Question 1

What is the term used for a short-term, unsecured debt sold by a large company to investors?

Accepted Answer

A)  commercial paper 
B)  retail paper 
C)  wholesale paper 
D)  unsecured paper 
A)  commercial paper 
B)  retail paper 
C)  wholesale paper 
D)  unsecured paper

Question 2

A firm issues six-month commercial paper with $500,000 face value and receives $488,000. What is the EAR the firm is paying for these funds?

Accepted Answer

A)  2.40% 
B)  2.45% 
C)  4.98% 
D)  6.00% 
A)  2.40% 
B)  2.45% 
C)  4.98% 
D)  6.00%

Question 3

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 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 temporary working capital needs for Hasbeen Toys in quarter 3 is closest to ________.

Accepted Answer

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

Question 5

Stuart Mining is offered a $4,000,000 line of credit for three months at an APR of 6%. The bank requires that the firm keep an amount equal to 10% of the loan principal in an account with the bank as long as the loan remains outstanding. This account pays 2% APR with quarterly compounding. What is the actual three-month interest paid on this loan?

Accepted Answer

A)  1.6% 
B)  6.6% 
C)  12.6% 
D)  14.6% 
E)  60.9% 
A)  1.6% 
B)  6.6% 
C)  12.6% 
D)  14.6% 
E)  60.9%

Question 6

A firm issues three-month commercial paper with $200,000 face value and receives $192,000. What is the EAR the firm is paying for these funds?

Accepted Answer

A)  5.24% 
B)  8.00% 
C)  16.00% 
D)  17.74% 
A)  5.24% 
B)  8.00% 
C)  16.00% 
D)  17.74%

Question 7

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 8

In a single, end-of-period payment loan, firms ________.

Accepted Answer

A)  pay no interest on the loan and pay back the principal in one lump sum at the beginning of the loan 
B)  pay no interest on the loan and pay back the principal in one lump sum at the end of the loan 
C)  pay interest on the loan and pay back the principal in one lump sum in the beginning of the loan 
D)  pay interest on the loan and pay back the principal in one lump sum at the end of the loan 
A)  pay no interest on the loan and pay back the principal in one lump sum at the beginning of the loan 
B)  pay no interest on the loan and pay back the principal in one lump sum at the end of the loan 
C)  pay interest on the loan and pay back the principal in one lump sum in the beginning of the loan 
D)  pay interest on the loan and pay back the principal in one lump sum at the end of the loan

Question 9

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 10

Glenside Industries is a domestic machinery manufacturer which specializes in the production of snowblowers. The above figures show the anticipated sales over the next four quarters. Glenside carries inventory equal to 25% of next quarter's sales, has accounts payable of 15% of next quarter's sales, and accounts receivable of 23% of this quarter's sales. If its net income is 10% of sales, in which quarter is it expected that Glenside'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 11

Tropic Fruit Preserves wants to borrow $4 million for two months. It uses its inventory as collateral for a 15% (APR compounded monthly) loan under a warehouse arrangement where the warehouse fee is $18,000 paid at the end of the two months. What is the EAR of this loan for Tropic Fruit Preserves?

Accepted Answer

A)  3.2% 
B)  7.8% 
C)  15.5% 
D)  19.2% 
A)  3.2% 
B)  7.8% 
C)  15.5% 
D)  19.2%

Question 12

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 13

Which of the following companies has the smallest need for short-term financial planning?

Accepted Answer

A)  a company that produces Christmas decorations. 
B)  a toy manufacturer. 
C)  a company that makes condiments such as ketchup. 
D)  a company that provides catering services for weddings. 
A)  a company that produces Christmas decorations. 
B)  a toy manufacturer. 
C)  a company that makes condiments such as ketchup. 
D)  a company that provides catering services for weddings.

Question 14

A firm issues two-month commercial paper with $1,000,000 face value and receives $985,000. What is the EAR the firm is paying for these funds?

Accepted Answer

A)  1.52% 
B)  7.50% 
C)  9.49% 
D)  15.00% 
A)  1.52% 
B)  7.50% 
C)  9.49% 
D)  15.00%

Question 15

General Manufacturing wants to borrow $1 million for three months. It uses its inventory as collateral for an 11% (APR compounded monthly) loan under a warehouse arrangement where the warehouse fee is $12,000 paid at the start of the three months. What is the EAR of this loan for General Manufacturing?

Accepted Answer

A)  2.8% 
B)  4.0% 
C)  17.1% 
D)  24.4% 
A)  2.8% 
B)  4.0% 
C)  17.1% 
D)  24.4%

Question 16

What is permanent working capital?

Accepted Answer

Permanent working capital is t

Question 17

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 18

Crimini Foods is offered a $400,000 line of credit for six months at an APR of 10%. This loan has a loan origination fee of 2%. What is the actual six-month interest rate paid, expressed as an EAR?

Accepted Answer

A)  7.14% 
B)  10.60% 
C)  11.03% 
D)  14.80% 
A)  7.14% 
B)  10.60% 
C)  11.03% 
D)  14.80%

Question 19

A short-term financial plan tracks a firm's cash balance and new and existing short-term financing, enabling managers to forecast shortfalls and plan to fund them in the least costly manner.

Accepted Answer

A) True 
 B)False

Question 20

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.

Exam 20: Short-Term Financial Planning

What is the term used for a short-term, unsecured debt sold by a large company to investors?

A firm issues six-month commercial paper with $500,000 face value and receives $488,000. What is the EAR the firm is paying for these funds?

Which of the following statements is FALSE?

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 3 is closest to ________.

A firm issues three-month commercial paper with $200,000 face value and receives $192,000. What is the EAR the firm is paying for these funds?

Which of the following statements is FALSE?

In a single, end-of-period payment loan, firms ________.

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

Tropic Fruit Preserves wants to borrow $4 million for two months. It uses its inventory as collateral for a 15% (APR compounded monthly) loan under a warehouse arrangement where the warehouse fee is $18,000 paid at the end of the two months. What is the EAR of this loan for Tropic Fruit Preserves?

Which of the following companies has the smallest need for short-term financial planning?

A firm issues two-month commercial paper with $1,000,000 face value and receives $985,000. What is the EAR the firm is paying for these funds?

What is permanent working capital?

Which of the following statements is FALSE?

Crimini Foods is offered a $400,000 line of credit for six months at an APR of 10%. This loan has a loan origination fee of 2%. What is the actual six-month interest rate paid, expressed as an EAR?

A short-term financial plan tracks a firm's cash balance and new and existing short-term financing, enabling managers to forecast shortfalls and plan to fund them in the least costly manner.

Which of the following statements is FALSE?

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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