C)  $10,200 
D)  $11,840

Question 7

A firm has a committed line of credit with a maximum of $10 million and an interest rate of 8.5% (EAR) with a certain bank. The commitment fee is 0.5% (EAR). The firm borrows $2 million at the start of the year and then repays it at the end of the year. What is the total cost of the loan?

Accepted Answer

A)  $520,000 
B)  $680,000 
C)  $210,000 
D)  $720,000 
A)  $520,000 
B)  $680,000 
C)  $210,000 
D)  $720,000

Question 8

What are compensating balance and what effect does it have on the loan?

Accepted Answer

Regardless of the loan structure, the ba

Question 9

According to the matching principle, short-term needs for funds should be financed by short-term sources of funds; long-term need for funds should be financed by long-term sources of funds.

Accepted Answer

A) True 
 B)False

Question 10

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 11

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 12

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 13

Azamel Cosmetics specializes in cosmetics which have high levels of UV protection. The above figures show the anticipated sales over the next four quarters. Azamel carries inventory equal to 30% of next quarter's sales, has accounts payable of 20% of next quarter's sales, and accounts receivable of 25% of this quarter's sales. If its net income is 12% of sales, in which quarter will Azamel's seasonal working capital needs will be the greatest?

Accepted Answer

A)  Q1 
B)  Q2 
C)  Q3 
D)  Q4 
A)  Q1 
B)  Q2 
C)  Q3 
D)  Q4

Question 14

Which of the following is NOT a reason why a firm would choose to follow an aggressive financing policy?

Accepted Answer

A)  to reduce sensitivity to the firm's credit quality 
B)  to reduce agency costs 
C)  to take advantage of lower interest rates 
D)  to reduce exposure to funding risk 
A)  to reduce sensitivity to the firm's credit quality 
B)  to reduce agency costs 
C)  to take advantage of lower interest rates 
D)  to reduce exposure to funding risk

Question 15

The accounts receivable and inventory of a firm typically are used as collateral when issuing short-term secured financing.

Accepted Answer

A) True 
 B)False

Question 16

Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%. If this loan has an origination fee of 1%, then the effective annual rate (EAR) for this loan is closest to ________.

Accepted Answer

A)  12.0% 
B)  12.6% 
C)  4.1% 
D)  13.8% 
A)  12.0% 
B)  12.6% 
C)  4.1% 
D)  13.8%

Question 17

Commercial paper is usually a more expensive source of funds than a short-term bank loan.

Accepted Answer

A) True 
 B)False

Question 18

A blanket lien exposes a lender to less risk and thus carries less interest than a trust receipt.

Accepted Answer

A) True 
 B)False

Question 19

The interest on commercial paper is typically paid by selling it at an initial discount.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following best describes the agreement where all of a firm's inventory is used to secure a loan?

Accepted Answer

A)  pledging of accounts receivable 
B)  factoring of accounts receivable with recourse 
C)  factoring of accounts receivable without recourse 
D)  floating lien 
A)  pledging of accounts receivable 
B)  factoring of accounts receivable with recourse 
C)  factoring of accounts receivable without recourse 
D)  floating lien

Exam 20: Short-Term Financial Planning

Which of the following statements is FALSE?

In which of the following loans can inventory NOT be used as collateral?

What is the average and maximum maturity of commercial paper?

What are commitment fees and what effect does it have on the loan?

A firm has a committed line of credit with a maximum of $10 million and an interest rate of 8.5% (EAR) with a certain bank. The commitment fee is 0.5% (EAR). The firm borrows $2 million at the start of the year and then repays it at the end of the year. What is the total cost of the loan?

What are compensating balance and what effect does it have on the loan?

According to the matching principle, short-term needs for funds should be financed by short-term sources of funds; long-term need for funds should be financed by long-term sources of funds.

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?

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

Which of the following statements is FALSE?

Which of the following is NOT a reason why a firm would choose to follow an aggressive financing policy?

The accounts receivable and inventory of a firm typically are used as collateral when issuing short-term secured financing.

Luther Industries is offered a $1 million dollar loan for four months at an APR of 9%. If this loan has an origination fee of 1%, then the effective annual rate (EAR) for this loan is closest to ________.

Commercial paper is usually a more expensive source of funds than a short-term bank loan.

A blanket lien exposes a lender to less risk and thus carries less interest than a trust receipt.

The interest on commercial paper is typically paid by selling it at an initial discount.

Which of the following best describes the agreement where all of a firm's inventory is used to secure a loan?

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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